Shortlisted for Overall Deal of the Year 2019 | |
Social Impact SRI/ESG: Majid Al Futtaim (MAF) Sukuk | |
Size: | US$600 million |
Arrangers: | BNP Paribas, Citigroup Global Markets and HSBC Bank |
Co-arrangers: | Abu Dhabi Islamic Bank, Dubai Islamic Bank, Emirates NBD Bank, First Abu Dhabi Bank, Gulf International Bank and Standard Chartered Bank |
Legal counsels: | Dentons for the arranger, Clifford Chance for the issuer and Maples Group for the issuer (Cayman Islands) |
Rating: | Fitch: ‘BBB’ and S&P: ‘BBB’ |
Date closed: | October 2019 |
Shariah advisors: | Executive committee of the Fatwa and Shariah supervisory board of Abu Dhabi Islamic Bank, executive committee of the Shariah board of Dubai Islamic Bank and Dar Al Sharia, central Shariah committee of HSBC Bank Middle East and Shariah supervisory committee of Standard Chartered Bank |
2019 showed increased a rush to the ‘responsible’ sector. Malaysia’s Pasukhas Green Assets joined the Republic of Indonesia in issuing Sukuk under the green label. Pasukhas had diversified into the green sector in 2017 and committed to the ASEAN Green SRI Sukuk Framework. These show a skewing of the ‘responsible’ sector toward renewable energy.
Majid Al Futtaim, the powerful UAE retailer, also joined the green crowd. In April 2019, the group published its own Green Finance Framework. This is overseen by the sustainability steering committee, chaired by the CEO. The company also employs a chief sustainability officer. The entire approach is novel, but logical given that most of its projects are in high-stress environments. The firm issued Sukuk to finance or refinance eligible projects within the following categories: (a) renewable energy; (b) energy efficiency; (c) sustainable water management; and (d) green buildings. Do not worry about green washing. You may not notice it, but you should benefit from these investments when you next shop at an Al Futtaim property. For instance, when you next park at a Majid Al Futtaim project, you may discover the parking lot shaded by solar arrays. Majid Al Futtaim is putting its Green Finance Framework to work. Honorable mention: Pasukas Green Assets and Republic of Indonesia (through Perusahaan Penerbit SBSN Indonesia III) |
Sukuk: Emlak Konut GYO (Emlak Konut REIC) | |
Size: | TRY250 million (US$42.48 million) |
Arranger: | Halk Yatirim Menkul Degerler (Halk Invest) |
Legal counsel: | Ayaz Law Firm/Akol Namli & Partners for the issuer and arranger |
Rating: | Fitch — national long-term rating: ‘AA (tur)’; long-term issuer default rating: ‘BB-’; long-term local currency issuer default rating: ‘BB-’
Outlook: Stable |
Date closed: | February 2019 |
Shariah advisor: | ISFA Islamic Finance |
Hub Power issued Sukuk Musharakah (Shirkah-Ul-Aqd). The PKR4.5 billion (US$29.01 million) issuance led by Meezan Bank finances Hub Power’s investments and working capital. The Sukuk will mature in nine months with a bullet payment. The short-term papers help to grow the short-term Islamic commercial paper market in Pakistan.
At a time when doubts about green washing and uncertainty were swirling the environmental, social and governance (ESG) markets in Europe, the IsDB returned to the euro market. The IsDB’s deal is the first euro green Sukuk and governed by a sustainable framework. The high uptake demonstrated that angst about ‘green’ investing is unmerited. Emlak Konut REIC is among the Turkish REICs to have issued Sukuk in 2019. The largest REIC raised TRY250 million, the largest such issuance for any type of real estate company in Turkey over the past 10 years. This is remarkable given the multi-faceted challenges facing the Turkish economy and real estate in particular. The short tenors assuage investor concerns over market conditions. The Wakalah-based Sukuk, however, are reissued and have gradually increased in outstanding to TRY900 million (US$152.93 million). The product, which Halk has delivered for other clients, has created a new alternative funding source and market for REICs, real estate developers and the infrastructure sector in the Turkish debt capital markets. |
Syndicated: Pakistan International Airlines Corporation | |
Size: | US$250 million (Islamic-conventional dual-tranche syndication) |
Arrangers: | Standard Chartered Bank |
Legal counsel: | Hogan Lovells (Middle East) |
Trustee: | Faysal Bank |
Rating: | Unrated |
Date closed: | November 2019 |
Banque Misr and ADIB Capital led a syndication for Al Marasem International Development to finance the first phase of Zone R5 in the new Egyptian Administrative Capital. The deal is structured as a revolving Mudarabah.
Pakistan Mobile syndicated PKR9.5 billion (US$61.24 million) of airtime represented by prepaid cards. This was part of a dual-tranche deal to fund working capital and capex for the rollout of its 4G/LTE services. A different intangible underlier was used for Pakistan International Airlines Corporation. The airline had already issued available tonne kilometer (ATKM)-based Sukuk. But the 2019 adaptation was Ijarah services utilizing airline ticket voucher distribution. Unlike ATKM, the airline ticket vouchers represent a portion of available seats on designated routes. In other words, the program is more specific. The deal is self-liquidating with ticket sales from specific routes going into collection accounts. With Ijarah voucher and services, one wonders when the next step will emerge and Sukukholders may convert their certificates into seats. Honorable mention: Al Marasem and Pakistan Mobile |
Trade Finance: Serba Dinamik | |
Size: | Confidential |
Financier: | Standard Chartered Bank |
Legal counsels: | Baker McKenzie for the obligor and Clifford Chance for the financier |
Guarantor: | Serba Dinamik International (Labuan), Malaysia UK Export Finance |
Trustee: | Standard Chartered Bank |
Rating: | Unrated |
Date closed: | December 2019 |
Having been well represented for a number of years, trade finance lagged in 2019. Standouts in 2019 included HSBC Amana Malaysia providing a EUR75 million (US$83.37 million) trade refinance to the International Islamic Trade Finance Corporation (ITFC) and Sidra launching its trade finance fund.
Serba Dinamik Indonesia stepped up with the first Tawarruq financing and first non-capital markets Islamic financing guaranteed by the Export Credits Guarantee Department operating as UK Export Finance. The cross-border Tawarruq financing included an Indonesian company, a Malaysian guarantor, a UK contractor, a Singapore-based financier and legal/Shariah advice from the UAE. The proceeds support various Serba Dinamik projects including electricity supply, cooling and heating, liquefied natural gas (LNG) midstream services and LNG ship to transport. |
Bahrain: Mumtalakat Sukuk Holding Co | |
Size: | US$600 million |
Arrangers: | BNP Paribas, Citi, HSBC, Standard Chartered Bank and National Bank of Bahrain |
Legal counsels: | Allen & Overy and Hassan Radhi & Associates for the arrangers, Clifford Chance, Maples Group and Zu’bi & Partners for the obligor |
Rating: | S&P: ‘B+’; Fitch: ‘BB-’ |
Date closed: | February 2019 |
Shariah advisors: | Shariah boards of BNP Paribas, Citi Islamic, HSBC, Standard Chartered Bank |
Alba refinanced its Line 6 project in a Bank ABC-led syndication. The Kingdom of Bahrain made its first issuance under its new global Sukuk program. This represents a move away from its past practice of issuing stand-alone bonds and Sukuk.
Mumtalakat returned to the market with an update to its multicurrency Sukuk program and issued US$600 million. This deal was innovative because the existing Wakalah/Murabahah hybrid structure was updated at the program level to include self-use real estate assets located in Bahrain in the Wakala limb of the structure in order to make the structure more robust from a Shariah perspective. The first issuance under the updated program used a combination of self-use assets and shares as part of the Wakalah limb. Honorable mention: Alba and Kingdom of Bahrain |
Egypt: MEDTEX | |
Size: | US$34.2 million |
Bookrunners: | Banque Misr and Venture Partners Advisory |
Legal counsel: | Banque Misr’s Legal Department |
Rating: | None |
Date closed: | 12th November 2018 |
Shariah advisor: | Banque Misr’s Shariah board |
Banque Misr led a EGP1.6 billion (US$99.79 million) syndicated Musharakah for Al Marasem International for Development Company and the Marina Way Lagoon for real estate and touristic investments.
ADIB Capital and Banque Misr raised EGP940 million (US$58.63 million) in a syndicated Mudarabah for Marasem International for Development Company for work in the New Administrative Capital. Banque Misr worked with BM Lease on restructuring the finances of MEDTEX. Due to poorly structured liabilities, the volume and tenor of the company’s liabilities had prevented it from achieving profits congruent with the company’s manufacturing capacity. The deal involves a US$29.2 million sale and leaseback with BM Lease acting as the asset owner, effectively the security agent, on behalf of Banque Misr. Proceeds were used to extinguish MEDTEX’s existing debts. This was executed in the form of a US$15 million six-year facility and a US$14.2 million revolving Mudarabah line. An additional US$5 million of equipment was leased to MEDTEX under a similar structure. Honorable mention: Marasem |
Indonesia: Jambaran-Tiung Biru Project (Pertamina) | |
Size: | US$100 million |
Arranger: | MUFG Bank, Singapore branch |
Legal counsels: | Latham & Watkins for the issuer and Milbank for the arranger |
Rating: | Unrated |
Date closed: | June 2019 |
Shariah advisors: | Shariah committee members of MUFG Bank (Malaysia) |
There is no doubt that the Republic of Indonesia’s return to market with its green Sukuk is a powerful signal to the markets. The investor uptake demonstrated faith in Indonesia, a persistent issuer, and support for ESG issuances among investors.
Serba Dinamik secured the first non-capital market’s deal supported by UKEXIM. Even if the deal is Tawarruq, this is an important achievement. One hopes that this opens the door for more export agencies to engage deeply with Islamic finance. Perhaps the next UKEXIM deal will apply true goods Murabahah. Jambaran-Tiung Biru Project (Pertamina) is the first Islamic project financing arranged for Pertamina for its key strategic project in Indonesia. The project involves the development of existing gas reserves in the Unitized Jambaran-Tiung Biru Field along with associated gas processing facilities and spur pipelines. The Wakalah structure adopted in the deal was also a first for an Indonesian oil and gas project financing. This deal also marked the first Islamic structure adopted under the legal framework of the Trustee Borrowing Scheme (TBS). The TBS had been the preferred structure for jurisdictions that require viable legal structures to manage requirements relating to a country’s assets under the World Bank Negative Pledge. MUFG brought this financial expertise to the deal based on its long experience with similar TBS programs. The unique features of this deal include a Japanese bank innovating Islamic and project finance schemes into the Islamic market. Honorable mention: Republic of Indonesia and Serba Dinamik |
Kuwait: Lagoon City | |
Obligor: | Lagoon City Sukuk Company; original obligor was Al Ahlia Gulf Holding and its related entities which were engaged primarily in investments and real estate, including the landmark Lagoon City development in Kuwait. |
Size: | US$200 million |
Certificateholders’ representative committee: | Emirates NBD, Islamic Development Bank, Masraf Al Rayan and Liquidity Management Centre |
Legal counsels: | For the committee: DLA Piper Middle East and for the obligor, Al-Hossam Legal – Al-Turqi & Partners |
Rating: | Unrated |
Date closed: | March 2019 |
Shariah advisors: | Shariah boards of the certificateholders’ representative committee |
The successful Sukuk programs of Warba Bank and Kuwait International Bank were important steps forward. Kuwait’s Islamic financial sector is robust and sound.
Lagoon City is significant because it involves a structure that allows for the settlement of the sums due to the certificateholders by utilizing a very unique assets swap arrangement. The transaction involved creating an intermediate vehicle to receive shares issued in numerous countries, with careful consideration of legal and tax issues in respect of the structure; creating a supplemental trust structure to allow for the existing Sukuk structure to accommodate new assets; creating a supplemental certificateholder representative committee; managing agent and other appointment documents to flex the structure and creating a complex waterfall dealing with existing liabilities and funds from realizations. Another unique element was completely restructuring a Sukuk Musharakah facility with voting carried out through Clearstream and Euroclear. The result was essentially an asset-for-asset Sukuk settlement — certainly among the first in Kuwait and the first of its kind in terms of the mechanisms utilized, allowing the certificateholders to start realizing value from their Sukuk investment. Honorable mention: Warba Bank and Kuwait International Bank |
Shortlisted for Overall Deal of the Year 2019 | |
Malaysia: Urusharta Jamaah | |
Size: | RM27.56 billion (US$6.76 billion) |
Arranger: | Bank Islam Malaysia |
Legal counsel: | Shook Lin & Bok |
Date closed: | May 2019 |
Malaysia is such a deal-rich environment that finding the best Malaysian deal is a significant challenge. Our entries range from Cypark Ref and green energy to Prolintas and infrastructure to real estate development with IJM Land. Behind these is a seemingly endless stream of innovative and exciting deals.
Of all of the Malaysian deals, the one that will touch the largest number of citizens for a long time is the rescue and refinance of Tabung Haji. The Urusharta Jamaah (UJSB) deal plays a critical role in restoring the financial soundness of a revered national institution that serves the interests of Malaysia’s Muslims in fulfilling their Hajj obligations and has long been a contributor to the domestic economy as an investor. The transfer of Lembaga Tabung Haji’s assets to UJSB had restored Lembaga Tabung Haji’s balance sheet and sped up its financial recovery. In the event the Sukuk Murabahah facility was not put in place and in turn, the turnaround and restructuring plan was not successfully completed, Lembaga Tabung Haji could have faced significant financial and liquidity difficulties. The financial loss to citizens would surely have been a poor reflection on the government. Timely action and a well-structured solution have prevented this from being realized. Honorable mention: Cypark Ref, IJM Land and Prolintas |
Shortlisted for Overall Deal of the Year 2019 | |
Oman: Oman Sovereign Sukuk with the government of Oman as obligor | |
Size: | OMR300 million (US$777.06 million) |
Arrangers: | Alizz Islamic Bank, Meethaq Islamic Banking (Bank Muscat) and Bank Nizwa |
Legal counsels: | Al Busaidy Mansoor Jamal & Co as the sole Oman law counsel and Linklaters as the international counsel for the arrangers and issuer |
Rating: | Unrated |
Date: | December 2019 |
Shariah advisors: | Shariah supervisory boards of Alizz Islamic Bank, Bank Muscat’s Islamic window, Meethaq and Bank Nizwa |
Abu Dhabi Islamic Bank financed two very large crude carriers (VLCCs) for Oman Shipping. The deal was the first ijarah for Oman Shipping, and one of a few for VLCCs.
The National Bank of Oman’s Muzn window provided OMR20 million (US$51.8 million) financing to Al Iskan Al Tullabi based on diminishing Musharakah. The transaction supports the arrival of a US student housing operator in the Omani market. Oman Sovereign Sukuk, however, is one of the most important deals of 2019. The transaction provides important capital market building blocks. First among these is the issuance in the Omani rial. We have repeatedly stressed that national markets will only prosper when the preponderance of Sukuk issuances are in local currency. The second is the provision of a domestic benchmark and the third is to deliver HQLA for the Omani Islamic banking sector. Honorable mention: Al Iskan Al Tullabi SAOC and Oman Shipping |
Shortlisted for Overall Deal of the Year 2019 | |
Pakistan: NASDA Green Energy | |
Size: | US$25 million and PKR4.7 billion (US$30.28 million) |
Mandated lead advisor & arranger: | Meezan Bank |
Financiers: | Islamic Corporation for the Development of the Private Sector and Meezan Bank |
Legal counsels: | Haidermota & Co (Pakistan law) for NASDA and Clifford Chance (international law) and Vellani & Vellani (Pakistan law) for the financiers |
Security trustees: | Meezan Bank (onshore security trustee) and Bank Al Habib, Wholesale Branch, Kingdom of Bahrain (offshore security trustee) |
Shariah: | Meezan Bank |
Rating: | Pending |
Date: | November 2019 |
Pakistan has always held promise for Islamic finance. For our 2019 awards, we enjoyed the most nominators ever. This saw four winners, the most-ever for Pakistan. AKT Sugar Mills provided the winner for corporate finance with a well-structured asset acquisition deal. Avari Hotels demonstrated the suitability of diminishing Musharakah for a structured transaction, this linked to underlying rentals from Unilever. And Pakistan International Airlines Corporation, which was a pioneer in the ATKM transactions, shifted to Ijarah services linked to seat capacity. A deserving package of deals from a country long on promise.
Wind power generation projects support Pakistan’s objectives of reducing dependence on fossil fuels, increasing diversity in energy mix, decreasing greenhouse gas emissions and saving foreign exchange reserves. Today, Pakistan is reliant on carbon-based power. NASDA, one of more than 11 wind power projects, is part of the solution. NASDA brought out the full promise of 2019: green energy, cross-border collaboration with the Islamic Corporation for the Development of the Private Sector and a pair of structures. The structures were designed to suit the phase of the transaction, the financier requirements and the timeline of the project. Honorable mention: Pakistan International Airlines, AKT Sugar Mills and Avari Hotels |
Qatar: QIIB Tier 1 Sukuk | |
Mudarib: | QIIB |
Size: | US$300 million |
Arrangers: | Al Khaliji, Barwa Bank, Kuwait International Bank, QInvest, QNB Capital and Standard Chartered Bank |
Legal counsels: | Dentons for the issuer, Allen & Overy for the arrangers and Maples Group for the issuer (Cayman Islands) |
Rating: | Unrated |
Date: | November 2019 |
Qatar Islamic Bank led successful syndications for Qatar Gas Transport Company (QGTC/Nakilat) and QTerminals. The Nakilat deal included QAR1 billion (US$274.57 million) and US$250 million tranches. QTerminals raised QAR320 million (US$87.86 million). The former was a straight Tawarruq deal using LMA documents while the latter was a structured Tawarruq deal. Addleshaw Goddard advised the arrangers.
The deal that rises to the top is the QIIB additional Tier 1 Sukuk. This deal required extensive work with the central bank to embrace both Basel III structuring points and an international issuance. The success of the deal may herald the reduction of tensions within the GCC and the appeal of Qatar and the QIIB to international investors on the other side of Asia. Honorable mention: Nakilat and QTerminals |
Shortlisted for Overall Deal of the Year 2019 | |
Saudi Arabia: Arabian Centres Sukuk (Fawaz Alhokair Group) | |
Size: | US$500 million 144a/RegS Sukuk and SAR4.5 billion (US$1.2 billion) syndicated facilities |
Arrangers (Sukuk): | Credit Suisse, Emirates NBD Capital, Goldman Sachs International, HSBC Bank, Mashreqbank, Samba Capital and Warba Bank |
Arrangers (Syndication): | Goldman Sachs International, Samba Financial Group, the Saudi British Bank, Abu Dhabi Commercial Bank, the National Commercial Bank, Arab National Bank, Al Rajhi Banking and Invesment Corporation, Mashreq Al Islami (Islamic Banking Division of Mashreqbank) |
Global agent, Ijarah investment agent, Murabahah investment agent, security agent and account bank: | Samba Financial Group |
Legal counsels: | White & Case for the obligor/issuer; Clifford Chance and Abuhimed Alsheikh Alhagbani Law Firm for the arrangers; Maples Group for the issuer (Cayman Islands) |
Rating: | Obligor: ‘Ba1’ (Moody’s)/‘BB+’ (Fitch) |
Date: | November 2019 |
Shariah advisor: | Executive Shariah committee of HSBC Saudi Arabia |
Financial advisors: | Houlihan Lokey & Swicorp |
Saudi Arabia did not disappoint in 2019. The Kingdom provided a rich slate of deals from the Alkhabeer Waqf Fund to contenders like the NMG Workspace Mudarabah and the Savola hybrid Sukuk. As Tadawul attracts more IPOs and Sukuk, we can expect much more.
Arabian Centres, however, was the top deal. The transactions repositioned the Kingdom’s top retail operator and consolidated its debt. Structured with high-yield characteristics, the Sukuk included a 144A tranche to facilitate US institutional investors. The combined transactions are a SAR4.5 billion (US$1.2 billion) term syndication and a ‘BB+’-rated 144A/Reg S Sukuk. The company has a sound financial footing stretching its debt tenors to eight and 12 years for the various tranches of the syndication and Sukuk. Honorable mention: NMG and Savola |
Turkey: North Marmara Motorway Infrastructure Project | |
Size: | US$300 million |
Arrangers: | Kuveyt Turk, Albaraka Turk, Garanti Bankasi and Is Bankasi |
Legal counsels: | Goksu Safi Isık & White and Case for the obligor and Clifford Chance for the banks |
Guarantor: | Republic of Turkey acting through the Prime Ministry, Undersecretariat of Treasury (Turkiye Cumhuriyeti Basbakanlik Hazine Mustesarligi) |
Rating: | None |
Date: | September 2019 |
Shariah advisor: | Kuveyt Turk Participation Bank’s Shariah committee |
Kuveyt Turk issued new regulatory capital Sukuk. Halk REIC and Emlak Konut REIC successfully issued new Sukuk under their programs with Emlak Konut REIC raising the largest sum in recent memory.
The North Marmara project, however, showed a return to classical structures, playing a key role in the largest public–private partnership project in Turkey in recent years. Honorable mention: Kuveyt Turk, Halk REIC and Emlak Konut |
Shortlisted for Overall Deal of the Year 2019 | |
UAE: Majid Al Futtaim (MAF) Sukuk | |
Size: | US$600 million |
Arrangers: | BNP Paribas, Citigroup Global Markets and HSBC Bank |
Co-arrangers: | Abu Dhabi Islamic Bank, Dubai Islamic Bank, Emirates NBD Bank and First Abu Dhabi Bank |
Legal counsels: | Dentons for the arranger, Clifford Chance for the issuer and Maples Group for the issuer (Cayman Islands) |
Rating: | Fitch: ‘BBB’ and S&P: ‘BBB’ |
Date closed: | May 2019 |
Shariah advisors: | Executive committee of the Fatwa and Shariah supervisory board of Abu Dhabi Islamic Bank, executive committee of the Shariah board of Dubai Islamic Bank and Dar Al Sharia, central Shariah committee of HSBC Bank Middle East and Shariah supervisory committee of Standard Chartered Bank |
A stalwart of the industry, the UAE too provides a diverse selection of contenders. Two winners in this year’s competition were Dubai Aerospace Enterprise (DAE) and the government of Sharjah. The former blended the unique business style of Abu Dhabi Islamic Bank with that of others to provide funding for DAE in its acquisition of new aircraft. The government of Sharjah was able to execute a unique liquidity management program with its benchmark sovereign issuance.
Majid Al Futtaim, however, steps to the front with its green Sukuk. These Sukuk finance and refinance green investments that the UAE’s top retailer is making across its properties in the UAE and MENA region. These investments are visible and represent a proactive approach to sustainable property management. This is part of the retailer’s commitment to 10 of the UN’s 17 sustainable development goals. Honorable mention: Dubai Aerospace Enterprise and government of Sharjah |
IFN Overall Deal of the Year 2019: Shortlist
Our IFN Overall Deal of the Year 2019 finalists reflected the dominant trends in the submissions. The top four markets are represented: Malaysia with Urusharta, Saudi Arabia with Arabian Centres, the UAE with Majid Al Futtaim and Pakistan with NASDA. Oman Sovereign Sukuk is an outlier. The power of each of Saudi Arabia, Malaysia and the UAE is well represented year after year among the Deal of the Year finalists. In 2019, the depth of Pakistan and the forward thinking of Oman bring diversity to our selected finalists.
The currency trends among the winners tell three stories. Each currency election reflected a unique driver. Majid Al Futtaim issued in US dollars reflecting the cross-border business of the company. Arabian Centres listed the Sukuk on Jersey’s International Stock Exchange. The firm also raised SAR4.5 billion (US$1.2 billion) from a syndicate of Saudi Arabian banks. NASDA also raised funds in the US dollar and the local currency. In NASDA’s case, the split facility helps the firm to manage foreign exchange costs relating to its import requirements. US dollar transactions reflect each of these finalists expanding its funding base and attracting new capital at the corporate level for Majid Al Futtaim and Arabian Centres, and supporting foreign exchange inflow for Pakistan in the NASDA case.
Local currencies also figured with the Arabian Centres, Urusharta, Oman and NASDA deals. Arabian Centres operates fundamentally in the Saudi riyal. As a result, a key component of its updated financial package is the local currency. As a purely domestic deal, Urusharta issued in the Malaysian ringgit. And, as part of a market development exercise, Oman issued solely in the Omani rial. Among these, Oman stands out as the domestic Omani rial issuance supports both the domestic capital market and the regulatory requirements of Oman’s Islamic banks. NASDA will also operate in the local Pakistani rupee and the co-financing has a domestic structure that protects the project from being overexposed to US dollar debt.
Our finalists reflect all of the market trends in structuring, and raise a few questions. Tawarruq shows up in three deals: Majid Al Futtaim, Arabian Centres and Urusharta. In the first two, Tawarruq is part of a hybrid structure. The common argument supporting this is that the underlying assets do not support the cash needs. For Majid Al Futtaim, it was Wakalah in assets and Tawarruq for additional cash. Arabian Centres used Mudarabah in specified assets and Tawarruq for the rest. Somewhat inexplicably, Urusharta used Tawarruq as well. This seemed to be an extra step. Why not sell the troubled asset pool directly against the certificates? One imagines two simple Murabahah purchase certificates due to timing and structure issues. The first certificate was issued prior to the 31st December 2018 to allow the Hibah to be paid on time to members, but not on time for a full valuation exercise. The second was issued in May 2019 to complete the transaction and after the full valuation exercise was completed. As a result, the deal could not have been completed using goods Murabahah.
Despite widespread complaints over Tawarruq’s use, finding ‘loan’ risk profiles with the other Islamic instruments is not so easy. This is especially true if there are not enough assets on a prospective obligor’s balance sheet. Why are we discussing ‘loan’ risk? Because many of our investors are banks, conventional and Islamic, and pure Mudarabah deals for instance would attract a much higher capital allocation than any deal based on Murabahah. Moreover, the complexity of property ownership, transfer and even hypothecation often mitigates against tools like Ijarah in complex financings like Majid Al Futtaim and Arabian Centres.
NASDA and the Oman Sovereign Sukuk reflected the allergy that Pakistan and Oman have toward Tawarruq. Each took on structures that were suitable to their markets and financiers. In the NASDA case, the Islamic Corporation for the Development of the Private Sector (ICD) elected to use an Istisnah–Ijarah model. Oman preferred straight Ijarah over diminishing Musharakah, which it had used in the past.
Three major themes ran through the Deal of the Year 2019 submissions: Green, restructuring and system development.
NASDA and Majid Al Futtaim earn the darkest, deepest green shades. NASDA earns its green rating on a project basis, and as part of a national effort to push away from hydrocarbon energy. Majid Al Futtaim earns its colors by fomenting a new culture of sustainability at the leisure and retail giant. Imagine if the other great GCC retailers, including Arabian Centres, made the same shift. We are already seeing this in Malaysia.
Restructuring may arise for either good or negative financial situations. Arabian Centres has restructured its financial obligations when times were good. It has right-sized its costs and extended the maturities. Saudi Arabia is one of the countries with the highest internet surfing, and online shopping is sure to be as important in the Kingdom as it is in Europe and the US. The new financial structure at Arabian Centres creates financial space for the retail group to navigate the future risks to traditional centers.
Urusharta, sadly, is a reflection of when things have gone badly wrong. Quick and clear action by the federal government averted the risk of a loss of confidence in the Islamic finance system. A well-defined solution protects a state and social institution, allowing Lembaga Tabung Haji (Tabung Haji) to get on with its core mission. It also shifts the burdens more directly to the taxpayer.
Financial system development is the crane hoisting the Oman Sovereign Sukuk atop so many other submissions and onto the podium among the top five. We have had many foreign currency Sukuk for sovereigns. These solve cash requirements, but do not contribute to the development of the domestic financial market. Oman is helping to provide a benchmark, albeit on the long end of the maturity ladder. Oman is providing a high-quality liquid asset (HQLA) for domestic Islamic financial institutions. And Oman is delivering a safe investment instrument to its citizens.
Why do these finalists matter? Let’s look at the particular circumstances of each of the finalists.
Arabian Centres is a consensus finalist. Fawaz Alhokair Group is the owner, developer and operator of Arabian Centres Company (ACC). With a portfolio of 21 lifestyle centers in 10 major Saudi cities, ACC made its debut issuance of a Reg S/Rule 144A US$500 million five-year Sukuk facility as part of the company’s US$1.9 billion refinancing package. The deal also included a SAR4.5 billion syndicated financing. These transactions followed ACC’s successful IPO which raised SAR2.8 billion (US$745.96 million). ACC’s IPO is the first Tadawul listing structured to meet US 144A rules. With a market cap of approximately SAR12.4 billion (US$3.3 billion), ACC’s financial repositioning is remarkable given the still sluggish Saudi Arabian real estate market and less than stellar domestic retail demand. The new structure positions the company for financial stability through the medium term.
A blend of GCC and global financiers formed the joint lead manager group: Goldman Sachs International, HSBC Bank, Credit Suisse Securities (Europe), Emirates NBD Capital, Mashreqbank, Samba Capital and Investment Management Company, and Warba Bank. White & Case represented ACC, Clifford Chance the managers and Maples Group for the issuer (Cayman Islands). Goldman and HSBC were the bookrunners. 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 one of a very few number of fundraising activities by the Saudi private sector in the global capital markets. The 144A format allowed US institutional investors to invest. Non-GCC investors purchased 84% of the deal.
The new bank facilities expanded ACC’s bank group from local relationship banks to new regional and international banks like the UAE’s Mashreq Bank and Goldman Sachs International. The comprehensive participation of Saudi banks was capped by the role of Samba Financial Group in key administrative functions including global agent, Ijarah investment agent, Murabahah investment agent, security agent and account bank.
The transaction shows that Saudi corporates may present themselves successfully in the global markets. The ACC story represents the emergence of Saudi Arabia as a G20 country. The financially sound ACC is now better able to support the emerging middle class with its modernizing more inclusive society trend.
Oman Sovereign Sukuk is another consensus finalist. 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 (US$777.02 million) Sukuk in the following two tranches: first tranche of OMR100 million (US$259.01 million) with a tenor of five years and the second tranche of OMR200 million (US$518.01 million) with a tenor of seven years. Both tranches were issued on the 10th December 2019. Unlike the Sultanate’s previous Omani rial deal, this is not a stand-alone issuance.
An important issue that we raise for Islamic financial market development is the requirement for both domestic currency benchmarks and HQLAs. 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 Omani rial 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. In 2015, Oman issued a single co-ownership-based Sukuk facility in the Omani rial. One might argue that the 2015 deal met these requirements. The distinction in 2019 is that the Sultanate has initiated a program which promises reissuances thereby sustaining the delivery of HQLA and supporting Islamic bank liquidity development requirements.
Another first for this issuance was the application of a differential pricing mechanism. The mechanics involved investors bidding on 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.
Oman Sovereign Sukuk, however, is one of the most important deals of 2019. The transaction provides important capital market building blocks. First among these is the issuance in the Omani rial. We have repeatedly stressed that national markets will only prosper when the preponderance of Sukuk issuances are in the local currency. The second is the provision of a domestic benchmark. And the third is to deliver HQLAs for the Omani Islamic banking sector.
The last consensus finalist is Majid Al Futtaim. The second retail magnate among our finalists, Majid Al Futtaim is not merely a financial story. The powerful UAE retailer joined the ‘green’ crowd back in 2011. In April 2019, the group published its own Green Finance Framework. This is overseen by the sustainability steering committee chaired by the CEO. The company also employs a chief sustainability officer. The entire approach is novel, but logical given that most of its projects are in high-stress environments.
The firm issued Sukuk to finance or refinance eligible green projects within the following categories: (a) renewable energy; (b) energy efficiency; (c) sustainable water management; and (d) green buildings. Do not worry about green washing. The company is among the first in the MENA region to achieve LEED and BREEAM certification across its properties portfolio. You may not notice it, but you should benefit from these investments when you next shop an Al Futtaim property. If you do not see it, the company’s sustainability activities are well documented on its website. For instance, when you next park at a Majid Al Futtaim project, you may discover the parking lot shaded by solar arrays. Majid Al Futtaim is putting its Green Finance Framework to work.
The holder of a Green Star rating from Global Real Estate Sustainability Benchmarks, Majid Al Futtaim has also received a ‘low risk’ environmental, social and governance (ESG) rating from Sustainalytics. An independent ESG auditor, Sustainalytics certified the company at ‘low risk’ of experiencing financial impact from ESG factors.
These investments are visible and represent a proactive approach to sustainable property management. This is part of the retailer’s commitment to 10 of the United Nations’s 17 sustainable development goals. One hopes that Majid Al Futtaim will be a much-copied role model in its sectors.
NASDA is the look of a green future. As part of the expansion of Pakistan’s alternative energy supplies, the federal government signed, through its Alternative Energy Development Board, energy purchase agreements with 11 wind power projects. These deals had not progressed and were fast-tracked by the prime minister in 2018 so that they could be signed in 2019. Rising to the top was NASDA Green Energy. The ICD financed a US dollar Istisnah forward lease facility. Meezan Bank arranged an onshore Pakistani rupee diminishing Musharakah. The facilities finance the design, development, construction, commissioning, operation and maintenance of a 50 MW wind power plant in Jhimpir, Sindh Province in Pakistan.
Wind power generation projects support Pakistan’s objectives of reducing dependence on fossil fuels, increasing diversity in energy mix, decreasing greenhouse gas emissions and saving foreign exchange reserves. Today, Pakistan is reliant on carbon-based power, much of it imported, much of it coal. NASDA is part of the solution to shift from foreign exchange-draining imported carbon to sustainable domestic resources. NASDA brought out the full promise of 2019: green energy, cross-border collaboration with the ICD and a pair of structures. The structures were designed to suit the phase of the transaction, the financier requirements and the timeline of the project.
Urusharta is a systemically important deal. Over the past decade, the longest-operating pioneer of Islamic finance, Tabung Haji, has slid 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 moves troubled assets from Tabung Haji’s balance sheet to an SPV created by the Ministry of Finance (MoF). The transaction is financed by the largest face value Malaysian 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 MoF is incentivized to maximize recoveries from the assets domiciled at Urusharta in order to redeem the Sukuk.
2. Tabung Haji stakeholders recover capital and profit over time from the Sukuk.
3. Tabung Haji was able to pay a Hibah, being a non-obligatory cash grant, to members for 2018 thanks to the restructuring.
The rebased Tabung Haji is now able to perform its duties without the weight of challenging business assets like TH Heavy Engineering on its balance sheet. The transfer, however, may yet put stress on the MoF as it will have to make decisions about how to resolve or revive the pool of assets now domiciled at Urusharta.
The transaction itself is complicated by the fact that the current market value of the acquired assets is RM9.63 billion (US$2.34 billion). But the consideration is RM19.9 billion (US$4.83 billion) paid in two Sukuk tranches. The balance carried is to be paid over time. A successful recovery of the underlying businesses, many of which are underperforming and loss-making, may generate a gain to the government. In the meantime, the deal creates a drip subsidy to Tabung Haji of RM10.3 billion (US$2.5 billion). There are concerns that some of the assets were transferred to the SPV without fully reflecting the current market value. In other words, there are concerns that the real current valuation is less than RM9.63 billion.
Of all the Malaysian deals, the one that will touch the largest number of citizens for a long time is the rescue and refinance of Tabung Haji. The Urusharta Jamaah (UJSB) deal plays a critical role in restoring the financial soundness of a revered national institution that serves the interests of Malaysia’s Muslims in fulfilling their Hajj obligations and has long been a contributor to the domestic economy as an investor. The transfer of Tabung Haji’s assets to UJSB had restored Tabung Haji’s balance sheet and sped up its financial recovery. In the event the Sukuk Murabahah facility was not put in place and in turn, the turnaround and restructuring plan was not successfully completed, Tabung Haji could have faced significant financial and liquidity difficulties. The financial loss to citizens would surely have been a poor reflection on the government. The bold and timely action, characteristic of Prime Minister Dr Mahathir Mohamad, led to a structured solution that has prevented these two harms from being realized.