Sadara Chemical Company, the joint venture between Saudi Aramco and The Dow Chemical Company, launched a Sukuk on the 13th March 2013 when it received approval from the Saudi Capital Market Authority (CMA). The Sadara Sukuk is only the second project Sukuk worldwide after the 2011 Sukuk issued in respect of the SATORP refinery and petrochemical project, another Saudi Aramco joint venture.
It is planned that the Sadara Sukuk will form part of the proposed US$20 billion financing plan for the integrated chemicals complex, which is to include loans from, among others, export credit agencies, Saudi investment funds, and conventional and Islamic banks. The Sadara complex will construct, own and operate a world-scale integrated chemicals complex in Jubail Industrial City II, in the Eastern Province of the Kingdom of Saudi Arabia (KSA). Once completed, the Sadara complex will represent the largest petrochemical facility ever built in a single phase.
The use of project Sukuk remains in its nascent stages having made its debut in 2011 on the SATORP project, where a US$1 billion Sukuk was used as replacement debt to refinance shareholder senior debt. Uniquely for project Sukuk, the Sadara Sukuk will form part of the initial debt to fund the Sadara project which made the structuring and implementation of the Sukuk more challenging than the SATORP forerunner. Given the high degree of political support within the kingdom to grow its capital markets and the low pricing of project Sukuk as compared to other funding sources, this trend would seem to continue to gather pace in the country.
The Sukuk issue is structured on substantially similar terms to SATORP as a Sukuk Musharakah, under which there is an Istisnah contract for construction with an Ijarah forward lease agreement, through which investors receive returns based on the future lease of project assets.
The Sukuk tranche is expected to be between US$1.4 billion to US$2.5 billion on a floating rate, with a tenor of approximately 16 years. Investors will receive an expected return of six-month SAIBOR plus a margin per annum to be distributed semi-annually.
In recent years Saudi Arabia has become a hub for Sukuk and overtook the UAE in terms of issuance volume in 2012, which was previously the country with most Sukuk issuances in the region. The standard five-year Sukuk format is popular with Saudi investors, who ‘buy and hold’ certificates until maturity. The 16-year tenor makes this offering unique when compared to other Saudi offerings. The longer tenor is seen as an attempt to promote and develop a secondary market in the KSA, which has been dormant since the inception of the CMA in the early 2000s.
The use of Sukuk an alternative financing source was partly intended to diversify the creditor base as a result of a lack of liquidity arising from the Eurozone crisis. This dynamic coupled with the strategic desire for many GCC countries to promote the use of the Islamic capital markets has given Sukuk a rising appeal for sponsors particularly in view of their long-tenors, comparatively low pricing and potentially looser covenant packages. Although there have only been a small number of project bonds or Sukuk issued as part of greenfield multi-sourced project financings, it has now become common practice on large-scale financings to pre-structure the documentation to accommodate project bonds or Sukuk despite the fact that a project bond or Sukuk may not be issued as part of the initial finance plan.
Future of project Sukuk
It is argued that a more developed capital market in the KSA would augment greater capital source diversity and thereby financial stability. The development of the capital markets in the KSA would benefit from having a broader institutional investor base. The relative paucity of domestic private institutional investors such as mutual funds, insurance companies, private pension funds and brokers means such institutions are too few in number to play a meaningful role in the Saudi market — this is why the Saudi market would benefit from the ability to have qualified foreign institutional investors registered as direct investors.
The longer tenor of both the SATORP and Sadara project Sukuk as compared to other Sukuk launched to the Saudi market facilitates a market alternative to the ‘buy and hold’ strategy practised by most investors and takes a step towards creating secondary trading. The establishment of a secondary market would increase investor diversity and allow for wider market participation in Sukuk.
The importance of the Sadara Sukuk is significant not just for the KSA but also for the establishment of a sound financial and legal precedent for project Sukuk across the GCC. With the departure of many European banks from the region’s project financings, it would seem that the capital markets, especially Sukuk, will continue to play a major role in bridging that gap in the region.