LONDON, 10 July 2006 — The Saudi oil, gas and petrochemicals sector is finally waking up to the potential of accessing Islamic finance for their capital building, expansion and debt refinancing programs. A few days ago, Saudi Basic Industries Corp. (SABIC), one of the ten largest petrochemicals exporters in the world, announced that it was imminently launching the first issuance in its debut sukuk (Islamic bond) program totaling SR3 billion, following approval from the Saudi Capital Market Authority (CMA).
The sukuk is the first to be launched in Saudi Arabia under the new Capital Market Law. SABIC has mandated the HSBC Group, which has extensive experience in structuring and distributing sukuk, as the lead manager and book runner for the issuance.
Two weeks ago during a visit to London, the CMA’s head of authorization and inspection, Turki Ibrahim Almalik confirmed to Arab News that Saudi Arabia is in the process of drafting legislation which would facilitate the issuance of sukuk. “We are working on regulations which would allow for sukuk to be issued in the Kingdom. In fact, we are working on the issuance of a corporate sukuk. There were many technical issues to be considered and resolved. We do not intend to draft parallel regulations for an Islamic capital market (ICM) but these regulations would come under a comprehensive capital market regulatory and legal framework,” he explained.
Given that the oil, gas and petrochemicals sectors are the backbone of the Gulf economies, and given the phenomenal growth of Islamic finance in the Gulf Cooperation Council (GCC) region in the last few years as evidenced by the growing demand for such products and the appetite for initial public offerings (IPOs) of Islamic financial institutions and funds, one of the major anomalies has been the absence of Islamic finance from these sectors.
In the last two decades there have been a few deals involving the sectors in the Muslim countries, mainly in Malaysia where Petronas, the national oil and gas company, and Tenaga Gas, the electricity utility, have issued several Islamic papers totaling billions of ringgit primarily to refinance conventional debt or to raise funds for expansion work. These are corporate issues, rated by the two local rating agencies RAM and MARC, and listed on Bursa Malaysia. The major difference, other than the structure, is that Malaysian papers, whether conventional or Islamic, are actively traded in the secondary market, which increases the liquidity in the system and creates a market depth.
In the Middle East, the two financings for the Equate Petrochemical Company in Kuwait had sizeable Islamic tranches — perhaps the only major Islamic financial involvement in the sector in the region. There have been some smaller transactions.
The reasons for the relative absence of Islamic finance from the oil, gas and petrochemicals sectors especially in the Middle East are manifold. The general lack of awareness of Islamic finance structures including among the top corporates is revealing. Islamic project finance; structured finance; capital market products such as sukuk; private equity; construction finance (Istisna); and equipment leasing (Ijara) are ideally suited to these sectors especially from an investor risk-reward profile point of view. This knowledge gap seems to be changing especially with the involvement of Western banking majors in Islamic finance who perhaps are more adept at market education and distribution.
The other major reason is the lack of legal and regulatory frameworks to facilitate the above Islamic financial products. Most of the GCC countries, especially Saudi Arabia, do not have sukuk laws; trust laws; laws relating to the establishment of special purpose vehicles (SPVs) which are often used in sukuk structures, in place. As such both corporates and banks shied away from such structures because of the legal risks and also the potential costs of pioneering such instruments. The economic reform program in the Kingdom in the last few years has meant a much more receptive culture amongst Saudi lawmakers and the Shoura Council to Islamic finance. On the upside, the three sectors are core established asset classes. As such the flow of quality deals should not be a problem. Saudi Aramco alone has a capital expenditure plan of over $190 billion over the next decade or so.
In fact, HSBC Amanah recently acted as financial adviser to Saudi Aramco and Sumitomo Chemical on the $600 million Islamic facility for the Rabigh refinery and petrochemical project. This is the largest such facility to date and is based upon the procurement of a number of core project assets and an Islamic lease of those assets to the project company.
The SABIC sukuk, which has a minimum subscription of SR500,000, would be the first such commercial paper to be listed on the Tadawul (Saudi stock exchange), and would be fully tradable. The Shariah compliance would be provided by HSBC Amanah, the global Islamic finance division of the HSBC Group, which has a presence in the Kingdom through its joint venture entity SABB.
Saudi Aramco, has also accessed Islamic finance in the last year for leasing some of its tanker fleet for transporting crude oil. The Saudi oil giant, the world’s largest oil exporting company, has the largest tanker fleet in the world. Out of some 70 or so, it only owns about 19. As such, the rest of the fleet is chartered. Last year ABC International structured and co-underwrote the $26 million Al-Safeena Ijara Sukuk — a facility which combined Islamic equity with conventional debt for the same asset, the Venus Glory VLCC (very large crude carrier), owned by Pacific Star, a subsidiary of Saudi Aramco.
SABIC stresses that it is issuing the sukuk program and utilizing Islamic finance as part of a diversification of its source of funding. The company recently raised the largest ever Islamic finance tranche in a Greenfield project with the financing for the Yanbu National Petrochemicals Company (YANSAB) affiliate, in addition to a recent $1 billion Murabaha finance agreement with Deutsche Bank.
SABIC maintains that this sukuk demonstrates its continued commitment toward developing the scope and breadth of Islamic financing, which, it hopes, will contribute to developing the Saudi capital market and help develop the Saudi economy.