Standard Chartered worked on an innovative structure for a GCC investor’s acquisition of UK property. It put together a five-year bullet Tawarruq for the acquisition finance. The deal named Jersey Incorporate Property Holding Co has an LMA real estate security and covenant package.

Abu Dhabi Islamic Bank (ADIB) engaged in an unusual syndication for Dubai Aerospace Enterprise (DAE). The senior unsecured facility takes into account the restrictive views of ADIB’s Shariah board on Tawarruq. This requires one set of documents and processes for the ADIB share of funding and a different one for its fellow financiers Gulf International Bank and Warba Bank. From the ADIB perspective, the rollovers for commodity Murabahah create two transactions with one effectively refinancing the first. The accommodation of ADIB’s views still allowed effective management of client goals.

The facility’s proceeds refinanced the pre-delivery payment (PDP) payments that DAE has already made to Boeing. The facility’s repayment is ring-fenced against aircraft PDP refunds that DAE will receive on aircraft delivery dates.

Honorable mention: Dayang and Jersey Incorporate Holding Co

In Malaysia, Projek Lintasan Kota Holdings (Prolintas) raised RM780 million (US$191.22 million) in a syndicated commodity Murabahah transaction. The deal allowed Prolintas to finance two acquisitions: the entire issued and paid-up capital of Sistem Lingkaran–Lebuhraya Kajang from SILK Holdings and the entire outstanding Sukuk Mudarabah issued by Manfaat Tetap. This increased the group’s operating arteries to six. Malaysia’s UWC had a successful IPO in July 2019. The integrated engineering firm’s shares were affirmed as Shariah compliant by Securities Commission Malaysia prior to the IPO. The issuance finances an expansion of production facilities along with automation of the same.

AKT Sugar Mills (AKT) acquired the assets of Gulf Sugar Mills in a syndicated transaction. The eight-year diminishing transaction is structured with a two-year grace period. The structure is one that allows flexibility in addressing acquisitions. In this case, the acquisition is driven to assets. This allows AKT to acquire state-of-the-art crushing equipment and improve its market leadership. The acquired assets are located in the fertile and irrigated region of Ghotki which is climatically well suited for sugar cane production. On account of being near to the road network, the company has easy access for procuring raw material and distributing sugar at competitive prices. The transaction has collateral and AKT improves its market leadership position without violating regulatory restrictions on market concentration.

Honorable mention: Tecom Investments, Prolintas and UWC

As part of the expansion of Pakistan’s alternative energy supplies, the federal government signed energy purchase agreements with 11 wind power projects. The most interesting was NASDA Green Energy. Meezan Bank arranged the entire onshore and offshore financing for the project. The onshore financing is fully financed by Meezan Bank based on diminishing Musharakah while the offshore financing is fully arranged from the Islamic Corporation for the Development of the Private Sector (ICD) based on Istisnah cum Ijarah. The facilities finance the design, development, construction, commissioning, operation and maintenance of a 50 MW wind power plant in Jhimpir, Sindh Province, Pakistan.

Honorable mention: Warba Bank/Henley Investment Management and QIIB

Al Tamimi advised Al Aman Investment Co on the acquisition of four K-12 schools in the State of Kuwait from Ajyal Holding Company. The curriculum for each of the four schools includes Pakistani, Indian, bilingual and special needs respectively. The deal reflects the growing investor interest in education and consolidation across the GCC.

Wong & Partners advised Maybank Islamic (as the lender) in the commodity Murabahah term financing-I facility of up to RM780 million for Prolintas. The proceeds of the facility helped to partly finance the purchase consideration and offer price of:

• the entire issued and paid-up capital of Sistem Lingkaran–Lebuhraya Kajang from SILK Holdings, and

• the entire outstanding Sukuk Mudarabah issued by Manfaat Tetap.

Sistem Lingkaran is the concession holder of the Kajang Traffic Dispersal Ring Road, or more popularly known as the Silk Highway. The acquisition of the Silk Highway has expanded the infrastructure portfolio of Prolintas, supporting its objective of listing in 2020. This will elevate its competitiveness among the highway concessionaires in Malaysia and ultimately induce greater efficiency in the market of highway concessions, operations and maintenance.

Honorable mention: UWC and Al Aman Investment

Cypark Ref is Malaysia’s pioneering developer of integrated renewable energy, green technology, environmental engineering solutions and construction engineering. The Sukuk fund three project companies, of which the 30 MWac solar plants in Empangan Terip and Empangan Kelinchi will be the largest grid-connected floating solar plants in Malaysia. A third ground-based plant is being built in Sik, Kedah.

The deal is rated ‘AA3’ by RAM based on the strength of the power purchase agreements. The rating is affected by the variability of solar power reflected in its performance ratio.

Honorable mention: NASDA and Telekosang

Allen & Overy advised Savola Group, Saudi Arabia’s largest food product group, on an innovative method of subscription to issue replacement Sukuk for its 2013 issuance. SAR493 million (US$131.22 million) of the 2019 issuance was paid for through monetary consideration. SAR507 million (US$134.94 million) of the previous Sukuk was exchanged for Sukuk from the 2019 issuance, reducing the 2013 issuance’s balance to SAR993 million (US$264.3 million).

The innovative structure incorporates two alternative Mudarabah/Murabahah structures. These give Savola the flexibility to either use the ‘classic’ structure, with multiple Murabahah transactions covering both the principal amount of the Sukuk and all profit payments or an ‘enhanced’ structure, where the payment of principal is covered by a single Murabahah transaction and profit payments are made using income from the Mudarabah.

Honorable mention: NASDA, Exsim Capital and Almarai

A&O advised Merex Investment Group on the AED2.45 billion (US$666.96 million) Ijarah financing of a five retail center portfolio. The highly structured deal delivered non-recourse funding to Merex with a comprehensive covenant package. Merex is a joint venture between Canada’s Brookfield Asset Management and Dubai’s Meraas Holdings.

The Sultanate of Oman transaction involved the establishment of the first-ever local Omani rial Sukuk issuance program by the government of Oman and the issuance and listing on the Muscat Securities Market of OMR300 million-worth of Sukuk in the following two tranches — first tranche of OMR100 million (US$259.02 million) with a tenor of five years and the second tranche of OMR200 million (US$518.04 million) with a tenor of seven years. Both tranches were issued on the 10th December 2019.

An important issue that we raise for Islamic financial market development is the requirement for both domestic currency benchmarks and high-quality liquid assets (HQLA). The former helps to establish pricing transparency by creating a risk-free benchmark. The latter helps Islamic banks to meet Basel III requirements. This first-ever OMR Sukuk issuance program by the government of Oman provides both to Omani Islamic institutions. Beyond supporting the further development of the Omani capital market, the deal was structured to provide opportunities to the retail sector in Oman to invest in Islamic instruments.

Another first for this issuance was the application of a differential pricing mechanism. The mechanics involved investors bidding on the price based on a fixed profit rate with allocations determined by the competitiveness of each bid. The unique outcome is that the ‘auction’ results in different investors paying different prices.

Honorable mention: Sidra Capital and Merex Investment Group

Abu Dhabi Islamic Bank (ADIB) tweaked the concept of Tawarruq to structure a novel working capital line for Etihad Airlines. In the ADIB structure, a rebate mechanism was introduced to create a competitive Tawarruq-based product that does not have any rollovers. And Serba Dinamik secured UK Export Finance support for its Tawarruq financing into Indonesia in support of project supplies.

King & Spalding advised NMG Workspace Solutions, the investor, on an innovative Mudarabah deal. The design gives the Sukuk investor an economic interest in Saudi operating company Modern Era Management Co. This is what Mudarabah is all about. NMG Workspace Solutions is a US company. The Sukuk allowed NMG Workspace Solutions to support Modern Era’s acquisition of a 50% stake in Jeel Al Idara Al Hadeetha Tijara Co, a Saudi operating business, without having to hold shares in the Saudi operating company directly. The importance of this deal is that NMG is not entitled to invest directly in Modern Era. The target company and Modern Era remain 100% Saudi-owned. Al Bilad Investment Company played an important role in the deal as the agent for the investor to act as the Rab Al Maal in the Mudarabah with Modern Era. Returns from the underlying Mudarabah flow to the US-based investor as a return on the Sukuk investment.

Honorable mention: Konsortium KAJV, Etihad WC, Serba Dinamik

US-based NMG Workspace Solutions entered into a Mudarabah with a Saudi business, gaining an economic return without having to hold shares in the Saudi operating company. An innovative deal, the transaction manages issues relating to foreign ownership in Saudi Arabia and taxes elsewhere.

CIMB led the dual-tranche securities issuance for Sarana Multi Infrastruktur (SMI). One series is structured conventionally. The second series is structured as Mudarabah. The Mudarabah tranche was issued in four series with tenors of 370 days, three years, five years and seven years. Proceeds go to domestic infrastructure development.

Given the nature of its business, SMI decided to opt for a Mudarabah structure as this Shariah structure does not necessitate the contribution of underlying properties or fixed assets. The Mudarabah has a cap and floor linked to revenue-sharing:

– Should revenue-sharing income drop below the floor, SMI will then provide a portion to the Sukuk Mudarabah holders, so that the Sukuk Mudarabah holders will receive revenue-sharing in accordance with the minimum value limit of the coupon to be funded from a reserve or SMI funds.

– Should revenue-sharing income attributable to the Sukuk Mudarabah holders exceed the cap, then the Sukuk Mudarabah holders will forgo the excess above the cap. Part of the excess will go to the reserve.

This is an unusual structure for project finance. If successful, SMI may more easily manage the revenue cycle of its projects.

Honorable mention: Sidra Capital and NMG Workspace Solutions

Major Malaysian property developer IJM Land, advised by CIMB Investment Bank, issued RM650 million (US$159.35 million) of perpetual Sukuk in Musharakah form. The Musharakah venture under this transaction consists of Shariah compliant investments in the business operations of the issuer and its subsidiaries. The deal is highly structured to provide protection to investors.

Standard Chartered arranged the first zero coupon Islamic certificates to be issued in the Bangladesh market. The US$60 million equivalent deal for United Mymensingh Power was the largest corporate Sukuk in Bangladesh.

Two of the most bedeviling challenges in Islamic finance are foreign exchange risk management and the J-curve for project finance. United Group had raised foreign currency financing for its power business and the currency risk was a growing burden. The zero coupon Musharakah structure allowed the payouts to be more manageable for the underlying business, while providing an investor with a Shariah compliant return. The deal allowed the company to extinguish its foreign currency debt.

The Musharakah is a co-ownership of assets agreement. The underlying assets are then leased to the operator with a rent reset every six months.

Honorable mention: IJM Land and Engro Powergen Thar

In 2019, Malaysia led the way with issuances by WCT Holdings and IJM Land. WCT issued Musharakah perpetuals under a RM1 billion (US$245.15 million) program. This made WCT the first construction holding company to issue perpetual Sukuk. The issuances strengthened its capital structure, and provide a non-dilutive alternative to equity while improving the company’s rating profile.

IJM Land issued a complex Musharakah perpetual with a unique subordinated guarantee. This issuance is Malaysia’s first perpetual issuance backed by a guarantee, in this case, a subordinated guarantee from the issuer’s parent company, IJM Corporation (the Holdco Kafalah guarantor). The Musharakah venture under this transaction consists of Shariah compliant investments in the business operations of the issuer and its subsidiaries.

The transaction structure of this issuance contains some unprecedented features for the benefit of Sukukholders. In addition to the subordinated guarantee by the Holdco Kafalah guarantor, the repayment feature consists of replacement perpetual Sukuk to be issued by the Holdco Kafalah guarantor. This unique approach by a leading Malaysian developer may lead to more creative financing for the dynamic Malaysian real estate market.

Honorable mention: QIIB and WCT

Exsim Capital Resources raised RM290 million (US$71.09 million) as Sukuk Musharakah and RM130 million (US$31.87 million) as Sukuk Murabahah as bridge financing for payments due under various projects. The first tranche of the RM2 billion (US$490.3 million) 10-year Sukuk Musharakah program monetizes unbilled sales for executed property transactions. Under this program, Exsim and its group of companies will sell their beneficial interest under the respective development projects.

Kuveyt Turk acted as a senior financier on the North Marmara Motorway Infrastructure Project. This was 2019’s largest Turkish public–private partnership (PPP) infrastructure deal. The total credit package is US$4.43 billion including conventional (US$4.13 billion) and Islamic tranches (US$300 million). Kuveyt Turk provided US$200 million in funding and acted as the Islamic facility agent.

The market trend has long favored Istisnah–Ijarah structures, and more recently diminishing Musharakah structures. The application of parallel Istisnah for the Islamic tranche is unique.

Honorable mention: Konsortium KAJV and Exsim Capital

Sukuk: ‘Ba2’ (Moody’s)/‘BB+’ (Fitch)

Axis REIT also returned to the market for a seventh follow-on placement of RM276.7 million (US$67.83 million). This was the largest equity capital market deal in Malaysia in 2019.

Fawaz Alhokair Group’s Arabian Centres Company (ACC), the owner, developer and operator of Arabian Centres, operates a portfolio of 21 centers in 10 major Saudi cities, made its debut issuance of Reg S/Rule 144A US$500 million five-year Sukuk as part of the company’s US$1.9 billion refinancing package which included a SAR4.5 billion (US$1.2 billion) domestic syndication. ACC’s successful financial repositioning is remarkable given the still-sluggish Saudi Arabian real estate market and less-than-stellar domestic retail demand.

The Sukuk apply a hybrid restricted Mudarabah–Murabahah structure. The deal is a rare high-yield covenant-style Sukuk issuance in a Reg S/Rule 144A format. The restricted Mudarabah is linked to two shopping malls and one additional property, and these provide the coupon revenue for the Sukuk. This was a rare excursion for the Saudi private sector into the global capital markets.

The new bank facilities expanded ACC’s bank group from local relationship banks to new regional and international banks.

Honorable mention: Axis REIT and Exsim Capital

With the advice of Dentons, QIIB updated its 2017 Sukuk program. The 2019 issuance of US$300 million represented the first international Basel III-compliant additional Tier 1 issuance from Qatar.

The transaction involved protracted discussions with the Qatar Central Bank regarding the structure of the terms and conditions, including on point-of-non-viability loss absorption, and detailed negotiations with the auditors regarding the issuance of its equity accounting treatment letter.

Getting the deal done with a wide international investor representation is hoped to be an indicator of reduced GCC tension.

Honorable mention: All other banks!

Maybank Investment Bank and United Overseas Bank coordinated the debt restructuring of Dayang Enterprise Holdings. They successfully arranged a RM682.5 million (US$167.32 million) Tawarruq Sukuk program that allowed a comprehensive restructuring of the firm’s obligations. The issuance was supported by collateral and partial guarantee by Danajamin Nasional.

The longest surviving pioneer of Islamic finance, Lembaga Tabung Haji, fell into serious liquidity issues. Warnings first arose with a Bank Negara Malaysia missive to improve risk management practices. Then, mismanagement and asset impairments were highlighted in external reports. In December 2018, new management came in with renowned Malaysian banking plumber Zukri Samat taking the lead as CEO. Acting quickly, Zukri identified the leaks, and worked with Bank Islam and the Ministry of Finance to plug them.

The result was the Urusharta issuance. The transaction efficiently moves troubled assets from Tabung Haji’s balance sheet to an SPV created by the Ministry of Finance. The transaction is financed by the largest face value ringgit bond ever. Arranged by Bank Islam and advised by Shook Lin & Bok, the Sukuk are sold on a discount to Tabung Haji. With the closing of this transaction, three positive outcomes were achieved:

1. The Ministry of Finance is incentivized to maximize recoveries from the assets domiciled at Urusharta in order to redeem the Sukuk.

2. Tabung Haji stakeholders will obtain a recovery of capital and profit over time from the Sukuk.

3. Tabung Haji was able to pay a Hibah to members for 2018 thanks to the restructuring.

The rebased Tabung Haji is now able to perform its duties.

Honorable mention: Dayang Enterprise Holdings and Lagoon City

Issue rating: ‘A3/BBB+’ (Moody’s/S&P)

The government of Sharjah came to market with a liability management transaction being used alongside the new issuance to support multiple commercial and risk management objectives, including the smoothing of its debt maturity, expanding its debt maturities and taking advantage of the low-rate environment.

Recognizing the unfamiliarity of the liability management transaction to many investors, Sharjah offered an attractive deal framework, whereby there would be an extended tender period for the outstanding Sukuk and a direct switch, at the investor’s option, into the new issuance. The result was that Sharjah was able to hit its liability management target of 35–40% take-up (actual was 36.5%), reducing its 2021 maturities by US$182.4 million and executing the new issuance at the top of its target range of US$1 billion, without compromising on price.

The deal was supported by Sharjah’s strong credit story showing economic resilience. With a diversified economy, not reliant on hydrocarbons or real estate, Sharjah is supported by real productive economic activities and a comprehensive program of government investment and development

Honorable mention: Oman, Indonesia and IDB

Meezan Bank has structured a diminishing Musharakah for Avari Hotels. The deal was based on advance future rentals receivable by Avari Hotels from Unilever. Meezan purchased the land from Avari. The facility was structured to ring-fence the Unilever receivables. Unilever Pakistan entered into a 10-year lease with Avari of which two years had lapsed when the deal was executed.

Unilever Pakistan as the tenant entered into a 10-year lease deed with Avari Hotels for its office premises. The rentals are payable in advance for five-year terms. In order to manage its cash flows efficiently, Unilever and Avari agreed to a provision to discount the lease deed rental, whereas Unilever undertakes to cover all associated costs of financings. The remaining rental stream is sufficient to fully amortize the deal.

Honorable mention: North Marmara and Konsortium KAJV