Structured Finance & Trade Finance: Deal of the Year
In February 2016, the government of Senegal issued an innovative US$75 million Shariah compliant trade financing facility. What made this issuance unique was its one-of-a kind structure engineered to overcome unfavorable market trends and to cater specifically to a crucial commodity while maintaining the Shariah integrity of the deal.
Purpose
The deal was carried out to finance the purchase of groundnuts and to fund the processing of the groundnuts into groundnut oil and cake for export by Sonacos (formerly Suneor), the leading company in the market. The deal, carrying a tenor of up to 12 months, was arranged by the IDB Group’s International Islamic Trade Finance Corporation (ITFC).The IDB Group has a long history of a strategic relationship with Senegal. Today, the group continues to play an integral part in financing and developing the country.
Challenges
However, the deal was not without challenges. Plunging market prices caused financial deterioration for Sonacos and the sector and which in turn made the deal and its processes challenging. To plug this, the ITFC team developed and provided a unique and tailor-made pre-export structured commodity trade finance scheme. The scheme combined Shariah compliant Murabahah as well as an element of Islamic tolling, the first of its kind under the same structure. The purpose of Islamic tolling is to accommodate the processing of the groundnuts into groundnut oil before exporting.
Structure
The unique structure begins with the ITFC purchasing groundnuts from local farmers and cooperatives and which are then delivered to Sonacos. According to the Islamic tolling arrangement, the ITFC pays a tolling fee to Sonacos for the processing of the groundnuts into groundnut oil and cake which will then be exported. The final products are then sold under the Murabahah contract. The gains from the export sales are finally assigned to the ITFC to repay the facility. The final product will be put under a collateral management agreement (CMA) from production to export and will be supervised by a third-party collateral manager. This move is to further strengthen the security package of this self-liquidating structure. These security measures such as proceeds assignment and the CMA are in addition to the guarantee of the government of Senegal.
Significance
Noteworthy in its structure, the social impact of the transaction is also significant as it finances a strategic national cash crop commodity – on which 40% of the 14 million-strong Senegalese population are dependent on for their livelihood. This deal therefore contributes to increasing the African country’s overall export revenues and subsequently reducing the unemployment level as well as assisting in alleviating poverty.
Sonacos planned to collect 200,000 tonnes of groundnuts out of the one million tonnes to be produced in the country for the 2016/17 season and because this objective could have been jeopardized by the lack of funding, the ITFC decided to sustain its support for the sector given its strategic importance in terms of socioeconomic development. The ITFC’s involvement in the sector was catalytic, eventually impacting local banks which finally set aside their reluctance and brought their support to the sector.
Finally, the initiatives and actions carried out by the ITFC contributed greatly to the ongoing restructuring and the reduction of financial constraints not only at the level of Sonacos but also at the level of the Senegalese groundnut sector.
Summary of terms & conditions |
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Instrument: |
Pre-export structured commodity trade finance |
Issuer: |
Government of Senegal as the beneficiary, and Sonacos (formerly Suneor) as the executing agency |
Issue size & pricing: |
US$75 million – up to a tenor of 12 months |
Date: |
21st February 2016 |
Arrangers: |
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Lawyers: |
In-house counsel of the ITFC |
Said Ben Afane Ibouroi
Manager, Sub-Saharan Africa, ITFC, IDB Dakar Regional Office, BP 6253, Dakar-Etoile, Senegal
Tel: +221 33 889 11 44
Fax: +221 33 823 36 21
Email: [email protected]
Website: www.itfc-idb.org