The results are in, and IFN is delighted to announce the final winners of our Deals of the Year (DOTY) 2018, as judged by our independent panel of industry experts. We wish all winners the sincerest congratulations.
DOTY 2018 enjoyed three main themes: market expansion, social impact/sustainability, and perpetuity. Oddly, one factor was missing: fintech. Notably, crowdfunding and financial technology-driven transactions were not present among the nominations.
As has become a common thread, the International Islamic Trade Finance Corporation (ITFC) is the most active player expanding the African market and nurturing the Central Asian markets. Following the Kingdom of Morocco’s maiden benchmark Sukuk, one is hopeful that Morocco will be a significant contributor to future DOTY competitions. Elsewhere, OCBC Al-Amin took Islamic finance to Cambodia.
We have always had this discussion, but never came to a satisfactory conclusion: Is Islamic finance different from a positive moral construct? The heated contest for Social Impact DOTY seems to indicate that the Islamic finance market is increasingly committed to sustainable development. Innovation in the US and government engagement in Asia and Africa complemented the array of new green and sustainable transactions. Efforts are afoot in Malaysia starting with the first social impact Sukuk. Now, Malaysia is promoting value-based intermediation, and global market players are heeding the call.
Although Malaysia has traditionally led in submissions, in 2018 the UAE pipped Malaysia. Saudi Arabia, Pakistan and Oman were closely followed by Turkey as the top markets. Nonetheless, many submissions were variations of an older theme, even second or third issuances under a program that won an award in the past!
Among the big developments in 2018 was the diversity of submissions from all other markets. In previous years, the well-established markets accounted for 94-96% of submissions. In 2018, their submissions shrank to 73%. One is hopeful that this is a trend showing a deeper and wider global Islamic finance market. We captured Morocco, Cambodia, Uzbekistan, Tajikistan, Gambia and Togo among the highly regarded newcomers.
Energy remains a theme. In 2018, hydrocarbons and green energy continue to do well. If HSBC Amanah Malaysia, Indonesia, and UiTM Solar were prominent on the sustainable side, then Yinson, Indonesian mining companies, Engro, Dana Gas and Tufail all raised the hydrocarbon flag.
Tawarruq’s importance remains untouched. Even many of the so-called Wakalah deals include a Tawarruq tranche as do many of the Mudarabah deals. Deals considered purely commodity Murabahah or Tawarruq made up 25% of the submissions. In a number of cases, Tawarruq became the tool of choice to attract multilaterals like the World Bank Group or open new markets like Cambodia. The Wakalah universe, which includes ATKM, TEU, cooling units and Tawarruq, jumped to 27% of the offerings.
Ijarah, both asset-heavy and asset-lite, is still a top choice for structuring.
The 2018 submissions showed a new Malaysian flavor in corporate finance. Three Malaysian corporates were nominated for issuing distinct forms of perpetual Sukuk.
DOTY submissions are disproportionately Sukuk. The 2018 array of Sukuk showed two trends. The first is more equity Sukuk, ie Mudarabah or Musharakah. These are typically alternative capital instruments. The second is the use of Sukuk to roll-up, repackage or restructure obligations. One job which Sukuk seemed to have lost is that of opening new markets or attracting new players. Syndicated Tawarruq seized this mantle.
In 2018, real estate roared. Social housing, REITs in Saudi Arabia and corporate real estate deals in the UAE, Malaysia and beyond were highlighted. There was even the first securitization of UK Islamic home purchase plans.
As has been customary, the importance of the US dollar remained high with 49% of submissions relating to US dollar-denominated deals. Malaysia remains a critical player, but ringgit deals dropped from 30% to 19%. We have long argued that the Sukuk and Islamic finance markets are not achieving their potential until local markets grow.
In 2018, 15% of the deals nominated were in ‘other currencies’ reflecting increased domestic activity in new markets. For instance, the Kingdom of Morocco launched its benchmark Moroccan dirham Sukuk. The role of local currencies points first to local market growth, and should represent the strengthening of local financial institutions.
The IDB’s first euro-based transactions highlighted new market activity in the eurozone and in countries using euro-linked currencies like the CFA in West and Central Africa. The euro nonetheless has not yet emerged as an active currency for the Islamic financial markets.
Although the number of nominations was nearly the same as in the past, the number of categories slipped as several countries were less well represented than in the past. Winners came from 11 countries of the 31 countries with nominations. 2018 was a solid year as the market grew but the year ended on a number of rocky indicators: retreating oil prices, China-US trade and political feuds, a possibly botched Brexit and a slowing global economy. In 1990, legendary real estate investor Sam Zell laid out the goal “’95 and alive”. Perhaps we are in a similar situation, we have to wait for “’20 to enjoy plenty”.
|CORPORATE FINANCE: PUNCAK NIAGA HOLDINGS|
|Size:||RM210 million (US$51.21 million)|
|Principal advisor:||Hong Leong Investment Bank|
|Independent advisor:||Public Investment Bank|
|Lawyers:||Adnan Sundra & Low|
|Date closed:||February 2018|
|Shariah advisors:||Not applicable for cash tender of Shariah compliant business|
|The 2018 corporate finance market reflected diversity and complexity. The UAE offered a series of linked transactions for Tecom Investments and Dubai Properties Land for nearly AED1 billion (US$272.22 million) with about AED606 million (US$164.97 million) for Tecom and AED380.9 million (US$103.69 million) for Dubai Properties. The unique aspect of this series is the acceleration process, whereby there is limited recourse to the six SPV obligors, and separate procedures apply for ‘global’ events of default and ‘development company’ events of default.
In Pakistan, Pioneer Cement raised PKR2.7 billion (US$19.28 million) through diminishing Musharaka in order to erect a 24 MW coal-fired power plant at Chenki, District Khushab. Arranged by Meezan Bank, the deal finances a captive power plant using local resources.
Malaysia, too, was a rich market. Yinson privately placed a perpetual senior and subordinated Sukuk Mudarabah program of up to RM1.5 billion (US$365.76 million). The deal was the first-ever ringgit perpetual Sukuk based on the Shariah principle of Mudarabah. Malaysia’s Puncak Niaga acquired the entire issued share captial of TRIplc from Pimpinan Ehsan. Prior to the acquisition of TRIplc, Puncak Niaga’s principal operation was water treatment and water distribution through Pengurusan Air Selangor. Since the commencement of the consolidation of the water industry in the state of Selangor and the Federal Territories of Kuala Lumpur and Putrajaya, the company has been exploring opportunities to increase its income stream to minimize dependency on the water, wastewater, and oil and gas segments.
Puncak’s board had identified TRIplc, whose principal activities are construction, property development, service concession and project management. The board recognized the underlying value behind the acquisition of TRIplc as they already hold concessions from the Malaysian government and University Teknologi MARA. Furthermore, it would provide Puncak Niaga access to an already profitable organization.
By retaining TRIplc’s current management, Puncak Niaga’s operations would be enhanced by their expertise and knowledge of the industry alongside an improved holding of land banks within the Selangor region. The retention of TRIplc’s management will also improve Puncak Niaga’s capacity to undertake more projects. From announcement to completion, the transaction took nearly 14 months.
Honorable mention: Tecom Investments and Pioneer Cement
|CROSS-BORDER: VIP INVESTMENT HOLDINGS|
|Arrangers:||Mashreq Al Islami (mandated lead arranger), National Bank of Fujairah, Noor Bank, Warba Bank|
|Bookrunner:||Mashreq Al Islami|
|Lawyers:||Dentons for arranger|
|Date:||May 2018 final closing|
|Shariah advisors:||Shariah Supervisory Board of Mashreq Al IslamiPROJECT & INFRASTRUCTURE FINANCE:
PROJECT SPV: ÇANAKKALE OTOYOL VE KOPRUSU INSAAT YATIRIM VE IŞLETME
|Most cross-border deals were based on Tawarruq. This allowed expedient solutions addressing gaps in international rules. For instance, OCBC Al-Amin structured a US$53 million deal for Pestech (Cambodia), a market that is new to Islamic finance.
Allen & Gledhill advised Autoriti Monetari Brunei Darussalam on the structuring of a BN$120 million (US$88.64 million) transaction involving Wakalah to be constructed under Ijarah Mawsufah Bil Dhimmah, the first of its kind in Brunei under local law.
Mashreq Bank’s Islamic arm financed Byrne Equipment Rental on its East Asian expansion. The acquisition vehicle VIP is an SPV owned by Itqan Investments and Tamar VPower Energy Fund, a vehicle jointly managed by Hong Kong-based power company VPower Group International and CITIC Pacific, the overseas arm of a diversified Chinese conglomerate. VP Power is a key player in China’s ‘One Belt, One Road’ initiative. The transaction was structured as a commodity Murabahah secured by a share security and account pledges with further credit support provided by way of corporate guarantees.
Byrne is a top 100 global leasing company based on its GCC footprint. Folding Byrne into the Tamar VPower Energy Fund complements the specialties of VP Power Group and Byrne and brings Byrne’s skills into the Southeast and East Asian markets.
|MOST INNOVATIVE: SOUQ EXTRA|
|Size:||AED50 million (US$13.61 million)|
|Financier:||Dubai Islamic Bank (DIB)|
|Ultimate investor:||Warba Bank|
|Legal counsel:||Internal counsel for Souq Extra and Hadef & Partners for DIB|
|Date:||26th June 2018|
|Shariah advisors:||Dar Al Sharia|
|Established in 2008, Souq Extra is a developer, owner and operator of technology-driven retail centers, situated in communities throughout the UAE. The company is backed by prominent UAE shareholders including National Bonds, Emirates Investment Authority and the Lootah family. Souq Extra integrates retail planning with lifestyle developments, and engages with local communities to deliver real estate assets and civic services (such as community mosques).
The 2018 Dubai Islamic Bank (DIB) transaction is structured as a 7.5-year AED50 million (US$13.61 million) Musharakah construction facility for the completion of Souq Extra Silicon Oasis Retail Mall Phase 2. The Musharakah is drawn down against Project payment certificates validated by the bank’s engineers and the sponsor’s independent cost consultant. DIB’s contribution is up to 85% of total project costs. The documentation includes Musharakah facility agreements, assignment of rentals, first charge mortgage, promissory note, and assignment of contractor’s performance bond and insurance guarantees covering the project financing. The transaction was underpinned by a forward sale arrangement with the company’s investment partner ENBD REIT; a NASDAQ Dubai-listed Shariah compliant REIT.
ENBD REIT will take ownership of the completed retail mall through various promissory arrangements that are based on specific milestones. The forward sale to ENBD REIT is a notable highlight of a successful 10-year track record for Souq Extra.
|EQUITY & IPO: MALAYSIA BUILDING SOCIETY (MBSB)|
|Size:||RM644 million (US$157.03 million)|
|Merger:||MBSB with Asian Finance Bank|
|Lawyers:||Albar & Partners for buyer and Abdullah Chan & Co for seller.|
|Shariah advisor:||Not applicable|
|Date:||7th February 2018|
|VMMEA issued the first pre-IPO exchangeable on reference event Sukuk in the region.
The US$30 million Sukuk facility is based on an airtime structure and includes novel redemption features and an option for investors to exchange the Sukuk for shares in VMMEA in the event of an IPO. Credit enhancement included a financial covenant package and certain securities in favor of the investors.
Abu Dhabi Islamic Bank (ADIB) successfully raised AED1 billion (US$272.22 million) as part of the bank’s comprehensive capital plan to support its growth. ADIB also raised AED5.5 billion (US$1.5 billion) from shareholders and investors who purchased rights from the secondary market. The rights offered existing shareholders and other investors who bought rights during the trading period on the Abu Dhabi Securities Exchange the opportunity to purchase ADIB shares at AED2.16 (58.8 US cents) per share.
Despite a hiatus in the launch of REITs, Alkhabeer REIT launched during adverse market conditions and yet the IPO was still oversubscribed. The deal included SAR427 million (US$113.78 million) of in-kind contributions and SAR237 million (US$53.15 million) of new money. In order to address market conditions, the REIT was structured to deliver a 9% return.
The acquisition by MBSB of Asian Finance Bank (AFB) allowed MBSB to operate an Islamic bank. MBSB paid RM644 million to the exiting shareholders and rebranded the bank as MBSB Bank. The ball started rolling in November 2017 when MBSB entered into a conditional share purchase agreement with the legacy owners of AFB. The proposed acquisition was approved by the shareholders of MBSB on the 23rd January 2018. The shareholders also approved the transfer of Shariah compliant assets and liabilities of MBSB to AFB via a members’ scheme of arrangement.
As part of the process, MBSB then issued RM2.44 billion (US$594.97 million) in nominal value of covered Sukuk. MBSB then proceeded to implement an innovative Sukuk exchange program, whereby existing Sukukholders would exchange their Sukuk in MBSB for new Sukuk in AFB on a similar structure, terms and conditions. The deal allowed MBSB to transfer its Shariah compliant assets to a licensed Islamic bank. This deal is seen as playing an important role in realigning the participants in the Malaysian Islamic banking market and driving a stronger position for MBSB as the operator of an Islamic bank and not just a mortgage bank.