Volume14.Issue02

IFN Deals of the Year 2016: A good year after all

2016. It was a bad year. But, it was bad in ways that we didn’t expect, and some segments of the Islamic financial markets made major headway. Four clear trends emerged in the 2016 IFN Deals of the Year. 

New markets continued to open: Jordan, Togo and Senegal launched their maiden sovereign Sukuk; Sri Lanka’s first domestic Sukuk was issued; ITFC and ICD kept building new markets and building on their prior work; Oz provided a magical journey to commercial real estate finance. Newness, however, remains characterized by slow and steady progress. 

We are Tawarruq. 2016 brought innovation and perfection of recent innovations. But, the volume of submissions applying Tawarruq was shockingly overwhelming. The innovation story seemed to be one step forward, two steps backwards.  

Whatever the price of oil, whatever the geopolitical challenges, Malaysia, the UAE and Saudi Arabia are the champions. Domestic demand for Islamic finance in these three giants continues to prove rich and active. Indonesia and Pakistan continued to play catch-up. But some of 2015’s rising stars like Turkey have faltered.   

Environmental and social impact were noted in a number of deals across categories. For the first time, Islamic finance players and their customers are demonstrating a more clear and systematic focus on doing well for the planet and for people.

Shockingly absent, Europe. Nominations from Luxembourg and London nearly evaporated. Cross-border deals into North America were rare. Housekeeping and austerity took their toll.

Nineteen product categories were contested. Winners came from 10 countries with Malaysia followed by the UAE as the top deal-making countries. Nine currencies were used with the US dollar and Malaysian ringgit the top currencies used in seven and five of the deals respectively. Eight of the winners were Sukuk transactions. Seven were syndicated. Two were bilateral and two were equity.  Eleven countries were put to the test. Six currencies were used, but the US dollar was dominant as it was applied in seven of the countries deals. 

For a year that everyone thought would have few notable deals, 2016 was a good year after all.

Corporate Finance: Sime Darby

Size:

RM3 billion (US$670.32 million); first issuance RM2.2 billion (US$491.57 million)

Arrangers:

Maybank Investment Bank

Lawyers:

Zaid Ibrahim & Co for the arrangers and Wong & Partners (member of Baker McKenzie) for the issuer

Rating:

‘AAIS’ by MARC

Date closed:

24th March 2016

Shariah advisors:

Maybank Islamic

The endless drone of Tawarruq fueled most corporate finance transactions in 2016.  Axiom brought to the fore a program of goods Murabahah support from Noor Bank. Meezan supported key customers like Sui Southern Gas with the development of flexible leasing products.  Equate of course relied on steady freddy Tawarruq to fund the Islamic tranche.

Sime Darby turned to deleveraging. Due to rating pressures at the time, Sime Darby wanted to explore a solution to bolster its balance sheet and manage its credit rating. Via the issuance of capital market instruments, Sime Darby wanted a solution which was dual-pronged ie strengthen its balance sheet whilst being able to raise funding cost effectively. This involved a two-pronged approach by this Shariah compliant counter: the first was to issue perpetual Sukuk based on Wakalah Bil Istithmar; the second was to issue new shares worth RM2.36 billion (US$527.32 million) in October 2016.
The Sukuk is the largest perpetual Sukuk issuance globally by a non-bank, the largest ringgit-denominated perpetual Sukuk issuance so far, and the first perpetual Sukuk globally based on the Shariah principle of Wakalah. The Sukuk program revolves around a Wakalah arrangement entered between the Sukuk trustee for the program and Sime Darby, whereby the Sukuk trustee appoints Sime Darby as its agent or Wakeel to perform duties in respect of a basket of Wakalah portfolio, including management of the Wakalah portfolio. The Wakeel’s responsibilities include investment in the Wakalah portfolio and collection and distribution of income generated from the Wakalah portfolio. Sime Darby will issue Sukuk Wakalah to the Sukukholders, and the Sukukholders will subscribe to the Sukuk Wakalah by paying a subscription price. 

The structure provides for flexibility in the determination of the Wakalah portfolio and the manner in which the Wakalah portfolio can be acquired by the Wakeel, subject to the compliance of certain asset classifications. For instance, for the initial issuance of the Sukuk Wakalah, the Wakeel, as buyer needed to acquire a certain basket of Ijarah assets from Sime Darby that complied with certain prescribed minimum standards. The Wakeel as lessor will then lease the Ijarah assets to Sime Darby at an agreed rental and tenure with option to renew upon expiry. In addition to using the principles of Ijarah to facilitate the procurement of the Wakalah portfolio, the structure also allows the Wakeel to use the principles of Murabahah for investment into commodity Murabahah investments. 

Honorable mention: Axiom Telecoms, Sui Southern Gas and Equate

Ijarah: Tiga Pilar Food Sejahtera

Size:

IDR1.2 trillion (US$89.88 million)

Arrangers:

Maybank Kim Eng Securities, Mandiri Sekuritas, OCBC Sekuritas Indonesia, Indo Premier Securities and Danareksa Sekuritas

Bookrunners:

Maybank Kim Eng Securities, Mandiri Sekuritas, OCBC Sekuritas Indonesia, Indo Premier Securities and Danareksa Sekuritas

Legal counsel:

Tumbuan & Partners for the issuer

Rating:

‘idA’ by PEFINDO

Date:

19th July 2016

Shariah advisors:

Digi Laras Prosperindo (Iggi H Achsien)

Even if Tawarruq was widely applied, Ijarah deals were a close second. Complex deals were done to facilitate the leasing of 11 airliners to Saudi Arabian Airlines by International AirFinance Corp. Sovereigns still prefer Ijarah for their initial launch deals as was the case with Jordan, Togo and Senegal.  

Tiga Pilar Food Sejahtera returned to the market with the largest Indonesian ruppiah issuance for 2016. The transaction refinanced the obligor’s existing debt and provided for future working capital needs. The firm, which brands itself TPS, is the leading consumer goods player in Indonesia. TPS produces and distributes basic consumer food products including egg noodles, instant noodles, rice noodle, snacks and candy. 

An important observation is that previously Ijarah deals were not considered easy to execute in the Indonesian securities market. This deal by prominence and size demonstrates that key impediments to Sukuk Ijarah have been overcome.

Honorable mention: International AirFinance Corp and Jordanian Company for Islamic Sukuk for Financing Government Projects

Cross-Border: Thar Block II

Size:

US$1.52 billion

Arrangers:

Mining Project: China Development Bank Corporation (Lead arranger of US dollar-denominated tranches) and Bank Alfalah, Habib Bank, United Bank, Faysal Bank (Lead arrangers of rupee-denominated tranches)

Power Project: China Development Bank Corporation (Lead arranger of US dollar-denominated tranches) and Habib Bank (Lead arranger of rupee-denominated tranches)

Lawyers:

Pinsent Masons (Lead counsel to the project companies) and HaidermotaBNR & Co (Pakistan counsel to the project companies)

Linklaters (Lead counsel to the arrangers) and Vellani and Vellani (Pakistan counsel to the arrangers)

Date:

4th April 2016

Guarantor:

Government of Pakistan

Shariah advisors:

Internal Shariah boards of Islamic facility providers

2016 was a good year for cross-border transactions. These included Malaysian capital flowing into Africa. Cagamas returned to the international market with a Singapore dollar issuance; but, China’s One Belt and One Road Initiative finally included Islamic finance for the financing of Thar Block II.  

Thar is a 3.8Mt/a coal mining project and 2x330MW coal-fired power project in Pakistan. Each financing comprised a mix of Chinese credit under Sinosure cover and conventional and Pakistan rupee tranches. The use of Islamic tranches to finance these projects demonstrates the immense importance of Islamic liquidity in current market conditions. Islamic financing was provided under the Musharakah structure by a syndicate of Pakistani banks (Habib Bank, Meezan Bank and Faysal Bank) and sat neatly with the conventional tranches under the head of a common terms agreement.

The Thar projects represented a greater than usual set of ‘firsts’. It was the first power project in Pakistan to utilize indigenous coal reserves and as such, marks a new era of energy security and economic development in Pakistan. It was also the first project financing of a mine project in Pakistan. It was also China Machinery Engineering Corporation’s first major overseas investment project. 

The financing involved a comprehensive suite of security being taken by the lenders. Some of the relevant secured assets such as the project accounts were located offshore in the Dubai International Financial Center (DIFC). Due to Pakistani stamp duty regulations, the signing of the transaction documents also took place in the DIFC.

Honorable mention: Yinson Production and Cagamas Singapore dollar Sukuk

Commodity Murabahah: Al Dzahab Assets

Size:

RM900 million (US$201.1 million) of which RM155.48 million (US$34.74 million) Class A and RM181 million (US$40.44 million) Class B

Arrangers:

AmInvestment Bank and Hong Leong Investment Bank

Lawyers:

Adnan Sundra & Low for the arrangers

Rating:

Class A: ‘AAA/Stable’; Class B: ‘AA3/Stable’; and Class C: unrated

Date:

21st June 2016

Shariah advisor:

Dr Mohd Daud Bakar

Tawarruq was the most highly nominated category. Key market players like Al Rajhi arranged a commodity Murabahah financing for Yanbu Aramco Sinope Refining. In project financing, Tawarruq allows project financing like Sarawak Hidro to proceed with draws akin to traditional project finance. In the Al Dzahab Assets’s deal, the process is used to facilitate asset securitization.  

Al Dzahab’s proceeds allow the purchase of all the rights, benefits, titles and interests to and under the Islamic personal financing agreements entered into between various Malaysian cooperatives and their customers. These asset-backed securities facilitate the extension of credit into markets that banks frequently miss and increase economic inclusion.

In addition to its high level of structuring with three classes, the program’s originator retains an option (in the form of a clean-up call) to repurchase all outstanding obligations sold to the issuer upon occurrence of certain events, if it desires. 

Dzahab is the first non-property related asset-backed securitized Sukuk, piping Ziya Capital by two months. Dzahab is also the first asset-backed security issued by a non-government linked company in the Malaysian capital market. 

Honorable mention: Sarawak Hidro, Yanbu Aramco Sinope Refining 

Most Innovative: Ziya Capital

Size:

RM20 billion (US$4.47 billion); first tranche: RM900 million (US$201.1 million) comprising RM630 million (US$140.77 million) senior Sukuk and RM270 million (US$60.33 million) subordinated Sukuk

Lead arranger:

Bank of Tokyo-Mitsubishi UFJ (Malaysia)

Lead manager:

CIMB Investment Bank

Legal counsel:

Zaid Ibrahim & Co for arranger

Rating:

Unrated

Date:

12th August 2016

Shariah advisors:

Dr Shamsiah Mohamad and Mohd Fadhly Md Yusoff

Much of the innovation in 2016 involved expanding tested concepts into new applications. DP World took the well tried concept of selling capacity into port throughput. The government of Malaysia also broadened its use of the same concept. These concepts turned heavily on the use of the seller as Wakeel or agent to deliver the services to third parties on behalf of the investors.

Bank of Tokyo-Mitsubishi UFJ (BTMU) implemented Malaysia’s first Islamic auto securitization under a Wakalah Bil Istithmar. The program is a multi-source program with different Shariah compliant auto financiers delivering assets into the conduit. The program is one of the few asset-backed Islamic securitization transactions. The originator and seller in the first issuance was CIMB Islamic Bank. The purchases are funded by paired issuances of senior and subordinated Sukuk by the issuer. The proportions of the senior and subordinated Sukuk may vary.

Although the program began with auto transactions, the universe of eligible ‘Islamic receivables’ may include trade receivables, corporate financing, Islamic credit cards, hire purchase financing, commercial financing and leases, inventories, project cashflows, etc.

Although Malaysia permits Bai Al Dayn, the Wakalah Bilistithmar structure facilitates buying ‘Ayn’ such as the property in Ijarah and Musharakah transactions. The concept may be copied for application in other jurisdictions. BTMU, the first Japanese bank appointed as lead arranger for such a program, hopes that this will help launch a more active Islamic asset-backed securities market in Malaysia.

Honorable mention: Al Dzahab Assets, DP Crescent World and Malaysia Global Sukuk

Sovereign: Jordanian Company for Islamic Sukuk for Financing Government Projects

Size:

JOD34 million (US$47.81 million)

Arrangers:

Islamic Corporation for the Development of the Private Sector, Japan International Cooperation Agency and Nomura International

Lawyers:

Dentons for the arrangers

Guarantor:

The Hashemite Kingdom of Jordan, acting through the Ministry of Finance (Obligor)

Rating:

Unrated

Date:

17th October 2016

Shariah advisors:

International Islamic Fiqh Academy and Dr Hana Huneity and Dr Mohammed Hawalmh from the Central Shariah Scholars Committee of Jordan

Although Malaysia and Indonesia returned to the markets, they built on tried and true methods. Jordan, however, came to market with its first sovereign Sukuk which issuance bears a number of unique features that may influence the evolution of the Islamic capital markets.

For instance, the issuing special purpose company covers its expenses by a deduction from the periodic payments. The deduction is subject to a ceiling. Another factor is that the rental stream is not based on a central bank benchmark, but the fair value of the rental payment. This led to the formation of an Expert Advisory Committee to conduct a study of the underlying asset and advise on the rental payment.  A third innovation was that the investors would subscribe to the deal based on an expected yield, not the final yield. This left the investors to negotiate with the obligor once the deal was closed.

In the process of this project, the Jordanian scholars had to be convinced about using an asset under construction as an underlyer. The IDB Group Shariah Committee provided assistance in resolving this in the affirmative. This led to a need to address the forbidding of sale and leaseback under Jordan’s Leasing Law. As part of the comprehensive reforms required for this deal, the Japan International Cooperation Agency provided a technical assistance package.

The transaction now establishes a benchmark Sukuk Ijarah for the Jordanian market and a risk-free reference rate for the section. Key innovations in the structure may lead to new developments in the global Sukuk market.

Honorable mention: Malaysia Global Sukuk and Perusahaan Penerbit SBSN Indonesia III

Musharakah: Noman Group

Size:

US$32 million

Arrangers:

Standard Chartered Bank and Islamic Corporation for the Development of the Private Sector

Lawyers:

Clifford Chance and Syed Ishtiaq Ahmed & Associates as local Bangladeshi counsel for the arrangers and Legal Shelter for the obligor.

Date:

23rd October 2016

Shariah advisors:

Shariah committees of the arrangers

South Asian deals frequently feature Musharakah and diminishing Musharakah deals. Lalpir returned to the market in 2016. New deals were seen in Indonesia like Jaya Marga Persero.

The Ismail Spinning transaction brings the Noman Group, one of Bangladesh’s largest textile groups, within the Islamic finance ambit. The transaction represents Ismail Spinning’s first club or syndicated facility structured on a Shariah compliant basis. The facility enabled Ismail Spinning to diversify its financier base by attracting new banking relationships from abroad.

The facility was structured as a diminishing Musharakah with the financiers sharing in the company’s machinery.

Honorable mention:  Jasa Marga Persero and Lalpir.

Equity & IPO: Middle East Healthcare Company

Size:

SAR1.8 billion (US$479.34 million)

Arranger &

bookrunner:

Samba Capital & Investment Management Company

Lawyers:

The Law Office of Salman Al-Sudairi in association with Latham & Watkins advised the issuer. Clifford Chance advised the arranger.

Date:

3rd March 2016

IPOs took their time to come to market in 2016. Eventually two prominent deals hit the Saudi market: Middle East Healthcare Company (MEAHCO) and Riyadh REIT.  Elsewhere on the equity front, Sime Darby came to market with perpetual and secondary issuances. And, Khazanah Nasional monetized part of their holding in Tenaga Nasional.

MEAHCO went IPO in what is the largest IPO by a Saudi Arabian healthcare company. This sector is hot in the GCC. MEAHCO has long been a key player in the Saudi market. MEACHO owns and operates hospitals under the Saudi German Hospitals brand name in Saudi Arabia and is an affiliate of the Bait Al Batterjee Medical Co. The IPO was the outcome of two years effort in the reorganization of the former Saudi German Hospitals Group which operates in Jeddah, Riyadh, Madinah and Aseer with new hospitals under development in Dammam and Hail.

MEAHCO is a fully Shariah compliant company and therefore the transaction had to comply with all Shariah bylaws of the company making it particularly complex. 

Honorable mention:  Sime Darby and Riyadh REIT

Sukuk: Al-Falaah Sukuk Ijarah

Size:

LKR500 million (US$3.25 million)

Arranger:

Trillion Investments

Bookrunner:

Hatton National Bank

Lawyers:

Nithya Partners for the arranger and issuer

Rating:

Unrated

Date:

4th August 2016

Shariah advisor:

Shariah Supervisory Board of Al-Falaah, Islamic Business Unit of LOLC Finance

Jordan blazed the trail with a novel sovereign Sukuk structure; DP World tested a new concept under the wakalah structure; and, Al-Falaah opened the Sri Lankan market another crack. The deal is small. Yet, it is the first Sukuk of any kind issued in Sri Lanka. Despite discussions that the government might issue, this Ijarah transaction is for a local leasing company. The deal is expected to provide a roadmap for future issuances in Sri Lanka. 

Honorable mention: Jordanian Company for Islamic Sukuk for Financing Government Projects and DP World Crescent Sukuk 

Mudarabah: Egyptian Electricity Transmission Company

Size:

EGP2 billion (US$111.06 million)

Arrangers &

bookrunners:

Société Arabe Internationale de Banque & Industrial Development & Workers Bank of Egypt and Abu Dhabi Islamic Bank — Egypt

Date:

February 2016

Guarantor:

Ministry of Finance

Shariah advisors:

Abu Dhabi Islamic Bank — Egypt

Most Mudarabah deals have been investments in the Tier I and Tier II capital of Islamic banks. This applied respectively to our runners-up Boubyan Bank and Meezan Bank.  Abu Dhabi Islamic Bank — Egypt (ADIB Egypt) has been quietly perfecting the method in the local market.  

In this case, ADIB Egypt syndicated a Mudarabah with conventional banks in order to partially finance the emergency plan of the electricity sector in Egypt. The funds support the upgrading of the electricity transmission network.  

As the biggest Mudarabah transaction completed in Egypt, the deal is the first syndicated Mudarabah facility for the Egyptian Electricity Transmission Co. ADIB Egypt’s syndicate was selected in an intense competition with conventional banks. 

Based on the success of the nominated deal, the obligor returned to ADIB Egypt for a second syndication in September 2016. The performances indicate that the emerging Islamic finance institutions in Egypt can compete head to head with the leading conventional banks. 

Honorable mention: MBL Tier II Mudaraba Sukuk and Boubyan Tier 1 Capital SPC. 

Structured Finance & Trade Finance: Sonacos (formerly Suneor)

Size:

US$75 million

Arrangers:

Islamic Corporation for Trade Finance (ITFC)

Lawyers:

Dentons for the arrangers

Rating:

Unrated

Date:

21st February 2016

In 2016, there were a number of attractive structured finance deals like Al Dzahab and Ziya Capital. The IDB Group’s ITFC plays an important part in breaking the ground for new markets. The typical ITFC deal requires updates in local laws, the introduction of new techniques and a focus on key development sectors linked to import and export finance. 

ITFC purchases groundnuts and the processing of groundnut oil and cake for export by Sonacos, the leading actor in the sector. Groundnuts are a strategic commodity for Senegal: up to 40% of the population is dependent on this cash crop commodity for their livelihood. Growth in groundnut oil and cake exports will improve the country’s overall export revenues and employment level, thus contributing to poverty alleviation. 

The procedures involve ITFC providing liquidity to local farmers and cooperatives by purchasing groundnuts for delivery to Sonacos. In accordance with an Islamic tolling arrangement, ITFC pays a tolling fee to Sonacos for the processing of the groundnuts into groundnut oil and cake, both which are exported (the cake is used as animal feed). The final products are then sold under Murabahah contracts with the proceeds from the export sales assigned to ITFC.

The security package of this self-liquidating structure is strengthened by the fact that the final products are put under Collateral Management Agreement (CMA) from their production until their final export. A third party collateral manager oversees the management of the goods until export. The above enhancements (assignment of proceeds, CMA) are additional securities in addition to the sovereign backing of the government of Senegal.

The deal was challenging as the sector was facing difficulties. The main actors faced financial deterioration due to a downward trend in market prices. ITFC was able to provide a unique and tailor-made pre-export structured commodity trade finance program. 

Honorable mention:  Axiom Telecoms and Ziya Capital

Social Impact: Sonacos (formerly Suneor)

Size:

US$75 million

Arrangers:

Islamic Corporation for Trade Finance

Lawyers:

Dentons for the arrangers

Rating:

Unrated

Date:

21st February 2016

Social Impact nominations in 2016 lacked the glitz of Khazanah’s 2015 winner. 2016 is the year of steady goes the game. Sime Darby TNBES Renewable Energy will make its impact felt over an extended period. ADIB Egypt’s syndication for the Egyptian Electricity Transmission Company provides key assistance in the improvement of electricity transmission for millions of Egyptians.  
ITFC’s financing of government of Senegal as beneficiary and Sonacos has an immediate impact on the daily lives of millions of Senegalese connected to each step of the groundnut industry. Beyond its immediacy, the financing is sustainable and replicable. More critically, the process may be applied to other commodities and products in Senegal and elsewhere. This points the way for Senegal to diversify its economy and ITFC to continue improving lives in more emerging markets.

Honorable mention: Sime Darby TNBES Renewable Energy and Egyptian Electricity Transmission Company

Hybrid: Six Flags (Dubai Parks & Resorts)

Size:

AED993 million (US$270.28 million)

Arrangers:

Dubai Islamic Bank, Abu Dhabi Commercial Bank, Sharjah Islamic Bank

Lawyers:

Linklaters the arrangers and Allen & Overy for the obligor

Rating:

Unrated

Date:

21st February 2016

Shariah advisor:

Shariah committees of arrangers

Khazanah Nasional returned to market with a new exchangeable. The structure took a turn by using an unexpected form of security into which investors could exchange their obligations. Barwa Bank issued a hybrid Mudarabah/Wakalah security.  

Dubai Islamic Bank, however, syndicated a hybrid for the proposed Six Flags-branded theme park. Scheduled to open in late 2017, the project financing includes a combination of debt and equity. Dubai Parks and Resorts has issued rights for 37% of the deal and the banks provided the balance in the form of Tawarruq. This is unusual from two perspectives: the deal is not a Sukuk facility with two or more operational contracts like Mudarabah in business operations and a Wakalah to do Tawarruq; and, the deal runs a rights issuance in parallel to the debt in lieu of having all of the obligor equity in place.

Honorable mention: BBG Sukuk (Barwa Bank) and Bagan Capital (Khazanah)

Perpetual & Regulatory: Mumtaz

Size:

RM300 million (US$67.03 million)

Arrangers:

Maybank Investment Bank

Bookrunners:

Maybank Investment Bank and AmInvestment Bank

Lawyers:

Shook Lin & Bok for the issuer and Adnan Sundra & Low for the arrangers

Rating:

‘AA3(s)’ by RAM Ratings

Date:

20th June 2016

Shariah advisors:

Maybank Islamic

The perpetual category was dominated by submissions for bank deals. The majority of these were Tier I Mudarabah deals like Boubyan’s. Malaysian Airlines and Sime Darby issued perpetuals as part of their corporate finance strategies. Mumtaz represents the first time that a development finance institution has issued regulatory capital instruments in Malaysia.

The obligor is Bank Rakyat which currently operates under Basel I. Bank Negara Malaysia has mandated that Bank Rakyat prepare for Basel III compliance. These Tier 2 subordinated Sukuk serve as the strategic step for the bank to meet  Basel III requirements.

Honorable mention: Sime Darby, Malaysian Airlines and Boubyan

Real Estate: Emaar Sukuk

Size:

US$750 million under US$2 billion program

Arrangers:

Standard Chartered Bank (SCB)

Bookrunners:

National Bank of Abu Dhabi (NBAD), Arab Banking Corporation, Dubai Islamic Bank (DIB), Emirates NBD, First Gulf Bank, Mashreqbank, Noor Bank, SCB and Union National Bank

Legal counsel:

Linklaters and Maples and Calder (Dubai) for the issuer and Allen & Overy for the bookrunners.

Rating:

‘Baa3’ by Moody’s and ‘BBB-’ by S&P

Date:

7th September 2016

Shariah advisor:

Shariah board of SCB

Real estate will always be the top category for Islamic investors. The love of tangible assets with predictable cash flows has a strong allure whether one invests at home as with the Ezdan Sukuk Company or abroad as with GFG CI-1. In 2016, the consensus real estate deal of the year is Emaar Sukuk.
 
Emaar Sukuk represents Emaar Properties’s return to the Islamic capital markets following a four-year hiatus. The deal bears the lowest coupon ever achieved for a 10-year international Sukuk by a UAE corporate issuer as well as the longest dated senior Sukuk from the MENA region in 2016. The structure blends Ijarah (51% of the deal) and Tawarruq legs under a Wakalah.  These Sukuk Wakalah incorporated the Tawarruq leg to allow the deal to be upsized and to reduce reliance on the firm’s tangible assets. This eases the way for Emaar to apply the proceeds with greater flexibility.

Honorable mention: GFG CI-1 and Ezdan Sukuk Company 

Syndicated: Emirates Global Aluminium

Size:

US$1.23 billion Islamic tranche of US$4.9 billion facilities

Arrangers:

Dubai Islamic Bank, Emirates NBD, National Bank of Abu Dhabi, BNP Paribas, Citibank, ING, Natixis, APICORP, Export Development Canada, Masheqbank, Kuwait Finance House

Bookrunners:

Dubai Islamic Bank, National Bank of Abu Dhabi, Citibank, BNP Paribas, Emirates NBD, ING, Natixis

Lawyers:

Allen & Overy for the obligor and Clifford Chance for the arrangers

Rating:

Unrated

Date:

17th February 2016

Shariah advisor:

Dubai Islamic Bank

Al Rajhi led the SAR6 billion (US$1.6 billion) syndication for Yanbu ARAMCO SINOPEC Refining Co in a domestic syndication. Noor pulled together a purely Islamic syndicate for Axiom Telecom. Emirates Global Aluminium (EGA) required a high level of complex coordination to pull together Islamic and conventional banks along with export credit agencies for the largest co-financing syndication in the UAE since 2008.

The sovereign wealth funds of Abu Dhabi and Dubai own EGA. The deal consolidates the merged entity’s project financing liabilities which had been arranged in 2007 and 2012. The facility was initially underwritten by the seven initial mandated lead arrangers and bookrunners, which was then syndicated to the wider bank group. The transaction simplified EGA’s corporate financing structure and is expected to pave the way for a capital markets issuance. The deal brought in new financiers to EGA.
A key element of the transaction was the establishment of EGA as the primary funding vehicle of the EGA Group as part of the merger which created EGA. The company has helped the UAE to become the 4th largest aluminum-producing country in the world.

Honorable mention: Axiom Telecom and Yanbu ARAMCO SINOPEC Refining Co

Murabahah: Axiom Telecom

Size:

Confidential

Arranger:

Noor Bank

Lawyers:

Allen & Overy and Clifford Chance

Rating:

Unrated

Date:

5th April 2016

Shariah advisor:

Supervisory Board of Noor Bank

We are mostly familiar with the Murabahah legs in Tawarruq. In 2016, ITFC built on its impressive record in Africa using Murabahah to supply or export goods. In the UAE, Noor Bank syndicated a deal for Axiom Telecom with Al Hilal Bank, Dubai Islamic Bank and Qatar Islamic Bank.  

Axiom Telecom is a household name in the UAE. Noor Bank used ‘goods Murabahah’ to assist Axiom Telecom with meeting its working capital requirements. This differs from commodity Murabahah or Tawarruq — in the latter, the customer seeks cash. In Noor’s program, Noor as an investment agent for the syndicate buys the specific goods like mobile phones from pre-approved vendors. The phones are then sold onward to customers on a cost-plus-profit basis. The customer pays on deferred basis. 

Goods Murabahah is familiar in the retail and SME markets but its application in a large syndicated deal is unusual. Advantages of using goods Murabahah include its diversified obligor universe.  Finally, the secured program is preferred to Tawarruq by many Shariah councils because it is based on the physical movement of goods desired by the end buyer. 

Honorable mention: Government of Mauritania and government of Senegal (Sonacos).

Restructuring: National Titanium Dioxide Company (Cristal)

Size:

SAR6.96 billion (US$1.85 billion)

Bookrunners:

Alinma Bank, Bank AlJazira, Bank Saudi Fransi, JPMorgan, Riyad Bank, Samba Financial Group, The Saudi British Bank, Saudi Hollandi Bank, Saudi Investment Bank

Lawyers:

Khoshaim & Association in cooperation with Allen & Overy for the arrangers and Latham Watkins for the obligor

Guarantor:

Limited support provided by the National Industrialization Company

Rating:

unrated

Date:

25th September 25 2016

Shariah advisors:

Shariah committees of all bookrunners

Restructuring fell into two buckets in 2016, the first was the reorganization of truly challenging businesses like Limitless; the second was the reorganization of the finances of companies affected by declining commodity prices, but not themselves affected; this included Ma’aden and Cristal.

Cristal involved a number of important steps in the consolidation of various funded and unfunded bilateral facilities under a common terms agreement. The facilities were then restructured into a two-tranche syndicated Murabahah facility and a separate two-tranche Bai Al-Ajal facility with various ancillary facilities (with one tranche under each of the facilities benefiting from credit support). 

The syndicated Murabahah and Bai Al-Ajal agreements have a bullet repayment at the end of the third year. Cristal has an option to extend for an additional two years if certain conditions are met. The structure and covenants allow the company breathing space to recover from the extended dip in the commodity cycle. The transaction does not have asset security, but it enjoys support from its 79% shareholder The National Industrialization Company.

Honorable mention: Limitless and Ma’aden Phosphate Company

Infrastructure & Project Finance: Sime Darby TNBES Renewable Energy

Size:

Confidential

Arrangers:

RHB Islamic Bank

Lawyers:

Wong and Partners for the issuer and ZUL RAFIQUE & partners for the arranger

Guarantor:

TNB Energy Services and Sime Darby Plantation

Rating:

Unrated

Date:

April 2016

Shariah advisors:

RHB Islamic Bank

Project and infrastructure typically take us to mega projects. Certainly KNPC’s Clean Fuels deal and Lebuhraya DUKE Fasa 3 fit in the mega category as does Yanbu Aramco Sinope Refining. This year’s best project deal is closer to the micro level. TNB Energy Services and Sime Darby Plantation teamed up to build power plants which will be capable to develop renewable energy using biogas converted from palm oil mill effluent.  

Up until now, the palm oil industry has faced a number of environmental challenges.  One persistent problem has been the disposal of palm oil mill waste. This project addresses the problem by generating a cleaner source of energy. The project is sustainable, leading to a green certification from the Malaysian Green Technology Corporation.

The Tawarruq facilities finance up to 80% of the project costs of the development and construction of biogas power plants owned by Sime Darby TNBES Renewable Energy as well as working capital purposes, the importation of local purchases of Shariah compliant trade-related goods and for the issuance of security deposit, tender bonds, performance bonds and other guarantees.

Honorable mention: KNPC Clean Fuels, Lebuhraya DUKE Fasa 3 and Yanbu Aramco Sinope Refining

Indonesia: Perusahaan Penerbit SBSN Indonesia III

Size:

US$25 billion dual tranche comprising of a US$750 million five-year facility and US$1.5 billion 10-year paper

Arrangers:

Standard Chartered Bank, Citi, CIMB, Deutsche Bank, and Dubai Islamic Bank

Lawyers:

Allen & Overy (English & US Law) and Hadiputranto, Hadinoto & Partners member Baker McKenzie (Indonesian Law) for the arrangers and Clifford Chance (English Law) and Assegaf Hamzah & Partners (Indonesian Law) for the issuer

Rating:

‘Baa3’/‘BB+’/‘BBB-’ by Moody’s, S&P and Fitch respectively

Date:

21st March 2016

Shariah advisors:

Shariah committees of Standard Chartered Bank, CIMB Islamic Bank, Citi Islamic Investment Bank, Deutsche Bank and Dubai Islamic Bank

Slowly but surely, the Republic of Indonesia is claiming an important role in Islamic finance. Tiga Pilar Food Sejahtera and Jasa Marga Persero were cases of increasing corporate appetite for Islamic finance. The Republic itself has proven an adept and active issuer.  

Perusahaan Penerbit SBSN Indonesia III achieved several landmarks: largest deal out of Asia in 2016; largest ever US dollar sovereign Sukuk in Asia; first Sovereign US dollar Sukuk issued this year; and the Republic’s first dual tranche US dollar Sukuk; and the Republic’s largest ever US dollar Sukuk

The program permits the Republic to issue both Ijarah and Wakalah series of certificates. This issuance is under the Wakalah series, which is underpinned by a Shariah compliant portfolio of certain state-owned real properties (the Ijara assets) with no less than 51% of the Sukuk proceeds used by the issuer to procure such Ijarah assets and beneficial rights (Hak Manfaat) in certain identified assets that are either under construction or to be constructed (the project assets) and which shall be delivered on a future date upon completion. The Hak Manfaat are restricted to 49% of the issuance. 

The Hak Manfaat represent a new development within the Indonesian market.

Honorable mention: Jasa Marga Persero and Tiga Pilar Food Sejahtera

Malaysia: Sime Darby TNBES Renewable Energy

Size:

RM35.3 million (US$7.89 million) composed of RM28.9 million (US$6.46 million) term-financing and RM2.4 million (US$536,253) trade finance

Arranger:

RHB Islamic Bank

Lawyers:

Wong and Partners for the issuer and ZUL RAFIQUE & partners for the arranger

Guarantor:

TNB Energy Services and Sime Darby Plantation

Rating:

unrated

Date:

April 2016

Shariah advisors:

RHB Islamic Bank

Malaysia remains the most dynamic Islamic finance market. A hub of innovation, Malaysia enjoys the highest volume production of Sukuk year in and year out. In 2016, small is beautiful. The joint effort of TNB Energy Services and Sime Darby Plantation to build renewable energy power plants using biogas converted from palm oil mill effluent is the winner.  

The deal represents the conjunction of two of Malaysia’s most visible industries:  palm oil and Islamic finance. On the one hand, the palm oil industry has to overcome many SRI issues including the management of its waste. On the other hand, the Islamic finance industry as a whole is often seen as not fully embracing social, environmental and sustainable projects. In this financing, Islamic finance is directly engaged in a socially relevant environmentally sound project that it sustainable. And, how so? Islamic finance assists in the conversion of palm oil mill waste into a cleaner source of energy. Certified by the Malaysian Green Technology Corporation, Sime Darby TNBES Renewable Energy is the Malaysian deal of the year.

Honorable mention: Al Dzahab Assets, Malaysian Sovereign Sukuk, Purple Boulevard, Ziya Capital and Sime Darby.

Pakistan: Power Holding

Size:

PKR25 billion (US$238.32 million)

Arrangers:

Meezan Bank, Dubai Islamic Bank Pakistan and Bank Islami Pakistan

Lawyers:

Ahmed and Qazi for the arrangers

Rating:

Unrated

Guarantor:

Government of Pakistan

Date:

April 2016

Shariah advisor:

Shariah committee of Meezan Bank

Thar Block II represented an outstanding example of cross-border cooperation. The Islamic Republic of Pakistan’s third international Sukuk was a successful replication of previous Sukuk. Meezan Bank is the power house of innovation in an increasingly dynamic Pakistani market. In this case, Meezan led a syndicated long-term Wakalah Bil Istismaar financing for Power Holding (PHPL).

PHPL is a government of Pakistan holding company which accesses the financial markets to fund Central Power Purchasing Agency Guarantee (CPPA). Providing an Islamic finance structure to PHPL was a challenge. The solution was for the financiers to appoint PHPL as their agent for onward investment in the purchase and sale of electricity. 

Subsequently, PHPL entered into Wakalah agreement with the CPPA to purchase electricity generated from different sources (first priority will be from hydro power plants (cheapest source), next is nuclear then thermal and so on.) As agent of financiers and PHPL, CPPA will sell this electricity to distribution companies for onward distribution to end consumers.

The CPPA will provide semi-annual accounts to the financiers to provide a complete picture of the business’ profitability. At an agreed semi-annual date, the financiers will redeem their Wakalah investments and receive a distribution of profits.

Honorable mention: The Third Pakistan International Sukuk Company and Thar Block II

UAE: DP World Crescent

Size:

US$1.2 billion under US$3 billion

Arrangers:

Citigroup Global markets, Deutsche Bank (London branch), Dubai Islamic Bank, Emirates NBD, First Gulf Bank, HSBC Bank, Barclays Bank (appointed as dealers for the day), JPMorgan Securities (appointed as dealers for the day), National Bank of Abu Dhabi (appointed as dealers for the day) and Société Générale (appointed as dealers for the day)

Bookrunners:

Barclays Bank, Citigroup Global Markets, Deutsche Bank, Dubai Islamic Bank, Emirates NBD Capital, First Gulf Bank, HSBC Bank, JPMorgan Securities, National Bank of Abu Dhabi and Société Générale

Lawyers:

Linklaters for the arrangers and Clifford Chance with Conyers Dill & Pearman for the issuer

Rating:

‘Baa3’ by Moody’s and ‘BBB-’ by Fitch

Guarantor:

DP World as obligor

Date:

31st May 2016

Shariah advisors:

Shariah committees of Citi Islamic Investment Bank, HSBC Saudi Arabia, Dubai Islamic Bank, First Gulf Bank and Dar Al Sharia

If Malaysia is the market leader: watch out because the UAE is sprinting to catch up. Innovation and volume are always hallmarks of the UAE market. Major deals like Six Flags and Emirates Global Aluminum were syndicated. Noor Bank led the Axiom goods Murabahah syndication. Emaar, Noor and Etihad Airways all issued Sukuk. And, DP World returned to market. 

DP World is one of the largest container terminal operators in the world by capacity and throughput. DP World is also one of the most geographically diversified. This transaction was the groundbreaking return to the market of DP World after nine years.  

This RegS/144A Sukuk transaction was issued on the back of a highly successful tender offer on the outstanding DPW US$1.5 billion 2017 Sukuk certificates. The aim of the transaction was to optimize the issuers funding through the tender and new issue process. It helped DPW achieve their strategy of building a liquid curve to better reflect the strength of their credit. 

The Sukuk Wakalah are based on throughput services. These comprise loading, off-loading, storing and delivering containers at various terminals owned or operated by the company in the UAE. 

Honorable mention:  Axiom Telecoms, Emaar Sukuk and Six Flags

Saudi Arabia: Jabal Omar Development Co

Size:

SAR8 billion (US$2.13 billion)

Arrangers:

HSBC Saudi Arabia, Samba Capital, Saudi British Bank

Lawyers:

Allen & Overy for the obligor and Clifford Chance for the arrangers

Rating:

Unrated

Date:

January 2016

Shariah advisor:

Shariah committees of the arrangers

The Saudi Arabian market seems to be swimming in Tawarruq. But, Jeddah Economic City Real Estate Fund and International AirFinance Corp showed some independence and branched respectively into diminishing Musharakah and Ijarah. Middle East Healthcare Company, of course, was an equity deal. For much of the past 10 years, the question of how to redevelop Jabal Omar, a mountain near the Haram Sharif in Makkah, has dogged financiers.
The current transaction represents an expanded facility based on Istisnah-Ijarah Mawsufah Fil Dhimah. The original transaction was meant to be a SAR2 billion (US$532.61 million) multi-tranche facility. The final deal is SAR8 billion which funds the mixed use project. The project comprehends three of the seven phases. This involved complexity in dealing with the different phases in the same operating company and contractually ring-fencing the security and cash flows from each phase in the wider project. The ultimate project includes hotel, retail and residential elements.  

Honorable mention: Jeddah Economic City Real Estate Fund, International AirFinance Corp  and Middle East Healthcare Company    

Oman: Mohammed Al Barwani Sukuk

Size:

US$51.020 million and OMR9.86 million (US$25.51 million)

Arrangers:

National Bank of Oman and Standard Chartered Bank

Lawyers:

Allen & Overy and Trowers & Hamlins for the arrangers; Dentons for the issuer

Rating:

Unrated

Date:

29th June 2016

Shariah advisors:

Sharia Supervisory Committee of Standard Chartered Bank and Amanie Shariah Supervisory Board

In 2016, Bank Muscat Meethaq continued being a juggernaut as the largest player in Islamic banking. Their financing for Sebacic involved an Ijarah Mawsufah Fi Dhimmah. Oman Shipping also enjoyed a landmark Musharakah funding. And, the Sultanate returned to the markets. Mohammed Al Barwani Holding, a diversified natural resources company, became the first issuer to apply the Sultanate’s new Sukuk regulations.  

The Barwani Sukuk issuance utilizes a Wakalah structure. The issuer special purpose company purchased a portfolio of assets and engaged Barwani as servicing agent. The assets included income-generating real estate assets and shares. This is the first time that a Wakalah structure has been used in Oman. This required an extensive analysis of Omani law to determine whether the key cash flows in such a structure would be enforceable from a local law perspective. This structure now paves the way for Omani Islamic banks and corporates to utilize this type of structure for future Sukuk issuances. 

The Barwani transaction also achieves another milestone as the first dual tranche (Omani rial and US dollar) Sukuk issuance in Oman. Oman’s local clearing system, the Muscat Clearing and Depository Company, clears and settles the US dollar-denominated Sukuk for the first time. The Sukuk will also be listed on the newly established Bond and Sukuk Market pursuant to the amendments made to the Executive Regulations of the Capital Markets Law in June 2016. 

Honorable mention: Sebacic Oman and Oman Shipping Co

Kuwait: Boubyan Tier 1 Capital SPC

Size:

US$250 million

Arrangers:

Boubyan Capital, Dubai Islamic Bank, Emirates NBD Capital, HSBC, KFH Capital, National Bank of Kuwait, Standard Chartered Bank

Lawyers:

Allen & Overy, Meysan Partners for the arrangers and Dentons and AlTamimi & Co for the issuer

Rating:

Unrated (obligor rating ‘A+’ by Fitch and ‘Baa1’ by Moody’s)

Date:

16th May 2016

Shariah advisors:

Sharia committees of Boubyan Bank, DIB, HSBC, KFH Capital, Standard Chartered Bank

KNPC Clean Fuels and Equate show the demand for syndicated finance in Kuwait. In the meantime, the Capital Markets Authority of Kuwait (CMA) has established a robust framework for the launch of Islamic securities. Boubyan Bank provided some of the first clear applications of the framework. In the process, Boubyan’s issuance was the first ever fully Basel III-compliant public Sukuk issue in the world.  

As Kuwait’s first public Sukuk, the deal paved the way for Warba Bank and Ahli United Bank to issue their regulatory capital Sukuk. Accordingly, there was a significant amount of time spent with the relevant Shariah boards and scholars who were looking at this type of structure and instrument for the first time. Although Tier I issuances in the UAE and Qatar have used Mudarabah structures, this was the first time for Kuwait. This transaction was the first Sukuk transaction to have received formal approval from the Kuwait CMA pursuant to amendments made to the CMA’s bylaws which now require CMA approval for capital markets issuances for Kuwaiti entities (even when the issuer is an offshore SPV). In addition, approval was obtained from the CMA to offer and market the Sukuk in Kuwait. 

Boubyan wins the Kuwait Deal of the Year for opening the Kuwaiti Islamic capital market under the CMA rules.

Honorable Mention: KNPC Clean Fuels and Equate

Qatar: Ezdan Sukuk Company (Ezdan Holding Group)

Size:

US$500 million issued under US$2 billion program

Arrangers:

Abu Dhabi Islamic Bank, Barwa Bank, Emirates NBD, HSBC Bank, Mashreqbank, Qatar First Bank and QInvest

Bookrunners:

Abu Dhabi Islamic Bank, Barwa Bank, Emirates NBD, HSBC Bank, Mashreqbank

Lawyers:

Linklaters and Al Tamimi & Company for the arrangers and Allen & Overy and Maples and Calder (Dubai) for the issuer

Rating:

‘Ba1’ by Moody’s and ‘BBB-’ by S&P

Date:

18th May 2016

Shariah advisors:

The Shariah committees of HSBC Saudi Arabia and Mashreq Al Islami of Mashreqbank

In 2016, Qatari banks were active with regulatory Sukuk issuances. In the past, the State of Qatar and its government-linked companies have issued. Ezdan Holding, however, is the first ever private sector Qatari corporate to issue Sukuk in the international capital markets. 

The Ezdan deal is the first time that a hybrid real estate Wakalah (for no less than 51% of the underliers) and commodity Murabahah Sukuk paper has been issued in Qatar. The deal required counsel to address a number of novel local law issues in connection with the real estate assets. The Wakalah limb of the structure allows for the use of real estate-based assets that are in designated zones in Qatar where a usufruct interest in such real estate may be granted to a foreign entity. The initial issuance was composed of 70.7% Wakalah assets and 29.3% Tawarruq proceeds.

This is an important transaction in view of Ezdan’s profile in Qatar and the wider region. Ezdan is one of the Gulf region’s largest real estate companies with a market capitalization of approximately US$13.3 billion. Ezdan is also one of the largest companies listed on any Arabian stock market.  

Honorable mention: Qatar Islamic Bank and BBG Sukuk (Barwa Bank)

Turkey: Yemeksepeti

Size:

EUR250 million (US$263.17 million)

Buyer:

Delivery Hero

Lawyers:

Hourani & Associates, Dentons and Bird & Bird (advised the sellers) for the arrangers and King & Spalding, legal counsel for Delivery Hero Holding (buyer)

Date:

Ongoing due to local law issues for cross-border acquisition

Shariah advisor:

none

The Turkish market continues to be very promising. Nonetheless, the majority of 2016 deals are bank deals as well as a domestic currency deal for the Republic. Delivery Hero’s acquisition of Yemeksepeti is remarkable as it validates the opportunities in Turkey. With a major German applied technology group buying a Turkish peer, the deal is exciting on its own. But, this deal was structured as a Mudarabah. When two major groups that are not explicitly mandated to arrange their finances according to Shariah structures, one knows that Islamic finance is highly relevant. 

Honorable mention: Hazine Müstesarligi Varlik Kiralama Anonim Sirketi  (Republic of Turkey) and KT Kira Sertifikaları Varlık Kiralama 

Bahrain: Kingdom of Bahrain

Size:

US$1 billion

Arrangers:

Arab Banking Corporation, BNP Paribas, Credit Suisse, JPMorgan Securities and Standard Chartered Bank

Lawyer:

Allen & Overy and Hassan Radhi & Associates for the arrangers and Norton Rose Fulbright and Zu’bi & Partners for the issuer

Rating:

‘BB’ (Stable outlook) by S&P and ‘BB+’ (Stable) by Fitch

Date:

4th October 2016

Shariah advisors:

Shariah advisory committees of joint lead arrangers

Not too long ago, one thought of Bahrain as almost exclusively a banking center. The Kingdom has been diversifying its economy. Over the past five years, no single industry accounts for more than 25% of real GDP. As a result, real estate and corporate finance deals featured among the nominees for Deals of the Year. The Kingdom of Bahrain’s own Sukuk leads the pack as the Kingdom was able to achieve its key goals: affirmation of the government benchmark in the domestic market, diversification of funding sources, and a successful confirmation of the Kingdom’s acceptance in global capital markets through the issuance of 144A and Reg S tranches for the Irish Stock Exchange-listed securities. 

Bahrain continued to use the head-lease/sub-lease structure. But, like others, the issuance adds a Tawarruq feature. The underlying real estate assets are to be no less than 51% of the total Sukuk underliers. This structure paves the way for the Kingdom of Bahrain to more easily issue Sukuk in the future by minimizing the amount of real estate assets which are required for a Sukuk issuance. 

Honorable mention: Diyar Al Muharraq and The Oil and Gas Holding Company

Africa: Yinson Production (West Africa), a subsidiary of Yinson Holdings

Size:

US$780 million

Arrangers:

CIMB Investment Bank, Maybank Kim Eng Securities, OCBC, United Overseas Bank, Standard Chartered Bank, Instesa Sanpaolo

Lawyer:

Clifford Chance for the obligor

Rating:

Unrated

Date:

December 2016

The deal is a US$780 million commodity Murabahah financing for the refinancing of Yinson’s existing project financing arrangements for the acquisition, conversion and refurbishment of a floating production, storage and offloading unit as well as the chartering, installation and operation of the Vessel in the Offshore Cape Three Points block located in the Tano Basin approximately 60 kilometers off the western coast of Ghana. 

The deal brings key Asian players to the African market for the first time in a deal supporting the African subsidiary of a Malaysian corporate. The deal may be the largest vessel financing in both Africa during 2016. 

Honorable mention: Government of Senegal as beneficiary and Sonacos, and government of Mauritania.

US: Panasonic Corporation of North America Head Office building acquisition

Size:

US$165 million

Investors:

KFH Capital

Lawyer:

King & Spalding

Rating:

The tenant is rated ‘A-’ by S&P

Date:

December 2016

Shariah advisors:

Shariah Supervisory Committee of KFH Capital

Significant flows of private capital left the GCC and ASEAN regions for the US and UK real estate. Most of the investors preferred anonymity. Morgan Lewis represented Gulf Finance House’s return to the US market with a US$55.5 million acquisition of an industrial property portfolio and Sidra Capital entered the US real estate market with the acquisition of Amerisource/Lash Group Headquarters with a purchase price of US$67 million. 
After a long silence, KFH Capital also re-entered the US market with the acquisition of Panasonic Corporation of North America. The leveraged US$165 million deal is a bondable lease of the 12-storey building. KFH Capital’s equity in the investment is 35%. The Panasonic building enjoys advanced technology and has been certified with Leadership in Energy and Environmental Design (LEED) Platinum Interiors as well as LEED Core and Shell. LEED is an independent certification and recognized as the standard in the US and Europe. Not only has KFH made a sound income-generating investment, but KFH has invested in a sustainable and environmentally sound manner.

Honorable mention: GFG CI-1 and Sidra Capital — Amerisource Building.

Nearly 40 transactions were nominated for 2016’s Deal of the Year. Transactions like Boubyan, Togo, Jordan, and Al-Falaah all represented the opening of new Sukuk markets. Even if Jordan and Kuwait are established Islamic finance markets, Sukuk deals have lagged in both. Jordan now has a sovereign benchmark and ideas for the global Islamic capital market to consider. Boubyan gave proof of concept to Kuwait’s new capital market rules. The sovereign issuance for Togo and Al-Falaah’s maiden Sri Lankan Sukuk expanded the Islamic capital market into new domains.

Dzahab, Ziya, Axiom, Barwani and Jeddah Economic City are bringing new concepts into an established market.  Dzahab and Ziya provide examples of how to use the capital markets to manage corporate balance sheets in the financing industry. Barwani demonstrates the capacity of Oman’s CMA rules to accommodate innovation and new thinking. And, Jeddah Economic City breaks away from the overuse of Tawarruq in Saudi Arabia.  
Malaysia’s Sime Darby brought three landmark deals to bear. In a deleveraging exercise, the diversified corporation issued perpetual Sukuk and new shares. Sime Darby also entered the renewable and sustainable energy field.

Yinson, Thar Block II and Cagamas all provided worthy examples of cross-border collaboration: Yinson taking Malaysian capital to Africa; Thar achieving cooperation between China’s lenders who lack Islamic finance experience and Pakistan’s seasoned Islamic financiers; Cagamas showed the capacity of Malaysia and Singapore to collaborate in a deal that demonstrated the role of Singapore’s global financial center.

In 2016, DP World Crescent showed a bit of each as the flagship business of the Emirate of Dubai returned to market.

DEAL OF THE YEAR: DP World Crescent

Size:

US$1.2 billion under US$3 billion program

Arrangers:

Citigroup Global Markets, Deutsche Bank (London branch), Dubai Islamic Bank, Emirates NBD, First Gulf Bank, HSBC Bank, Barclays Bank (appointed as dealers for the day), JPMorgan Securities (appointed as dealers for the day), National Bank of Abu Dhabi (appointed as dealers for the day), and Société Générale (appointed as dealers for the day)

Bookrunners:

Barclays Bank, Citigroup Global Markets, Deutsche Bank (London branch), Dubai Islamic Bank, Emirates NBD Capital, First Gulf Bank, HSBC Bank, JP Morgan Securities, National Bank of Abu Dhabi and Société Générale

Lawyers:

Linklaters for the arrangers and Clifford Chance with Conyers Dill & Pearman for the issuer

Ratings:

‘Baa3’ by Moody’s and ‘BBB-’ by Fitch

Guarantor:

DP World as obligor

Date:

31st May 2016

Shariah advisors:

The Shariah committees of Citi Islamic Investment Bank, HSBC Saudi Arabia, Dubai Islamic Bank and Dar Al Sharia, and First Gulf Bank

In the consensus deal of the year, DP World returned to market with an innovative deal. One of the largest container terminal operators, DP World has unrivaled capacity and throughput throughout the world. This transaction relies upon that capacity to back its Sukuk Wakalah

This innovation is based on the first ever use of TEUs (twenty-foot equivalent units) as the underlying assets. TEUs are an industry measure of capacity. The TEUs are represented by vouchers allocated to the SPV for capacity comprised of loading, off-loading, storing and delivering containers at various terminals owned or operated by the company in the UAE. The Sukuk structure ties neatly into the company’s operating model without tying up physical assets in a transfer to the SPV or by their pledge as collateral. The Sukuk represents the latest in an evolving line of structures based on capacity rather than tangible assets. 

During 2016, we all shared great anxieties about the economic and political issues embroiling the MENA region. At the same time, global trade has stalled yet again. Nonetheless, DP World’s return to the global market after a nine-year hiatus was welcomed globally. 

The Sukuk were issued in 144A and Reg S formats. The deal was oversubscribed 1.75 times with a final orderbook of US$2.1 billion. Investors represented 154 accounts from the UAE (47%), other MENA (17%), UK (14%), Switzerland (7%), other Europe (6%), Asia (5%), and the US (3%). 

DP World’s Sukuk were part of a broader corporate finance exercise. The Sukuk were issued on the back of a highly successful tender offer on DP World’s outstanding US$1.5 billion 2017 Sukuk certificates. The Sukuk helped to optimize the obligor’s funding through the tender and new issue process. DP World has been able to build a liquid curve to better reflect the strength of their credit. 

DP World’s deal achieved many milestones including: the second-largest GCC Sukuk transaction in 2015-16; the largest GCC corporate Sukuk tranche since 2014; the largest CEEMEA corporate international debt issuance over the past 12 months; and the largest non-SSA Sukuk issuance out of CEEMEA since 2015.

Honoring the very best

Last week, we joined the global Islamic finance industry in recognizing its peers for their sheer resilience, creativity and impact on the market through the illustrious IFN Best Banks Poll; this week, we are extremely pleased to honor the very best Islamic deals of 2016 which broke new grounds, reached new heights and opened new doors: the highly-anticipated IFN Deals of the Year 2016 results are finally out! Congratulations to all winners for their most deserved win(s), especially during a year marked by great uncertainty, competition and challenges.

Building on the excitement, we are also delighted to bring you a selection of reports on the most timely and pertinent topics including an insightful comparison of US real estate in 2017 versus 2007 by Arch Street Capital Advisors; an exclusive S&P Dow Jones Islamic market quarterly review; a look into an innovative Salam liquidity management tool; and new thoughts on Shariah governance in Bahrain. As usual, IFN Correspondents, experts in their own markets, bring you the latest updates on the industry from across the globe and we have our very own IFN Columnist Mohammad Amin sharing with us his thoughts on Murabahah and the time value of money in Islamic finance.

We wish all our readers an insightful and informative read and again, heartiest congratulations to all Deals of the Year Awards winners! We look forward to welcoming you at one of the largest gatherings of Islamic finance elites next month, to honor all your achievements over 2016.

Sovereign Sukuk: Key markets keep the week alive

The new year kicked off with two key Islamic finance markets, Malaysia and Indonesia, keeping the sovereign Islamic debt space alive as uncertainties continue to keep the market on its toes. DANIAL IDRAKI brings you the latest developments across the sovereign Sukuk market.

Malaysia
The Malaysian government’s RM3.5 billion (US$782.04 million) GII Murabahah offering issued on the 6th January received 218 bids worth a total of RM6.26 billion (US$1.4 billion). According to a filing with Bank Negara Malaysia, the facility, to mature on the 15th April 2020, was sold at a profit rate of 3.23%.

Indonesia
The government of Indonesia will conduct an auction of sovereign Sukuk (SPN-S 11072017 and four project-based Sukuk series) on the 10th January to finance the 2017 State Budget, according to an announcement on the Ministry of Finance’s website. The indicative target for the auction is set at IDR6 trillion (US$449.4 million).

Furthermore, Indonesia has barred JPMorgan Chase & Co from submitting proposal for the sovereign’s next US dollar Sukuk issuance, according to media reports. The announcement came in the wake of JPMorgan’s announcement on the downgrade of its Indonesian stocks from ‘overweight’ to ‘underweight’. The government has asked other banks to submit proposals by the 12th January for the planned US dollar Sukuk offering.

Global outlook
In a recent report, S&P expects total global Sukuk issuance to remain subdued at around US$60-65 billion in 2017, attributing it to the continuous complexity surrounding the issuance process of the Islamic debt papers.

Upcoming sovereign Sukuk

Country

Amount

Expected date

Saudi Arabia

TBA

2017

Morocco

TBA

First half 2017

Bahrain

TBA

First quarter 2017

Oman

US$2 billion

TBA

Iran

IRR60 trillion

2016

Nigeria

TBA

First quarter 2017

Egypt

TBA

2017

Kazakhstan

TBA

2017

Kenya

TBA

2017

South Africa

TBA

2017

Bangladesh

TBA

TBA

Hong Kong

US$500 million to US$1 billion

TBA

Ningxia Hui Autonomous Region

US$1.5 billion

TBA

Niger

XOF150 billion

TBA

Luxembourg

TBA

TBA

Tunisia

US$500 million

TBA

UAE

TBA

TBA

Shandong Province

CNY30 billion

TBA

Sindh Province

US$200 million

TBA

Kuwait

KWD5 billion

TBA

Maldives

TBA

TBA

Sri Lanka

US$1 billion

TBA

Germany

US$1 billion

TBA

Complex issuance process to continue hindering Sukuk growth in 2017

The complexity surrounding Sukuk issuance will continue to hinder the growth of Islamic debt papers in 2017 unless counterbalanced by tangible results on standardization or the establishment of large issuance programs, according to S&P, which expects total issuance for the year to hover around US$60-65 billion. DANIAL IDRAKI reports.

When oil prices started falling in 2014, several market observers predicted an issuance boom in 2015, arguing that governments in oil-exporting countries would tap the Sukuk market to maintain their spending levels. However, global Sukuk issuance fell short of market expectations and 2016 saw only marginal increment from a year before, and some core Islamic finance markets even witnessed a much lower issuance compared to their conventional peers.

“The Sukuk market did not play a countercyclical role in core Islamic finance markets in 2016, and we forecast a stabilization of total issuance in 2017 at around US$60-65 billion,” noted S&P Global Ratings’ global head of Islamic Finance, Dr Mohamed Damak. “We believe the complexity of Sukuk issuance will continue to weigh on issuance volumes, unless counterbalanced by tangible results on standardization or the establishment of large issuance programs. Returning issuers, new entrants, and regulatory developments can stimulate activity, but more likely in the medium term,” he added. It is still more time-consuming and complex to tap the Sukuk market than to issue a conventional bond, even though the time and cost gap has reduced over the years.

The Sukuk market will also have to brace itself for the possibility of further raises in interest rates by the US Federal Reserve, which might squeeze global liquidity and make funding more expensive.

“This will inevitably dampen investors’ appetite for Sukuk, which are part of the global capital market and therefore also subject to changes in general financing conditions,” the rating agency noted. However, given the low interest rates in developed markets, emerging-market issuers with good credit stories might still be on investors’ radar and there is a possibility that liquidity will continue to leak into the Sukuk industry from developed markets.

S&P expects a substantial increase in Sukuk issuance in the GCC this year, although it reckons that some member countries might take the Islamic finance route alongside a conventional one. For example, Bahrain will most likely remain a prominent player after issuing US$3.2 billion of Sukuk in 2016, with other GCC members possibly tapping the market as well in 2017. 

“We think the GCC will need around US$275 billion of financing in 2017-19 and assume that, on average, around 50% of this amount will stem from conventional/Sukuk issuance. Some market stakeholders attribute the region’s low Sukuk issuance last year to governments’ strategy to ease liquidity pressure in local banking systems. However, there are other factors at work. For instance, the buyers of Sukuk are not only in the GCC or Malaysia, but come from a broad range of investors, including conventional financiers in developed markets. More importantly, there is reportedly a large gap between sukuk issuance and demand.”   

While S&P expects certain Asian and African countries to return to the market with modest volumes, it anticipates that Malaysia and Indonesia — two key Islamic finance players — to continue playing a significant role after issuing US$28.4 billion and US$7.3 billion of Sukuk, respectively, in 2016.

Additionally, the strengthening of Shariah governance could also help reduce issuance complexity and the time to market. One of the main proposals noted by S&P is to implement global standards coupled with external Shariah audit, which despite appearing difficult to achieve, might help the industry reach the desired level of standardization in Shariah interpretation. “Such advances in governance could also result in further integration of the Islamic finance industry, thereby increasing its attractiveness to new players and furthering growth,” opined S&P.

Liquidity management in Islamic finance

Liquidity management remains one of the primary concerns of the Islamic finance sector. Over the past year, the industry has seen very encouraging developments from central banks and institutions such as the International Islamic Liquidity Management Corporation (IILM) in managing liquidity in their respective jurisdictions. DANIAL IDRAKI brings an overview of this progress and provides an outlook on the subject. 

IILM
Over the past year, the IILM have carried out their role consistently in managing liquidity in the Shariah compliant space by issuing short-term Sukuk. IILM will kick off 2017 by auctioning two short-term Sukuk facilities worth a total of US$1.11 trillion on the 11th January – including its first two-month paper.

The two issuances follow a busy 2016 for the IILM, which consistently saw its offerings oversubscribed – demonstrating market demand. In December, its US$500 million three-month tenor Sukuk facility was oversubscribed by US$552 million, while its US$840 million three-month tenor Sukuk facility with a profit rate of 1.35% reissued in November was oversubscribed by US$831 million. The reissuance marked IILM’s 30th series of short-term Sukuk facility, and saw participation from primary dealers such as Abu Dhabi Islamic Bank, Al Baraka Turk, Barwa Bank, Boubyan Bank, CIMB Islamic Bank, Kuwait Finance House, Maybank Islamic, National Bank of Abu Dhabi, Qatar Islamic Bank, Qatar National Bank and Standard Chartered Bank.

Middle East
Bahrain Bourse had in the middle of last year launched the US$100 million Bahrain Liquidity Fund (BLF) to enhance the depth of the country’s capital markets and provide better liquidity to investors involved with the bourse. Launched by SICO in collaboration with other market participants, the BLF will act as a market maker by providing two-way quotes on most of the listed stocks with a reasonable spread, to allow investors to actively trade their stocks. Restricted liquidity currently plaguing the stock market in Bahrain causes securities to trade at a discount to their underlying value and regional peers, and the fund aims to reduce that discount over the medium to long term.

The BLF will be used to invest in Shariah compliant and conventional equity instruments listed on the Bahrain Bourse. This initiative follows other recent developments in Bahrain to deepen both its Islamic and conventional capital markets including the introduction of the Bahrain Islamic Index, the introduction of rules for REITs and the offering of Bahraini government bonds and treasury bills.

The Central Bank of Oman issued a circular on reserves against deposits in April last year, allowing banks to include investments in unencumbered treasury bills, government development bonds and Oman government Sukuk as part of their eligible reserves up to a maximum of 2% of their deposits. The measure aims to provide greater flexibility for banks in liquidity management, credit deployment and investments, although the reserves requirement remains unchanged at 5%.

In the middle of 2016, the Saudi Arabian Monetary Authority extended SAR15 billion (US$4 billion) of one-year financing to Saudi Arabian banks to ease short-term liquidity pressure. According to Fitch, the deteriorating operating environment and tighter liquidity are putting pressure on the ‘a-’ viability ratings of some Saudi banks, as banks in the Kingdom are largely funded by deposits, with mainly non-interest-bearing customer deposits representing around 60% of total sector deposits.

Asia
Bank Indonesia is currently working on issuing rules related to Shariah compliant negotiable certificates of deposit to attract short-term banking liquidity and the rules are expected to be issued sometime this year, Anwar Bashori, a senior economist with Bank Indonesia, was quoted as saying.

Over in Pakistan, the State Bank of Pakistan (SBP) reduced the statutory liquidity requirement (SLR) for Islamic banks by 5% to 14% with the aim of fixing the liquidity problems of Shariah compliant financial institutions. The SBP helps Islamic banks to maintain the SLR ratio through the purchase and sale of the government of Pakistan’s Sukuk Ijarah either on a deferred payment basis or on a ready payment basis through open market operations based on competitive bidding. The downward revision of the SLR requirement will provide support to the Islamic banking industry. At present, banks in Pakistan, particularly Islamic banks, are under stress from the low-interest rate regime. Due to high competition, the profit margin is shrinking but the cost of operations is still on the higher side and increasing gradually. 

Lebanon: Challenges persists

Lebanon may have ended its political stalemate with the election of President Michel Aoun in October 2016, however, the country still struggles with a weak economy brought on by a severe regional crisis. VINEETA TAN provides an overview of Lebanon’s Islamic finance landscape. 

Economic environment
Unfortunately the adverse economic impact of the Syrian crisis on Lebanon has not abated since it began almost seven years ago. The country is still struggling to close its budget gap and suffering from escalating inflation, rising public debt and worsening security threats. According to the World Bank, national GDP growth has decelerated to 1.3% in 2015, from an estimated 1.8% in 2014 while the IMF forecast only a 1% growth in 2016. Public debt, as a ratio to GDP, surged to 149.4% of GDP at the end of 2015 due to low growth and a relatively high cost of debt financing. In terms of ease of doing business, the upper middle class nation dropped a further four places last year to 126, out of 189 economies.

Regulatory landscape
The ongoing regional crises and strained public finances aside, Lebanon actually benefits from sophisticated banking regulations which boomed under its long-standing secrecy and fiduciary laws and foreign banks are attracted to its shores due to the absence of controls on the movement of capital and foreign exchange.

In terms of Shariah banking, related regulations were introduced in 2004. Half of Islamic banks’ assets are required by law to be invested in Lebanon. A three-member Shariah consultative body to approve and monitor Shariah compliance is also mandatory. However, industry participants have long called for more comprehensive and enabling Islamic finance regulations including the removal of double taxation and stamp duty and the implementation of laws that are conducive for equity-type financing as current regulations are restrictive and do not accommodate a variety of transactions. Islamic banking products can only be offered through stand-alone entities as opposed to window operations which may add further detriment to the expansion of the industry.

Banking and finance
The strength of the Lebanese banking sector is reflected in the high concentration of foreign banks in the country. While figures vary in the range of 60-90 institutions, the complete list of banks provided by the Central Bank of Lebanon (Banque du Liban) names 142 banks (including the now-defunct Bank Al-Madina). Out of the figure, five of them are fully-fledged Islamic banks: Iraq’s Al-Bilad Islamic Bank for Investment & Finance; Bahrain’s Al Baraka Bank Lebanon; Arab Finance House; BLOM Development Bank; and Lebanese Islamic Bank. Lebanese Islamic was the country’s first Shariah compliant banking player in 2005, following the official gazette of Law No. 575 on the 11th February 2004 which allowed the creation of Islamic banks. Overall banking activities are also subject to both the Code of Commerce (1942) and the Code of Money and Credit (1963).

Despite the economic turmoil, the central bank of Lebanon has been proactively implementing measures to support the nation’s banking and financial industry. The banking sector is still highly liquid and profitable: as at the end of July 2016, liquid asset-to-total deposit ratio stood at 71.4 (compared to 70.3 in January 2016); although commercial banks, which are large investors in public debt, are still highly exposed to sovereign credit risk – debt exposure went up to 59.2% in July, according to figures by the World Bank.

Most of the Islamic banks continue to innovate and push new products to improve market share which stands at less than 1% of the total banking market share. Al Baraka Lebanon, for example, has implemented a three-year strategic modernization plan. In 2015, it introduced new products, continuing product development in 2016 and targets to expand its branch network to 12 by 2020. Nonetheless, the Islamic bank was hit by the poor economic conditions as its total assets shrunk by 12% to US$321 million in 2015 while total income from joint financings and investments fell 11%.

Takaful
Lebanon’s insurance space is highly saturated with conventional players, with a relatively small Takaful presence. Its Islamic insurance segment was pioneered by Al Aman Takaful Insurance (previously known as Main Insurance Company), established in 2001. Part of Al Baraka Group, it is the country’s only Takaful player. Despite having only one Takaful player on its shores, however, there are several Lebanese insurance companies involved in the Islamic insurance business abroad including: Libano-Suisse (through Libano-Suisse Takaful Egypt) and Lebanese Delta Insurance Holding Company, which acquired Solidarity Family Takaful’s unit in Egypt in 2012.

Outlook
Lebanon is likely to still face severe security threats arising from regional turmoil which means that public finances are likely to remain stubbornly weak. It will be a tough year for the banking sector, especially the Islamic banks which so far remain mainly retail, with little development in the debt capital market and insurance space. 

Emaar Sukuk Limited’s Trust Certificates: A triumphant comeback

Emaar Sukuk, a subsidiary of Emaar Properties, sold US$750 million Registered S Senior Unsecured Sukuk in September 2016 to fund its upcoming projects worth billions. DURGAHYENI MOHGANA SELVAM provides an account of the developer’s Sukuk.

The issuance, falling under Emaar’s US$2 billion Trust Certificate Program, was the company’s successful comeback to the international capital market after an absence of four years. The issuance continues to prop NASDAQ Dubai as the world’s largest Sukuk listing center by value, simultaneously becoming among the top three Sukuk issuers in September 2016.

The deal, maturing on the 15th September 2026, is managed by Arab Banking Corporation, Dubai Islamic Bank, Emirates NBD, First Gulf Bank, Mashreqbank, National Bank of Abu Dhabi, Noor Bank, Standard Chartered Bank and Union National Bank. Standard Chartered were selected as the deal’s sole coordinator, with the bank’s Shariah Supervisory Committee also acting as the deal’s Shariah advisor.

The issuance levied heavily on the scarcity value GCC was facing in the third quarter of 2016, as there were not many noticeable investment grade corporate Sukuk supply in the region at the time. This brought the attention of investors, domestic and international alike, to purchase and participate in this issuance. The investors distribution for this deal were banks (57%), fund managers (33%), insurance firms and agencies (7%), hedge funds (2%) and others (1%).

The deal was issued in the wake of a three days meeting with investors from Europe and Asia, particularly the Middle East on the 4th September 2016. The deal was initially planned at low to mid 200bps over midswaps. It was then revised and fixed at 3.635% with a spread of 235bps over midswaps plus or minus 5bps. This price was one of the most competitive among the other issuers at that time. The other notable issuers were Majid Al Futtaim Properties which was trading at 239bps and Dubai International Financial Center was quoted at 230bp on the day of Emaar’s issuance. The deal’s final book size was evaluated at US$2.3 billion, giving Emaar the opportunity to size the deal at US$500 million to US$750 million, well inside its target. The deal was subscribed by investors from MENA (65%), Europe (18%), Asia (14%) and the US (3%).

Emaar Sukuk’s Trust Certificate Issuance

US$750 million

 

15th September 2016

   

Issuer

Emaar Sukuk

Obligor

Emaar Properties

Size of Issue

US$750 million

Mode of Issue

Regulation S Senior Unsecured Sukuk

Purpose

To finance future projects

Tenor

10 years

Issuance price

100%

Profit rate

3.635%

Payment

Semi-annually in arrears on the 15th March and 15th September each year until maturity date

Currency

US Dollars

Maturity date

15th September 2026

Lead manager(s)

Arab Banking Corporation, Dubai Islamic Bank, Emirates NBD, First Gulf Bank, Mashreqbank, National Bank of Abu Dhabi, Noor Bank, Standard Chartered Bank, Union National Bank

Bookrunner(s)

Standard Chartered

Governing law

Cayman Islands

Legal Advisor(s) / Counsel

Maples and Calder (Dubai), Linklaters, Allen & Overy

Listing

NASDAQ Dubai

Underlying Assets

51% Ijarah; 49% Murabahah

Rating

Moody’s: ‘Baa3’

S&P: ‘BBB-’

Shariah advisor(s)

Shariah Supervisory Committee of Standard Chartered Bank

Structure

Sukuk Wakalah

Tradability

Yes

Investor breakdown

Asia, Europe

Face value / minimum investment

US$200,000 in multiples of US$1,000

Emaar’s decision to finance future projects through Sukuk was based on the company’s previous experience and subsequent success. In July 2016, the company said that it had projects worth US$12.49 billion for the next three to four years. In 2014, Emaar’s high-rated subsidiary, Emaar Malls Group, raised US$750 million from a debut Sukuk sale. The parent company, Emaar Properties, issued Sukuk with a total profit of US$4.65 billion in 2012. The success of both issuances contributed to the financing of Emaar’s high end projects such as the Address Residences Dubai Opera and II Primo towers in Downtown Dubai; and the Fairway Vistas and the Sidra villas communities in Dubai Hills.

The success of this deal and the steady presence of Emaar in the global capital market are believed to serve as a sound platform for further traffic into the Sukuk in upcoming years. 

A quiet December as debt capital markets get ready for 2017

December has been a quieter month as issuers and investors position themselves for 2017. We are already seeing signs that 2016’s trend of sovereign issuances will continue into the first half of next year.

The past month has been dominated by news of sovereign issuances in the Islamic debt capital markets space, including an announcement by Morocco’s finance minister that the country will issue its debut sovereign Sukuk in the first half of next year. The Sukuk will be sold in the domestic market and the size of the facility is yet to be determined. The news coincides with recent regulatory reform to allow domestic Shariah compliant banking, which has reportedly seen the government approve a partnership between the state-owned Credit Agricole of Morocco and the IDB.

The government of Brunei recently issued its 140th series of short-term Sukuk Ijarah for a total of US$69.57 million. The facility matures on the 2nd March 2017 and Brunei is expected to issue further sovereign Sukuk in the first quarter of 2017.

Nigeria has also confirmed that it intends to issue a sovereign Sukuk facility in the first half of next year, and is reportedly seeking advisors for the transaction. The Sukuk facility is intended to help meet the country’s budget deficit and provide funding for infrastructure development. 

The Malaysian government completed a Sukuk sale on the 8th December for a US$338 million facility which matures in October 2035 and has a profit rate of 4.79%. The sale was several times oversubscribed, perhaps highlighting investors’ preference for investment grade issuances with long maturity dates.

A strong credit rating has also contributed to the success enjoyed by the ‘AAA’-rated IDB. Earlier this month it listed a US$1.25 billion Sukuk facility on NASDAQ Dubai. This is the bank’s seventh listing on the exchange, making it the largest Sukuk issuer with a total listing value of US$8.55 billion. 

Imran Mufti is a partner at Hogan Lovells (Middle East). He can be contacted at Imran.Mufti@hoganlovells.com.

Islamic finance in Scotland: New options

In November 2016, Al Rayan Bank opened its inaugural branch in Scotland, becoming the first Shariah compliant bank to establish itself in Scotland and presenting its 2,000 existing customers with an opportunity to interact with Al Rayan Bank up close and personal in Scotland whereas before they had been limited to only using online and telephone banking channels .To coincide with the branch opening, Al Rayan Bank also launched its ‘Home Purchase Plan Scotland’ which uses a diminishing Musharakah or co-ownership structure to allow individuals to purchase homes in Scotland under the terms of a Shariah compliant co-beneficiaries agreement.

Of the many Shariah compliant structures which can be used to fund real estate, diminishing Musharakah appears to be the only type of structure used in Scotland as far as Islamic finance in the retail lending space is concerned. The use of Ijarah or leasing structures where the financier acquires the property and leases it back to the customer for the mortgage term does not appear to have been used in Scotland. There may well be a good reason as a matter of law for this as the Land Reform (Scotland) Act 1974 provides that residential (as opposed to commercial) leases in Scotland cannot be longer than 20 years. 

Similarly, Murabahah under which the property is purchased by the financier and then immediately sold to the customer has not been used to any meaningful extent under Scottish law. 

In the corporate lending/investments space by contrast, Scotland has seen greater Shariah compliant activity with Gatehouse Bank (a wholly Shariah compliant bank) having acquired student accommodation Fountainbridge in Edinburgh for GBP20million (US$24.53 million), a Rolls Royce manufacturing facility in Glasgow and an office property in Aberdeen let to Petrofac. Aberdeen Asset Management also operates a number of Shariah compliant funds. 

While Scotland has made certain advancements at a policy level, the use of Islamic finance in the retail lending space has been fairly limited. Al Rayan Bank’s launch in Scotland ought to help address this. This is particularly so as there is a clear will to develop Islamic finance in Scotland, not least demonstrated by the partnership between the Church of Scotland and the Islamic Finance Council UK, a not-for-profit specialist advisory and development body focused on promoting and enhancing the global Islamic and ethical finance industry. The two bodies launched an initiative in 2016 to join forces in order to develop ethical financial services, looking to benefit society as a whole, a collaboration which will be interesting to follow moving forward. 

Shakeel Adli is a partner and the head of Islamic finance and Tabasam Faqir is a senior associate at international law firm CMS. They can be contacted at shakeel.adli@cms-cmck.com and tabasam.faqir@cms-cmck.com respectively.

Robust governance: The path to track

Governance, both Shariah and corporate, remains a vital component in the industry that requires further tightening. Various jurisdictions have applied some form of governance to boost the Islamic financial market, whether by appointing a Shariah officer to overlook the Shariah aspect of the business or by adopting a Shariah framework. With an ever-booming industry, both Shariah and corporate governance regulations must expand to cover all aspects of the financial industry. Shariah governance should not be seen as something separate from corporate governance nor should corporate governance be seen as something independent of Shariah governance.

Hence, the regulators in all jurisdictions need to ensure that both types of governance are intertwined to suit the overall needs of the industry. Malaysia is unique in this area as Bank Negara has introduced several regulations to ensure proper Shariah governance enforcement and the latest was the integration of Shariah governance in the Islamic Financial Services Act (IFSA). Other standard-setting bodies such as AAOIFI and the IFSB have also come up with Shariah governance standards. These standards and their role in the Islamic finance industry will be further explored in subsequent articles. One major aspect of governance is developing new talented and qualified Shariah scholars and this together with the issues surrounding it shall also be covered. 
 
Prof Dr Mohamad Akram Laldin is the executive director of the International Shariah Research Academy for Islamic Finance. He can be contacted at akram@isra.my.

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