“Sukuk,” explained the governor, “have a very great potential in the Saudi and Gulf market. The Saudi market is moving from traditional sources of financing such as bank credit to corporate bond and sukuk. This is a development issue and has started to happen. The banks may not be able to meet local funding requirements from traditional sources given the rapid expansion of infrastructure and projects in the Saudi economy. But this also depends on demand and supply dynamics of the market. SAMA encourages banks and corporates to go down the sukuk route. We would like to see the local credit market diversified from bank finance to corporate bonds and sukuk.”
The latest Saudi sukuk issuer is potentially the most important - both symbolically and from a sukuk structure point of view. The proposed sukuk offering by Saudi Aramco Total Refining and Petrochemical Company (SATORP), confirmed by the Saudi Capital Market Authority (CMA) in late August, which will go to the market from next Saturday for a period of 16 working days, may start an important trend in project sukuk especially to finance planned multi-billion dollar infrastructure and industrial developments in the Kingdom. Saudi Aramco’s planned project spend alone is estimated in excess of $160 billion of the next decade or so.
The SATORP Sukuk follows a number of high profile sukuk issuances out of the Kingdom this year. In May the Islamic Development Bank in Jeddah successfully closed its $750 million sukuk offering, which was the latest tranche in its $3.5 billion Islamic trust certificates program and priced at Mid Swap (US Treasuries) plus 35 basis points with a profit rate of 2.35 percent. In June, Saudi International Petrochemical Company (Sipchem) closed a SR1.5 billion Mudaraba sukuk, which was well oversubscribed with the order book reaching SR4.5 billion and was priced at SIBOR plus 1.75 percent. In July, the Saudi Binladin Group successfully closed its SR1 billion 1-year sukuk offering, which was issued through SBG Sukuk Co. and was well oversubscribed attracting orders in excess of SR3 billion. The privately placed sukuk was offered to sophisticated Saudi investors and has a maturity of 364 days and pays a profit rate of 2.5 percent per annum.
The flip side of the Saudi sukuk issuance success story, is the successful redemption this year of the first sukuk offering by Saudi Basic Industries Corp. (SABIC). The CMA in May approved the redemption of the SR3 billion SABIC 1 Sukuk issued in 2006 and priced at 3 months SIBOR plus 40 basis points. Similarly, the SR5.1 billion sukuk origination in the Kingdom started in earnest in 2004 with the SR98 million CARAVAN! Sukuk, which was a small issuance and which tested market conditions. The big hitters started with the SABIC 1 Sukuk in 2006 which to date has issued three sukuk. Other major sukuk issuers in Saudi Arabia have been Saudi Electricity Company with three issuances; the Binladin Group with two issuances; Saudi Hollandi Bank with two issuances; and Dar Alarkan Real Estate Development Company with three issuances.
The SATORP sukuk, together with the latest Malaysian sovereign sukuk and others in the GCC and ASEAN region, are further indications that the global sukuk market is fast on the road to recovery.
The CMA board approved in August the public offering of sukuk certificates by Arabian Aramco Total Services Company (AATSC), the special purpose company which is issuing the sukuk certificates on behalf of SATORP, which last week announced that it had appointed Deutsche Securities Saudi Arabia, Samba Capital & Investment Management Company and Saudi Fransi Capital as joint lead managers and joint bookrunners for its issuance, which according to Saudi banking sources will be in the region of $1 billion to $2 billion.
The structure of the sukuk was approved by the Shariah boards of Alinma Investment Company, Bank Albilad, Deutsche Bank, Samba Financial Group and Credit Agricole CIB.
Sukuk for development and infrastructure projects such as pure project sukuk have been hardly a feature of the sukuk landscape, although there have been a few notable exceptions. This is surprising given the estimated multi-trillion dollar infrastructure spend in the member countries of the Islamic Development Bank over the next two decade or so. The current Jeddah Rehabilitation Project, for instance, alone will cost in the excess of SR35 billion, and according to the promoters, Jeddah Development Company, sukuk may feature in the financing side of some of the planned projects.
The main constraints of the Saudi sukuk market are its parochialism and its lack of trading in a secondary market. Public offerings, sale and delivery of the Sukuk, according to SATORP, is limited “to Saudi nationals and those other legal persons with a permanent establishment in the Kingdom holding a current commercial registration number issued by the Ministry of Commerce and Industry.” The sukuk issuance will be offered to financial institutions, mutual funds, insurance companies and pension funds as well as individuals, who will be able to subscribe to the sukuk subject to the subscription terms and conditions.
The proceeds of the sukuk will be used to finance SATORP’s planned 400,000 barrels per day crude oil refinery in Jubail, which will process Arabian Heavy Crude and which is a project sponsored by Saudi Aramco and Total S.A of France. SATORP is 62.5 percent owned by Saudi Aramco and 37.5 percent owned by Total S.A. The total cost of the project is estimated at over $13 billion, and may involve further Islamic finance facilities down the line.
Last October, SATORP closed a multi-source $8.5 billion 16-year financing for the Jubail refinery project including $4.01 billion from the Saudi Public Investment Fund and Export Credit Agencies and $4.49 billion from commercial financial institutions. The financing facilities include dual-currency (US dollar and Saudi riyal) commercial loans; dual-currency Islamic financing facilities; ands export credit facilities provided by seven export credit agencies and local developmental agencies.
The Islamic finance facilities were lead arranged by Al-Rajhi Bank; Alinma Bank; the Islamic Development Bank and Bank AlJazira.
The state-of-the-art SATORP refinery is scheduled to be commissioned sometime in 2013 and is part of Saudi Aramco’s strategy to boost Saudi Arabia’s refining capacity by more than 1.7 million barrels a day from the current capacity of 2.1 million barrels a day. This will include production of diesel and jet fuels; 700,000 metric tons per year (t/y) of paraxylene; 140,000 t/y of benzene; and 200,000 t/y of polymer-grade propylene.
