When a consortium led by Emirates Telecommunications Corporation (Etisalat), the United Arab Emirates telecoms operator, emerged as the winning bidder in the recent auction of a second GSM licence in Saudi Arabia it chose to use Islamic finance facilities to part fund the licence fee and subsequent roll out of the network. Given the size of the transaction, this decision is viewed as having a significant impact on the future growth of Islamic financing.
As for the bid itself, this was the first time competition was introduced to the Saudi telecommunications sector. Six bids emerged in the final stages of the selection process with the Etisalat Consortium having submitted the highest bid.
The size of the bid was SR12.21 billion (approximately US$3.256 billion) for the GSM licence. The bid also covered a separate licence to operate Saudi Arabia’s first 3G network valued at SR753.8 million (US$201 million). Besides Etisalat, the winning consortium includes Saudi Arabian partners the General Organization for Social Insurance (GOSI), Al-Jomaih Holding, Abdul-Aziz al-Saghyir Commercial Investment, Rana Investment, Abdullah & Said Binzagr and Riyadh Cables Group.
The Etisalat Consortium required bank finance to fund its licence payment and had been running a competition for the arranger role between two sets of regional and international banks. The favoured group of mandated lead arrangers was chosen in the second week of August and comprised Samba Financial Group, National Commercial Bank, Citigroup, Emirates Bank International, Abu Dhabi Islamic Bank, Al-Rajhi Banking & Investment Corporation, Bank al-Jazira, Dubai Islamic Bank and Kuwait Finance House.
The facilities to be put in place were split into two tranches – tranche A was for an amount of US$1.6 billion to be used for the part-financing of the licence while tranche B worth US$750 million would be used to acquire equipment for the roll out of the network. Both tranches are murabaha facilities and in each case, National Commercial Bank will be Modareb.
Formal approval of the Etisalat Consortium selection came at a Council of Ministers meeting on 9th August this year when the Communications and Information technology Commission’s (CITC) recommendation was ratified. Following this, CITC issued a letter on 14th August, confirming the winning bidder and requiring 80% of the licence fee be paid into an escrow account or a bank guarantee to be provided for the same amount within 3 weeks. The 3-week period ended on 4th September.
In anticipation of the coordination of the issues that would have to be addressed, it was decided to opt for a guarantee bridging facility in order to ensure that CITC`s 3-week deadline for receipt of the deposit moneys was met. On 31st August, 2004, National Commercial Bank (NCB) and Samba Financial Group signed a SR10.4 billion (US$2.8 billion) guarantee facility agreement with the Etisalat consortium in favour of CITC.
It was always the intention to replace the guarantee facility with an Islamic finance arrangement. Documentation on the Islamic facilities – including an escrow agreement to be entered into by the parties and CITC – was well advanced before 2nd September and work continued to finalise it and secure Shariah approvals throughout the period.
Issues to be addressed
The size of the deal was extremely large, so the number of investors needed to fund it was substantially more than usual for an Islamic transaction. A number of these institutions had rigorous but varied approaches to relevant Shariah issues. Overcoming these differences was challenging, particularly given the very tight deadlines. Indeed, the big challenge for Clifford Chance and the MLAs, perhaps more so than dealing with commercial aspects of the deal, was ensuring that Shariah committees from more than 20 different institutions were comfortable with the documentation.
An interesting structural aspect of the transaction was that the actual obligor under the Islamic facilities is a special purpose vehicle, Etisalat International Company. This company had to be established by the Etisalat Consortium for the purpose of raising the financing of the escrow account deposit, but it was not possible to use the licensee company at the time because it was still in the process of being incorporated. The licensee company will assume the obligations of the LLC following completion of an initial public offering. (As part of the bid rules, the winning consortium had to offer 20% of the licensee company`s shares to the public. This was highly successful and has been reported as being 51 times oversubscribed.)
Other structural issues that had to be addressed included the incorporation of a 6-month, term-out option for tranche A that can be exercised for payment of a fee, and contrasting approaches from the investor group on issues relating to transfers of rights under the murabaha documentation following the settlement of the initial transaction.
Nevertheless, these and many other challenges were overcome and the signing of tranche A of the 12-month facility for Etisalat International Company took place in Dubai on 13th October.
The mandated lead arrangers were joined at general syndication by ABN Amro, Arab Banking Corporation, Arab Bank, Arab National Bank (ANB), Bank of Bahrain & Kuwait, Bank of Baroda, Banque Saudi Fransi, Commercial Bank of Dubai, Dubai Bank, Gulf International Bank, Habib Bank AG Zurich, National Bank of Sharjah, Riyad Bank, Saudi British Bank and United Arab Bank.