Sipchem’s recent Mudaraba Sukuk is notable as an economic success and also for its structure.  The financing represented a great addition to the tool kit available to corporate treasurers in Saudi Arabia.

A Sukuk financing typically requires that:

  • An issuer has unencumbered tangible assets available;
  • The assets are Shari’ah compliant (i.e not related to alcohol, pork, gambling etc.);
  • Direct/indirect ownership of those assets vest with the seller/issuer; and
  • The estimated value of the assets is greater than or equal to the aggregate nominal amount of the Sukuk to be issued.

In the case of Sipchem, with encumbrances at operating company level, and with relatively few assets itself (as a holding company), the first requirement detailed above was not easily satisfied. As such, Sipchem’s asset base had to be sufficiently broadened to accommodate a Shari’ah structure.  How was this accomplished?

The Saudi Hollandi Bank Mudaraba Sukuk which closed at the end of 2008 provides interesting background.  With relatively few assets to underpin the financing, the Mudaraba was not comprised of tangible assets but of an undivided interest of each sukuk holder in the present and future business operations of the issuer. Another example is the innovative Mobily ‘Airtime’ facility of 2007. Mobily’s tangible assets consisted mostly of its network equipment (which were too limited in value to back large borrowings) and its network licence (the use of which was restricted by regulatory constraints). Mobily therefore turned to an upfront sale of ‘airtime,’ or minutes, to investors, acting as a distributor of those minutes to its customers on the investors’ behalf. The staged sale of the minutes included an additional cost element (which was referenced to SIBOR).

In structuring Sipchem’s Mudaraba Sukuk, it was apparent that the key financeable asset was the right to receive distributions and other payments from its subsidiaries, once any relevant distribution tests had been met at project company level.  Stripping out equity in such a way and using it as the basis of the Mudaraba underlines a real progression among Shari’ah scholars in their acceptance of intangibles as the basis for Islamic capital markets instruments and is indicative of the growing sophistication of the Saudi Arabian market.

The assets of the Mudaraba were defined as follows:

an undivided interest in Sipchem’s existing and future business (including, amongst others, the right to share in distributions and any other payments made by any subsidiary to Sipchem once received by Sipchem but excluding the shares of any subsidiary of Sipchem or any interests in such shares or any votes attached to them).”

A copy of the Offering Circular is available here.

Notwithstanding the fact that the secondary market remains relatively illiquid, the paper’s appeal to investors means that a Sukuk issue increasingly represents comparable (if not good) value for corporates looking for medium- to long-term capitalisation when compared to commercial bank debt. With an increase in the institutional investor base (such as the growth of the insurance market), moves to provide access to the Sukuk markets to investors outside the GCC, increased document standardization, and a ‘debt’ market which seems relatively insulated from the contagion currently affecting European sovereigns, the Kingdom’s marketplace should be a busy place for financial institutions and attorneys in the coming years.

Editor’s Note: Latham advised Deutsche Securities Saudi Arabia LLC and Riyad Capital as Joint Lead Managers and Joint Bookrunners on the financing.

Photo: Courtesy of Sipchem