The worlds largest
oil company, Saudi Aramco, issued its first project bond last
month, raising SR3.75 billion ($1 billion) through an Islamic
deal for the oil firms majority-owned refining joint
venture with French energy firm Total.
refinery at the Saudi industrial port of Jubail is still in its
$14 billion construction phase. So the bond is the worlds
first sukuk (Islamic bond) for an uncompleted, so
greenfield, project. It is also the first project sukuk in the
Middle East, where project finance is increasingly important to
sukuk was delayed by more than a year. But bankers
hope the template will now make Islamic capital markets
instruments a more common part of the commercial financing pool
in projects, especially in Saudi Arabia. The Kingdom is eager
for national champions such as Aramco to develop the local
capital markets via project sukuk, especially given
waning activity on the local stock market, the Tadawul.
One of the main
difficulties for the sukuk was integrating a capital markets
instrument into the $8.5 billion of senior debt raised for the
project in June 2010. The large number of banks and export
credit agencies involved in the project worried that a
disparate pool of fixed-income investors would slow future
The sukuk matures, along
with the overall financing, 11 years after the projects
completion date, set at the latest as December 2014. So it was
especially important to streamline voting procedures, and
reduce quorums and notice periods in the documentation.
Another complication was
that Islamic law requires sukuk revenue to be asset-based to
avoid interest, which is forbidden. During the construction
period, the sukuk therefore has a forward lease structure
(istisna ijarah) guaranteed by Aramco. But this
structure sparked concern that the sukuk holders would
subordinate the other financiers.
The scholars had to find
an asset on which to base the sukuk. The solution was
the refinerys storage facilities for the refined crude.
But the banks and export credit agencies needed satisfaction
that this would not in effect give sukuk holders
preferential rights to the asset. There are therefore
provisions to effectively prevent sukuk holders from
selling the storage facilities.
Another novelty is that
this is Tadawuls first sukuk issued by an
unlisted company or special purpose vehicle. Saudi capital
markets rules are based around IPOs. The Capital Markets
Authority is now revamping its rulebook. But exceptions were
needed, for example, to allow a sukuk prospectus
without financial statements from Aramco, whose secrecy is
deemed strategically important.
Aramco controls Saudi
Arabias oil reserves so the firm is uncomfortable issuing
detailed financial information, which according to sources
close to the deal is part of the reason why the Jubail project
scrapped plans for a conventional bond.
Deutsche Bank, Samba
Capital and Saudi Fransi Capital (an affiliate of Crédit
Agricole) were the sukuks joint lead managers
and bookrunners. Allen & Overy and Linklaters, and their
local affiliates, acted as legal counsel.
The sukuk was
priced at 95 basis points over the six-month Saudi interbank
offered rate. It was three-and-a half-times oversubscribed.
That figure might not mean much, however, as in Saudi Arabia it
would be difficult to turn down the national oil company.
According to one of the
lead managers, the key investors were the usual suspects in
Saudi fixed-income capital-markets instruments: local banks,
together with the main state social security funds, and large
state corporations all of which are unlikely to trade
Nevertheless, there is potential for similar deals as, after
the Arab Spring, more state petrodollars are being spent at
home, meaning more large-scale development projects. Local
banks are not big enough to meet the funding needs, and
international banks face liquidity constraints.
"Interest in project bonds is growing as
projects look to the widest possible financing
Richard OCallaghan, Linklaters
Other Aramco projects are
looking to issue fixed-income instruments, and Abu Dhabi too
has projects looking at the project bond market notably
the Mubadala aluminium and pipeline projects (which are already
up and running). Qatari gas project Barzan is also hoping to
issue a bond.
"Interest in project
bonds is growing as projects look to the widest possible
financing pools," says Richard OCallaghan, who led the
team at Linklaters working on the sukuk. "The Middle
East is fertile ground for project bonds and some of the
biggest project bonds have been from the region. The Jubail
refinery sukuk is a very positive step in the further
development of the Gulf project bond market."
In the wider Islamic market, the Turkish arm of Kuwait
Finance House issued a $350 million sukuk last month,
and Goldman Sachs registered a $2 billion sukuk programme in