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Wednesday, 13 June 2012

Saudi Arabia: Aramco, Dow petchem JV picks banks for project sukuk

DUBAI, June 12 (Reuters) - Sadara, the $20 billion petrochemical joint venture between oil giant Saudi Aramco and Dow Chemical, picked four banks to manage the Islamic bond, or sukuk, portion of its multi-billion dollar fundraising, three sources said on Tuesday.
Deutsche Bank, Riyad Bank, Alinma Bank and Bank Al Bilad have been mandated for the deal, likely to be denominated in riyals, which will be only the second project finance sukuk ever to be raised in Saudi Arabia.
Earmarked to raise around $1.4 billion, the sukuk is not expected to be marketed until next year, two sources said.
It is part of a $12.5 billion debt package currently being raised to fund the construction of the project, which will produce more than 3 million tonnes of petrochemicals each year when completed in 2016.
"The sukuk will take at least nine months to pull together," said one banker with knowledge of the matter, speaking on condition of anonymity as the information isn't public.
"They have appointed the banks as they need to start now. Getting it registered and approved by the Capital Markets Authority (the Saudi regulator) takes a long time."
Saudi Aramco wasn't immediately available for comment.
The only project sukuk in Saudi thus far was the 3.75 billion riyals ($1 billion) issue in October from Saudi Aramco Total Refining and Petrochemical Co (SATORP), a joint venture between Aramco and France's Total.
However, while initially envisaged to be sold at the same time as the bank finance was arranged, the SATORP sukuk was completed more than 15 months after the loans were signed.
This was due to concerns among Islamic scholars about the sharia-compliance of using an unbuilt asset, not generating any revenue, as security - Islamic finance is based on the concept of risk/revenue sharing, with interest payments forbidden.
Such issues won't affect Sadara's sukuk as the SATORP offering provides a template to work from.
"The structure from SATORP is in place, although there will be some changes as the (SATORP) structure is quite simple," the same source said.
As well as the sukuk, the sponsors have also invited banks to bid for a $4 billion commercial loan, which is expected to include 16-year bank financing and a 17-year tranche from export credit agencies, loan bankers said.
The loan, which includes U.S. dollar and Saudi riyal tranches, is priced at what is widely considered a very competitive 45 basis points (bps), the loans bankers added.
"The sponsors are pushing very hard for big tickets, as well as pushing hard on the pricing," one European loan banker said. "There is a lot pressure on relationship banks to look at this."
Additional loans from export credit agencies will be used to raise the $12.5 billion target.
Much of the focus is expected to be placed on Saudi banks to provide loan funding, as lending by international banks has been constrained by Europe's sovereign debt crisis and Basel III, which makes long-term lending more difficult because of capital requirements on banks.
Saudi banks have ample liquidity and keen to lend to quality borrowers, although much of their liquidity is in local currency and not dollars.
Meetings between Aramco, Dow and banks are scheduled to take place next week, one of the sources said, to discuss the funding options.
This follows the initial information memorandum being sent to banks at the end of last month, according to Project Finance International (PFI), a unit of Thomson Reuters.
Royal Bank of Scotland and Riyad Bank are the advisors on the project.
(Reuters / 12 June 2012)

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Islamic finance must go back to basics

Islamic institutions, if run according to syariah regulations, should be able to avoid the problems afflicting conventional banks hit by economic woes in the US and Europe.
KUALA LUMPUR: Islamic institutions around the world should move past sukuk and build a unified platform that promotes the essence of Islamic finance – trading, said the head of Kuwait Finance House (KFH) in Malaysia.
CEO of KFH Malaysia Jamelah Jamaluddin said trading was the purest form of any business transaction and was what traditional syariah-compliant financial regulations were built upon.
In an interview with media and business events company Inside Investor, Jamelah said sukuk, the Islamic equivalent of bonds, is already an established and proven financial instrument that has helped to raise the profile of Islamic banking and finance.
However, she said little has been done to develop trading.
“Maybe we should start talking about the basic fundamentals of Islamic banking,” said Jamelah. “Some people have forgotten and talk about sukuk, sukuk, sukuk.
“What about the fundamentals? Trading is a fundamental aspect of Islamic banking. Interest-free banking was done long before the advent of the western banking system.
“There has been no trade finance brainstorming among practitioners of Islamic banking. How do we do trade finance with Islamic countries?
“There are no products. We talk about one thing, and that is sukuk. Malaysia has been an excellent example of how to develop sukuk. But that has now been done. Let’s move on.”
The issue of trading on a syariah-compliant platform will be among the key discussions to be raised at the Inside Investor Forum Asia 2012 event in Doha, Qatar in October, when leading experts on asset management and Islamic finance, among others, will explore inter-regional investment opportunities in the Middle East and East and Southeast Asia.
According to HSBC, Malaysia will account for 60 per cent of the US$44 billion worth of sukuk expected to be issued in 2012. While Malaysia retains global domination, institutions in the Middle East and Indonesia are also expected to be strongly represented.
Jamelah praised the establishment in 2010 of the International Islamic Liquidity Management Corporation (IILM), a collaboration of 11 central banks and two multilateral organisations aimed at assisting Islamic finance institutions in liquidity management and facilitating greater investment flows for the Islamic financial services industry.
The IILM issues short-term papers in international reserve currencies, such as the US dollar and the euro.
KFH in Kuwait has already set up its own Liquidity Management House, aimed at being a principal player in the international sukuk market and syariah compliant structured finance arena. LMH also enables Islamic financial institutions to manage their liquidity mismatch through short and medium term liquid investments structured in accordance with the syariah principles.
Jamelah added that Islamic institutions, if run according to syariah regulations, should be able to avoid the problems afflicting conventional banks hit by economic woes in the US and Europe.
“The things that happen to conventional banks shouldn’t really happen to Islamic banks,” she said.
“The reason for that is the very essence of Islamic banking. There must be an asset to deal with. Therefore, we take away speculation and derivatives.
(News Free And Independent / 11 June 2012)

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Bangladesh launches Islamic interbank money market

(Reuters) - Bangladesh has launched an Islamic interbank money market, aiming to help sharia-compliant banks manage their short-term funding.
Central bank governor Atiur Rahman told Reuters that the market would provide Islamic banks with a channel to use surplus money. Islamic banks account for over 15 percent of the country's banking sector.
"Now the banks who practice Islamic sharia will be able to overcome any funding crisis like the conventional banking system. For the past several months, we took initiatives to bring them into a system..." Rahman told Reuters.
A central bank official, who declined to be named, told Reuters that the new market, launched on Sunday, "is a blend, a mixed model". He added that money market solutions from Indonesia, Malaysia and Saudi Arabia were studied while developing the Bangladeshi platform.
The central bank will act as custodian in the market. Interbank transactions, limited to overnight tenors, will be based on a pre-determined profit-share ratio that will be decided by a central bank committee using Islamic banks' deposit rates as a starting reference.
Three to four banks have placed bids in the market ranging from 10 million to 55 million taka ($122,000 to $671,000), the central bank official said.
The country's Islamic banks maintain liquid assets above statutory requirements and well above levels held by conventional banks, but limited money market tools have made it difficult to manage this excess liquidity.
The central bank official also said amendments to Islamic bond regulations were under consideration by the ministry of finance, as part of efforts to increase the activity of Islamic banks in the capital markets.
The proposals include a sukuk programme that would be issued by the central bank, and might be ready in two to three months, the official said.
In the long term, the sukuk could be used as collateral for interbank transactions, according to the official, lowering costs for Islamic banks by reducing counterparty risk in deals.
(Reuters / 05 June 2012)

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