The world’s 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 firm’s majority-owned refining joint venture with French energy firm Total.
The 400,000-barrel-a-day refinery at the Saudi industrial port of Jubail is still in its $14 billion construction phase. So the bond is the world’s 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 banks’ revenues.
Aramco’s first 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 creditor negotiations.
The sukuk matures, along with the overall financing, 11 years after the project’s 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 refinery’s 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 Tadawul’s 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 Arabia’s 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 sukuk’s joint lead managers and bookrunners. Allen & Overy and Linklaters, and their local affiliates, acted as legal counsel.
Market potential
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 the sukuk.
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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. 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 O’Callaghan, 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 Ireland.
