Download the Full Issue - Islamic Finance News

Download the Full Issue - Islamic Finance News

Deals of the Year 2006 Handbook

Islamic Finance news team

Published By:

Suite C, Level 10 Bangunan Angkasa Raya,

Jalan Ampang, 50450 Kuala Lumpur,


Tel: +603 2143 8100

Fax: +603 2141 5033

Note from the editor

Size is often seen as a measure of strength. Since the establishment of the

Islamic Development Bank in 1975, the scope of Islamic banking and fi nance

has developed beyond recognition. It is a well known fact that global Islamic

banking assets have grown by leaps and bounds in recent years. However,

only about quarter of the banks are capitalized at above US$25 million.

Managing Editor


Deputy Editor

Features Editor


Forum Manager





New Business






Frances O’Sullivan

Nora Salim

Nazneen Abdul Halim

Shabnam Mokhtar

Kamal Bairamov, Seelan Sakran

Shirene Shan

Christina Morgan

Hasnani Aspari

Mahadir Mohamed


Charles Philip

Tel: +603 2143 8100 x 13

Musfaizal Bin Mustafa

Tel: +603 2141 8100 x 24


Dhana Dorasamy

This thinking has also permeated into the Islamic capital market where 2006

was a year of record mergers and acquisitions (M&As), not only in domestic

markets but across borders also. Different sets of people, processes and

technologies with the common objective of creating a larger unifi ed

enterprise are brought together by M&As. In order to survive in an increasingly

competitive environment, it has become necessary to seek partnerships or

consent to being absorbed into the bigger conglomerate.

These case studies have been authored by leading practitioners, including

investment bankers and lawyers. While not intended to give expert advice,

it will give a unique insight into the global Islamic M&A market and serves

to highlight the opportunities and pitfalls facing practitioners in an ever

changing market. Each deal comes complete with its respective term sheet,

all structured according to Islamic principles. Different asset classes were

used to structure the deals and new benchmarks were set for international

best practices and standards which paves the way to a very exciting year

ahead for the global Islamic capital markets.

Case studies include: Abu Dhabi Islamic Bank’s trust certifi cate program,

the largest by conventional and Islamic standards in the region; Malaysian

originated Al-‘Aqar REIT which emerged as the world’s fi rst listed Islamic

healthcare real estate trust; Dubai World’s Nakheel with the largest Sukuk

issue ever; the US East Cameron Gas Sukuk where the issuer in a non-Islamic

jurisdiction, sought alternative fi nancing from untapped liquidity in the Muslim

world; Pertamina’s fi nancing as the largest Islamic syndication in Indonesia

and SABIC as issuer of the maiden Islamic instrument for Saudi Arabia.

I would like to take this opportunity to thank all of the contributors for sharing

their experiences in structuring these award-winning deals. Congratulations

to all the winners of the Islamic Finance news Deals of the Year 2006!





Geraldine Chan

Tel: +603 2141 6024

Faizah Hassan

Very best regards,

Managing Director Andrew Tebbutt

Tel: +603 2141 6022

Managing Director Andrew Morgan

& Publisher

Tel: +603 2141 6020

Individual Annual Subscription Rate:

Company-Wide Subscription Rate:




Nora Salim


All rights reserved. No part of this publication

may be reproduced, duplicated or copied by any

means without the prior consent of the holder of the

copyright, requests for which should be addressed to the

publisher. While every care is taken in the preparation

of this publication, no responsibility can be accepted for

any errors, however caused.

Page 1


Ijarah & Real Estate Deal of the Year:

Nakheel Sukuk____________________________________________________________________________________________5

I-Reit Deal of the Year:

Al-Aqar KPJ REIT___________________________________________________________________________________________8

Mudarabah Deal of the Year:

KNM Capital_____________________________________________________________________________________________12

Murabahah & Kuwait Deal of the Year:

Mobile Telecommunications Company Murabahah Facility_______________________________________________16

Musharakah & Qatar Deal of the Year:

Qatar Real Estate Investment Company Sukuk____________________________________________________________17

Sukuk & Saudi Arabia Deal of the Year:

Saudi Basic Industries Corporation Sukuk__________________________________________________________________19

Cross Border Deal of the Year:

Dubai Financial Acquisition of Equity Stake in Bank Islam Malaysia Berhad___________________________________23

Equity Deal of the Year:

Abu Dhabi PJSC Sukuk Program___________________________________________________________________________25

Innovative, Sovereign & Malaysia Deal of the Year:

Raffl esia Capital Exchangeable Trust Certifi cates__________________________________________________________28

Project Finance Deal of the Year:

Al-Waha Petrochemical Project__________________________________________________________________________30

Structured Finance & US Deal of the Year:

East Cameron Gas Sukuk_________________________________________________________________________________32

Trade Finance & Indonesia Deal of the Year:

Pertamina (Persero) Murabahah Syndication______________________________________________________________35

Oman Deal of the Year:

Sohar Aluminium_________________________________________________________________________________________36

Pakistan Deal of the Year:

Sitara Chemical Industries Sukuk__________________________________________________________________________40

Turkey Deal of the Year:

Garanti Leasing__________________________________________________________________________________________42

Award Results __________________________________________________________________________________________43

Dubai Awards Dinner___________________________________________________________________________________44

Malaysia Awards Dinner________________________________________________________________________________45

Page 2





Islamic Banking from Absa

You are committed to a philosophy that guides your every day. We understand your needs,

which is why we have introduced Islamic Banking from Absa.

Every product from Vehicle Finance to Savings Accounts is monitored by the Shari'ah Supervisory

Board, your independent body in Fiqh Almua'malat. For Shari'ah compliant solutions, you'll feel

at home with Absa.

For more information on Islamic Banking, call us on 0860 000 786.

You can also e-mail us at or log onto

Absa Bank Ltd. Reg No 1986/004794/06. Authorised Financial Services Provider.





Islamic Banking from Absa

You are committed to a philosophy that guides your every day. We understand your needs,

which is why we have introduced Islamic Banking from Absa.

Every product from Vehicle Finance to Savings Accounts is monitored by the Shari'ah Supervisory

Board, your independent body in Fiqh Almua'malat. For Shari'ah compliant solutions, you'll feel

at home with Absa.

For more information on Islamic Banking, call us on 0860 000 786.

You can also e-mail us at or log onto

Absa Bank Ltd. Reg No 1986/004794/06. Authorised Financial Services Provider.

Deals of the Year 2006 Handbook

US$3.52 billion Nakheel Sukuk Al Ijarah

The largest Sukuk issued in 2006

On the 14 th December 2006 Dubai Islamic Bank (DIB) along

with Barclays Capital closed the three year Pre-QPO Equity

Linked Sukuk al-Ijarah of US$3.52 billion for Nakheel.

DIB was the joint lead manager and bookrunner along with

Barclays Capital. This transaction was the largest Sukuk issue

to date in the history of Islamic banking and is the first of

its kind in both Islamic and conventional capital markets.

The Sukuk was structured as per the rules of Shariah and

was approved by the Shariah board of DIB. It was documented

according to the Eurobond standards (Reg S) and

is listed on the Dubai International Financial Exchange.


DIB was approached by Dubai World to devise a funding

strategy for Nakheel PJSC, which is UAE’s largest property

developer. Dubai World is one the largest holding companies

in the world and was established to hold interests of

the government of Dubai in companies under common

management control. Dubai World currently owns assets in

excess of US$30.5 billion.

Nakheel PJSC is wholly owned by Nakheel Holdings 1,

Nakheel Holdings 2 and Nakheel Holdings 3, which are

directly owned by Nakheel World. Nakheel World is 99%

owned by Dubai World and 1% owned by Dubai World

Holdings Limited.

Nakheel PJSC was formed with the objective of developing

real estate projects in Dubai and is a part of HH Sheikh

Mohammed Bin Rashid Al Maktoum’s plan to substantially

diversify Dubai’s economic base and grow its tourism and

real estate industry. Nakheel currently owns approximately

US$29 billion in assets and is in the process of developing

iconic projects such as The World, Palm Jumeirah and Palm

Jebel Ali etc.


Nakheel’s objective was to devise a funding strategy that

will ensure access to a deep pool of global capital by tapping

investor demand for Nakheel’s risk and to establish a

platform for successful continued access to the international



The transaction was structured as a 3 year Pre-QPO Equity

Linked Sukuk al-Ijarah wherein funds were raised at the

Nakheel Holdings 1 (obligor) level. Under a purchase agreement,

certain pre-identifi ed assets were sold to Nakheel

Development Limited - an offshore special purpose vehicle

(Issuer SPV) that was formulated as a free zone company in

the Jebel Ali Free Zone.

The SPV issued trust certifi cates (Sukuk) for US$3.52 billion

in order to purchase assets from Nakheel Holdings 1. The

purchased assets were subsequently leased by the SPV to

Nakheel Holdings 2 for a period of 3 years.

A co-obligor guarantee was executed by Nakheel Holdings

1, Nakheel Holdings 2 and Nakheel Holdings 3 (together the

co-obligors) in favor of the issuer SPV under which the coobligors

jointly and severally, irrevocably and unconditionally

guarantee the payment, delivery and other obligations

of each other under the transaction documents.

Nakheel Holdings 2 in its capacity as the purchase undertaking

obligor executed a purchase undertaking by which

means Nakheel Holding 2 has undertaken to, in certain circumstances,

purchase all of the Issuer SPV’s interest in the

Sukuk assets from the Issuer SPV.

As a form of credit enhancement, Dubai World (guarantor)

also granted a guarantee in favor of the issuer under which

the guarantor has irrevocably and unconditionally guaranteed

the payment obligations of the co-obligors under the

transaction documents. The obligations of the guarantor

under the Dubai World guarantee constitute unsecured,

direct, unconditional and insubordinate obligations of the

guarantor which will at all times rank pari passu with all other

unsecured and insubordinate obligations of the guarantor.

Further, in order to secure the payment obligations of the

co-obligors, Nakheel Holdings 1 has granted a mortgage

over property and a share pledge of Nakheel PJSC shares

in favour of the security trustee.

Guaranteed Allocation

Under the subscription rights sale undertaking, the Sukuk

structure incorporated a guaranteed allocation of 25% of

the Sukuk amount to investors in any qualifying public offering

(QPO) undertaken by the Nakheel group during the

tenor of the Sukuk.

A QPO means any primary or secondary equity offering of

the authorized or issued share capital by any member of

the Nakheel Group including in the form of global depository

receipts, American depository receipts or other depository

receipts, any offering of mandatory exchangeable or

convertible bonds, warrants and rights issues, in each case

listed on any international stock exchange.

Each certifi cate provides the holder the right to subscribe

for QPO shares at the discount of 5% on the indicative share

price on each QPO that is launched prior to redemption of

the certifi cates.

A QPO shall be deemed to be launched when the initial,

preliminary, pathfi nder or other equivalent offering document

is published and/or made available to potential investors

in connection with that QPO.


Page 5

Deals of the Year 2006 Handbook

Nakheel Sukuk (continued...)

The rights of certifi cate holders in aggregate is limited to

an aggregate number of QPO shares equal to 30% of the

aggregate number of QPO shares to be issued. As such,

the aggregate value of the subscription rights in all QPO

launched after the closing date and prior to the redemption

date including the value of the subscription rights in

that QPO does not exceed in aggregate US$880 million,

being 25% of the Sukuk issue amount.

However in the event that the Nakheel Group does not

fl oat shares, then investors will receive a higher yield of up

to 200 bps depending on the value of the subscription rights

allocated to the Sukuk holders.

Look back rights

The Sukuk have a 3-year tenor but investors will also receive

look back rights for allocation of Nakheel Group QPO shares

that extend into a 4 th year. If a QPO takes place between

years 3 and 4, investors can participate as though the QPO

had taken place at the end of 3 years.


The main success story of the transaction was the lead managers

placement ability as a result of which they achieved

a high quality order book that was oversubscribed by 2.5

times, upsizing of the deal from US$2.5 billion to US$3.52 billion

(an increase of over 40%) and tightening of the QPO

spread range from the initial price guidance of 95/145bps

to 120bps.


The Sukuk attracted a well-diversifi ed global investor base

with demand exceptionally strong from Middle Eastern investors

followed by investors in Europe, Asia and the rest of

the world. The following graph presents the allocation by

geography for this landmark transaction.

Asia, 4%

Other, 18%




East, 40%

The authors are from Dubai Islamic Bank.





Nakheel Development Limited

Pre-QPO Equity Linked Sukuk al-Ijarah

Nakheel Development Limited

A development company based in Dubai, UAE. Their portfolio includes the waterfront developments The

Palm, The World and Dubai Waterfront.

DATE OF LISTING/ISSUE 14 th December 2006 ISSUE SIZE US$3,520 million

MATURITY 2009 COUPON 6.345% per annum




Dubai Islamic Bank and Barclays Capital

To the managers: Denton Wilde Sapte LLP; To the issuer: Clifford Chance LLP

Assets comprise of the leasehold rights for a term of 50 years over certain land, buildings and other property

at Dubai Waterfront




The return on the certifi cates shall be calculated on the basis of a fi xed return of 6.345% per annum

(the QPO yield). On the 14 th June and 14 th December in each year (each a periodic distribution date)

commencing on 14 th June 2007, the issuer will pay periodic distribution amounts to each certifi cateholder

calculated as the product of 50% of the QPO yield and the principal amount of the certifi cates on a 30/360

basis. In addition, on the redemption date (as defi ned herein) the issuer will pay to each certifi cateholder

(i) the fi nal distribution amount calculated as the product of 50% of the QPO Yield and the principal

amount of the certifi cates on a 30/360 basis

Sukuk proceeds were be used by the Issuer to purchase the Sukuk Assets in accordance with the terms of

the Purchase Agreement

Page 6

Deals of the Year 2006 Handbook

Al-’Aqar KPJ REIT – The World’s First Listed

Islamic Healthcare REIT



Real Estate Investment Trusts (REITs) began in the US

some 40 years ago, and today, building on their success

in the US, more than 20 countries have passed laws to

allow REITs. Investors, asset owners and regulators have

warmed to them, seeing the REIT as a vehicle that benefits

all participants. REITs are not new in Malaysia; they were

previously known as property trusts. The new “Guidelines on

REIT,” which came into effect in January 2005, revamp the

old “Property Trust Guidelines.”

In line with Malaysia’s Capital Market Masterplan to

promote the country as an international Islamic fi nancial

center, guidelines for Islamic REITs were released by the

Shariah Advisory Council (SAC) of the Securities Commission

of Malaysia (SC) in November 2005 to facilitate the further

development of new Islamic capital market products. With

the release of theIslamic REITs Guidelines,” Malaysia has

become the fi rst jurisdiction in the global Islamic fi nancial

sector to issue such guidelines, setting a global benchmark

for the development of Islamic REITs guidelines and of

Islamic derivatives in Malaysia. This latest achievement

further enhances Malaysia’s lead role in the development

of the Islamic capital market in the international fi nancial

community, and will further promote and accelerate the

growth of a competitive Islamic capital market in Malaysia.

Additionally, this development enhances the Islamic

fi nancial market as a complement to conventional forms

of investments.

REITs are essentially investment vehicles that own stable,

income generating, investment grade real estate assets,

through a trust that distributes most or all of their net income

to unitholders as dividends. An Islamic REIT invests primarily

in income producing Shariah compliant real estate and/

or real estate-related assets. A portion of the REITs fund

can also be invested in other Shariah compliant asset

classes such as cash, deposits and investment products.

The management of an Islamic REIT is guided by the

Shariah compliance criteria provided in theIslamic REITs

Guidelines.” Principally, the Islamic REIT manager shall

be advised by the Shariah committee/advisor relating to

Shariah compliant investment and assessment.

The introduction of theIslamic REITs Guidelines” provides

an opportunity for those who wish to invest in real estate

through Shariah compliant capital market instruments and

widen the investor base to those who would not normally

subscribe to non-Shariah compliant investments. The

guidelines facilitate the creation of a new asset class for

investors, allow further diversifi cation by fund managers of

their investment sources and portfolios, and also provide

for hedging against fl uctuations in the equities and

commodities markets. They also offer foreign investors

seeking Shariah compliant instruments, in particular Middle

East investors, an opportunity to invest in Malaysian real

property without the hassle and responsibilities associated

with direct ownership of such assets.

Similar to conventional REITs, Islamic REITs are managed by

professional managers who have specialized knowledge

of real estate and real estate-related assets. Islamic REITs

are liquid assets, which can be listed and traded on Bursa

Securities. This makes REITS attractive to investors, who are

able to invest and diversify their real estate investments

without large capital, while meeting their needs for Shariah

compliant investment.

Properties under an Islamic REIT must generate rental

income from permissible activities. A benchmark of up

to 20% of rentals can be derived from non-permissible

activities, under theIslamic REITs Guidelines.” The guidelines

also lay out specifi c rental activities that are classifi ed as

non-permissible, such as interest-based fi nancial services,

conventional insurance, and so forth.


The Al-Aqar REIT set many milestones: the world’s fi rst listed

Islamic REIT, Asia’s fi rst healthcare REIT, the fi rst listed Islamic

REIT under the new SC “Guidelines for Islamic REITs,” and a

benchmark for the development of Islamic REITs in Malaysia,

as well as in the region.

In May 2006, AmInvestment Bank, as the advisor, managing

underwriter and placement agent of the REIT, received

approval from the SC for the establishment and listing of Al-

Aqar KPJ REIT on the Main Board of Bursa Malaysia Securities

(Bursa Securities). On the 10 th August 2006, Al-Aqar KPJ REIT

was listed on the Main Board of Bursa Securities.

The sponsor of the REIT is KPJ Healthcare (KPJ), the

healthcare arm of Johor Corporation, the fi rst home-grown

healthcare group in Malaysia, which was listed on the Main

Board of Bursa Securities in November 1994. The KPJ Group

has more than 25 years of experience in the healthcare

industry and is principally involved in the business of hospital

management, healthcare technical services, hospital

development and commissioning, nursing and healthcare

professionals’ continuous education. With more than RM1

billion (US$285.58 million) in assets, and shareholders’ funds

in excess of RM420 million (US$119.94 million), KPJ Healthcare

is one of the largest groups of private healthcare providers

in Malaysia.

The Al-Aqar REIT is 100% Shariah compliant. In line with the

requirements of the guidelines, the assets injected into the

Al-Aqar KPJ REIT are Shariah compliant assets comprising of


Page 8

Deals of the Year 2006 Handbook

Al-’Aqar KPJ REIT (continued...)

hospital buildings owned by the KPJ Group. For the listing

of the KPJ REIT, KPJ initially injected six hospital buildings

owned by the group in prime locations nationwide into the


These six hospitals have a combined Open Market

Value (OMV) of RM481 million (US$137.36 million), based

on the valuation reports of CH Williams Talhar & Wong

dated September 2005 and May 2006. These properties

were injected into the Al-Aqar KPJ REIT at an average

4.1% discount on the OMV. Based on the OMV of the six

properties, the rental yield is 7.4%, while based on the value

at which the properties are injected into the REIT (i.e. a 4.1%

discount to OMV) the rental yield is higher at 7.7%.

The Al-Aqar KPJ REIT is expected to yield a competitive

market rate of more than 7% for the fi nancial years ending

on the 31 st December 2007 until the 31 st December 2009.

Investors are expected to enjoy a consistent income

return due to several key factors, which include a stable

rental income from the properties, a 100% occupancy

rate, minimum risk and single exposure in the healthcare

business. Investors will also gain from the anticipated capital

appreciation on the units purchased.








OMV & Purchase Consideration of 6 Properties

Ampang Puteri Damansara Johor Specialist Ipoh Specialist Puteri Specialist Selangor Medical

OMV for 6 Properties Purchase Consideration

All the six properties injected into the Al-Aqar KPJ REIT are

occupied by six tenants (which are subsidiaries of the KPJ

Group) and the lease agreements entered into with all these

tenants are long term, i.e. for a lease period of 15 years.

Upon listing, KPJ, as a sponsor of Al-Aqar KPJ REIT, as well as

the holding company of the six hospital tenants, indirectly

held 47.1% of the total units in the Al-Aqar KPJ REIT, with

a listed fund of 340 million. The relatively high percentage

held by the sponsor shows a commitment to nurturing and

further growing the REIT. The balance has been allocated

to institutional and selected investors (48.53%), as well as

to the Malaysian public (4.41%). A majority of the REIT units

have been successfully placed out to Islamic institutions, as

it is the fi rst Islamic REIT in the country.

After the listing, the Al-Aqar KPJ REIT is expected to grow in

asset size through the acquisition of hospitals or healthcarerelated

properties in Malaysia and region-wide. The KPJ

Group has the largest hospital network in Malaysia, with

15 specialist hospitals and a private nursing college. In

addition, the group owns and manages three specialist

hospitals in Indonesia and one specialist hospital in Dhaka,


The Islamic capital market is set to become an important

segment within the global fi nancial market. Malaysia’s efforts

in ensuring Shariah compliance will be complemented

by efforts to ensure international acceptability and

compatibility by benchmarking against international best

practices and standards, through the involvement of global

issuers, investors and intermediaries.

Going forward, Malaysia will continue to harness its position

to become a premier international Islamic fi nancial center,

with the supporting infrastructure and regulatory framework

already in place. After Shariah compliant equities, Islamic

bonds and Islamic funds, and now with the establishment

of “Guidelines for Islamic REITs” and the fi rst listed Islamic

healthcare REIT in the world, Malaysia is set for smooth

sailing towards achieving its vision of bringing Malaysia to

the forefront of Islamic fi nance.


AmInvestment Bank is not new to the REITs market, as the

bank listed Malaysia’s fi rst property trust, namely AmFirst

Property Trust Fund, some 17 years ago, which has now

been rebranded as AmFirst REIT. As of the 22 nd February 2007,

the total market capitalization of the the eight listed REITs

in Malaysia amounted to RM3.3 billion (US$941.87 million).

AmInvestment Bank have listed fi ve REITS, representing more

than a 60% market share of the total number of listed REITs

and 73% of the total market capitalization of the REITs.

Notably, AmInvestment Bank was the advisor, joint

managing underwriter, underwriter and senior co-lead

manager to the largest REIT – the Starhill REIT – in Malaysia

to date, with a total asset value of RM1.15 billion (US$ 338.23

million), underlining its dominant position in local investment

banking history.

The authors are from

AmInvestment Bank.

Page 9












Key objective is to provide the unitholders with stable distributions per Unit with the potential for

sustainable long-term growth of such distributions and the net asset value (NAV) per Unit.

Real estate and real estate-related assets

Income and growth

Damansara REIT Managers Sdn Bhd (formerly known as Ultimate Benchmark Sdn Bhd)

Non-independent non-executive chairman – Muhammad Ali Hashim; non-independent non-executive

directors – Siti Sa’diah Sheikh Bakir, Jamaludin Md.Ali (resigned on 12 th January 2007), Mohd Zam

Mustaman (resigned on 12 th January 2007), Kamaruzzaman Abu Kassim (appointed on 12 th January

2007), Lukman Abu Bakar (appointed on 12 th January 2007); independent non–executive directors

– Abdul Majit Ahmad Khan (resigned on 21 st November 2006), Dr. Mohd Hafetz Ahmad, Zainah Mustafa

(appointed on 16 th February 2007; chief executive officer – Yusaini Sidek


MARKET CAP RM323 million (US$93.54 million) as at 22 nd February 2007



Approved fund size is 340 million units

RM179.25 million (US$51.91 million)



For each distribution period, Al-‘Aqar REIT shall distribute all (or such lower percentage as it may

determine in its absolute discretion) of the distributable business income and capital/exempt income

within two (2) months after Al-‘Aqar REIT’s book closure date. It proposes to maintain minimum

distribution of at least 95% of its distributable income.

DIVIDEND PER UNIT Financial year 31 December *Annualised

2006 * 2007 2008 2009 #Based on institutional

Dividend per unit (%) 7.25 7.32 7.52 7.70

price and retail price of

RM1.00 and RM0.95 per

Dividend yield per annum (%)

- Institutional # 7.25 7.32 7.52 7.70

unit respectively.

- Retail # 7.63 7.71 7.92 8.11


RM481 million

IDENTIFIED ASSETS Hospitals Location Gross Floor Area Appraised Value * (RM)

Ampang Puteri Specialist Hospital Selangor 423,675 sq ft 128,800,000 (US$37.30 million)

Damansara Specialist Hospital Selangor 445,131 sq ft 107,500,000 (US$31.13 million)

Johor Specialist Hospital Johor 269,571 sq ft 75,300,000 (US$21.80 million)

Ipoh Specialist Hospital Perak 215,762 sq ft 69,000,000 (US$19.98 million)

Puteri Specialist Hospital Johor 131,033 sq ft 39,000,000 (US$11.29 million)

Selangor Medical Centre Selangor 209,455 sq ft 61,400,000 (US$17.78 million)

* Various valuation dates between September to December 2005.







AmInvestment Bank Berhad (formerly known as AmMerchant Bank Berhad)

Abdul Raman Saad & Associates

AmInvestment Bank (including AmSecurities Sdn Bhd)

Amanah Raya Berhad

Nooh Gadot, Mohd Hashim Yahya, Professor Madya Dr. Ab Halim Muhammad

Page 10

Deals of the Year 2006 Handbook

KNM Capital’s RM300 million

ICP/IMTN Program


Aseambankers Malaysia (Aseambankers) is the joint lead

arranger, joint principal advisor and joint lead manager for

KNM Capital’s (KNMC) Islamic commercial papers/Islamic

medium-term notes program (ICP/IMTN) of up to RM300

million (US$85.64 million) nominal value in combination with

the Mudarabah Islamic principle.

This signifi cant transaction has successfully profi led

Aseambankers as a pioneering Malaysian fi nancial services

provider, as this is the fi rst of such hybrid Islamic structures

in the Islamic capital market where a combination of

Murabahah and Mudarabah principles were used to

facilitate an ICP/IMTN program.

The concerted efforts between Malayan Banking’s

(Maybank) Shariah committee – the Shariah advisor for

this transaction – and Aseambankers’ Islamic debt capital

markets unit resulted in this innovative and sophisticated

structure which contributes to the promotion and growth of

Malaysian Islamic capital market.

The ICP/IMTN program, which was launched and issued in

October 2006, has a tenure of seven years and has been

accorded a short-term rating of MARC-1ID and a long-term

rating of A+ID by Malaysian Rating Corporation (MARC), of

which the short-term rating is one notch higher than the

earlier Mudarabah underwritten notes issuance facility/

IMTN program (MUNIF/IMTN program) issued by KNMC’s

parent company, KNM Group (KNMB).


KNMC is a special purpose vehicle incorporated in Malaysia

as a private limited company under the Companies Act

1965 on the 24 th April 2006. A wholly owned subsidiary of

KNMB, it is principally involved in the provision of funding

and treasury services and all related treasury functions for

the KNM group of companies (KNM Group).

KNMB is an investment holding company with subsidiaries

principally involved in the design, manufacture, fabrication,

assembly, commissioning and maintenance of process

equipment, pressure vessels, heat exchangers, skid

mounted assemblies, process pipe systems, storage tanks,

specialized structural assemblies and module assemblies

for the oil, gas, petrochemicals and mineral processing

industries. Through expansion and strategic acquisitions,

KNM Group continues to strengthen its position overseas;

with presence in the Oceania, Asia, North and South

America, Europe and African regions. Its customer base

comprises primarily established oil majors and reputable oil

and gas companies.



(See Diagram 1: Transaction Structure, on the next page.)

The purpose of the fi nancing exercise was to refi nance

KNMB’s existing outstanding MUNIF under the MUNIF/IMTN

program, to fi nance KNM Group’s expansion plans in China,

as well as fi nancing future investments, capital expenditure

requirements and working capital purposes.

The fi nancing exercise was undertaken by KNMC, a special

purpose vehicle established as the fi nancial hub for the KNM

Group to centralize all treasury and funding activities of the

KNM Group. Pursuant thereof, all domestic borrowings of

the KNM Group, including but not limited to the ICP/IMTN

program, will be made through KNMC to fund the activities

of the KNM Group. In addition, the refi nancing exercise is

also aimed at providing KNMB with relaxation of several

covenants contained under the MUNIF/IMTN program

and to eliminate the maintenance of certain designated

accounts to better refl ect the current fi nancial standings of

the KNM Group.

Notwithstanding the above, specifi c covenants have been

incorporated as enhancements to the structure to provide

additional comfort to the investors:

(1) a corporate guarantee from KNMB; and

(2) the creation of a fi nance service account (FSA) to

capture the principal and profi t payments of the IMTN

issued three months before payment is due.

The fi rst issuance under the ICP/IMTN program was done via

a private placement managed by the joint lead arrangers

and was well received by investors, given the strong rating

accorded by MARC.


The ICP/IMTN program is a hybrid Islamic structure, a

combination of the Islamic principle of Murabahah and

Mudarabah to address the issue of riba arising from the

transaction. The issue of riba arises due to the cash advances

to be upstreamed from KNMC to KNMB, of which in return,

KNMB shall repay KNMC the principal amount plus interest

(equivalent to the profi t amount to be channeled to the

investors). The interest portion to be paid by KNMB to KNMC

is tantamount to riba if the structure does not provide for

a separate Mudarabah arrangement between KNMC and

KNMB to govern the advances and the repayments of said

advances to KNMC. Thus the Mudarabah arrangement is

added into the structure to eliminate the element of riba

and so to ensure that the transaction structure is fully Islamic



Page 12

ABC Group - Islamic Financial Services

Providing a wider range of solutions

Al Waha Petrochemical Co.


Islamic Financing for the development of a

petrochemical complex in Saudi Arabia

Mobile Telecommunications Co.


Murabaha facility

US and European Operating

and Finance Leases

US$200,000,000 - Plus

Originated and Managed by

Part of the ABC Group helping the UK Muslim

community buy homes according to Shari’a by

Diminishing Musharika

Mandated Lead Arranger

September 2006

Joint Mandated Lead Arranger, Underwriter

and Bookrunner

December 2006

On behalf of various Islamic institutional

investors in the G.C.C.

2000 - 2006



Discounted rates

99% finance – Professional’s Scheme

Non-UK residents

Preferred Islamic home finance provider for

Lloyds/TSB, Islamic Bank of Britain

and Bristol & West

Gotts Island Phase II

Saudi KAYAN Petrochemical Company


Tabdeel & Al-Muwa’amah


Islamic Financing Advisory

Parallel Phased Istisna’ for 183-apartment

development in Leeds arranged by

For the construction and operation of a

petrochemical complex in Al-Jubail KSA






First structured Shari’a-compliant

alternatives to conventional interest rate swap

and conventional outright forward

foreign exchange contracts

Provided By



2005 - 2008

Commencing 2006


July 2005

DAAR International Sukuk Company


Sukuk al Ijara Trust Certificates

Joint Mandated Lead Arranger, Underwriter

and Bookrunner

ABC Clearing Company


Authorised share capital

First Shari’a-compliant investment vehicle

allowing depositors to profit from their

US Dollar overnight credit balances

Residential Developments


Istisna’ Facilities

arranged by

Provided By

Murabaha Facility for

AREF Investment Group


Joint Arranger, Underwriter and Bookrunner

Facilty Agent

February 2007

November 1993 – 2006

October 2000 - 2006

October 2006

Duncan Smith

Senior Vice President

Global Head Islamic Financial Services

Arab Banking Corporation (B.S.C.)


Naveed Khan

Managing Director

ABC Islamic Bank (E.C.)


Derek Weist

Chief Executive Officer

Islamic Financial Services

ABCIB Islamic Asset Management


Keith Leach

Head of Islamic Retail Financial

Services & alburaq

ABC International Bank plc


Tel: +973 17 543 347

Fax: +971 17 535 723

Tel: +973 17 543 342

Fax: +973 17 533 382

Tel: +44 207 776 4186

Fax: +44 207 600 7569

Tel: +44 207 776 4183

Fax: +44 207 600 7569

Abu Dhabi Algiers Amman Baghdad Bahrain Beirut Cairo Frankfurt am Main Grand Cayman Istanbul London Madrid Milan

New York Paris Sao Paolo Singapore Stockholm Tehran Tripoli Tunis

Deals of the Year 2006 Handbook

KNM Capital (continued...)

Mudarabah is a profi t-sharing arrangement between two

parties to fi nance a business venture where the profi ts are

shared between the two parties but the losses will be borne

by the capital provider. This arrangement is incorporated

into the structure where KNMC is the capital provider (rab

al maal), whereas KNMB, the mudarib, shall utilize the

capital provided (proceeds raised from the issuance of

the ICP/IMTN program under a Murabahah principle) in

accordance to the utilization of proceeds provided in the

terms of arrangement.

Under the Mudarabah arrangement, a profi t-sharing ratio

is fi xed in advance and agreed between the Rab al Maal

and Mudarib at a ratio of 1:99 (Mudarib: Rab al Maal).

Notwithstanding that, the Rab al Maal’s entitlement under

the Mudarabah arrangement is only to the refund of capital

and the expected profi t-sharing, which will be equivalent

to the profi t rates to service KNMC’s debt obligations under

the ICP/IMTN program when it is due.

To ensure that the profi t earned from the Mudarabah

venture is suffi cient to meet the profi t payments due to

investors under the ICP/IMTN program, Tanazul (waiver) is

given by the Mudarib to waive its profi ts portion due under

the Mudarabah arrangement.



KNMC’s perspective:

• The Shariah compliant ICP/IMTN guarantee access

to a wider investor base. Hence, funds are raised at

competitive rates which in turn translate into lower

overall fi nancing costs for KNMC.

• It provides maximum fl exibility to KNMC in managing

its funding requirement for its expansion plan and

investments overseas.

• It facilitates KNM Group’s centralization of all its

funding and treasury functions through the setting up

of KNMC.

Joint lead arrangers’ perspective:

• The ICP/IMTN program is testament to Aseambankers’

innovative structuring abilities in Islamic structures in

further developing and adding depth and width to

the Malaysian Islamic capital markets.

• The innovative structure is an effort by Aseambankers

to expand the spectrum of Shariah compliant products

and services in order to meet growing demand for

competent and competitive Shariah product.

Diagram 1: Transaction structure

Investment / capital

expenditure /

working capital

Key features:

Mudarabah transaction

Murabahah transaction



/ Mudarib)

FSA 1 & FSA 2 (solely

operated by the trustee)


(3) Mudarabah







(4) Sharing

of profit

based on

fixed preagreed


Corporate guarantee in

relation to the principal and

profit payments under the

ICP/IMTN program

(7) Principal and profit


KNMC / issuer / Rab

al Maal

Facility agent








Identified assets

In relation to the identified assets, if required, letter(s) of Hibah will be

procured from the beneficial owner(s) of the assets and relevant blanket

consent(s) from existing chargee(s)/assignee(s) will be obtained in

respect of such assets to facilitate the Akad and the Shariah advisor’s

confirmation that such consent(s) obtained is/are in compliance with

Shariah principles will also be obtained.


Page 14

Deals of the Year 2006 Handbook

KNM Capital (continued...)

Diagram 1: Transaction Structure

1. Investors purchase identifi ed asset(s) from the issuer at

RMX million (if the identifi ed asset(s) is/are not owned

by the issuer, the issuer will: (i) procure letter(s) of

Hibah from the benefi cial owner(s) of such asset(s);

and where applicable, (ii) obtain the relevant blanket

consent(s) from the existing chargee(s)/assignee(s)

of such asset(s) to facilitate the Hibah and the

Murabahah transaction(s) and confi rmation from the

Shariah advisor that such consent(s) obtained is/are in

compliance with Shariah principles).

2. The investors pay the purchase price of RMX million in

cash to the issuer, the proceeds of which shall then be

advanced to KNMB and/or the subsidiary companies

under a Mudarabah transaction.

3. A Mudarabah arrangement will be entered into

between KNMC (Rab al Maal) as the capital provider

and KNMB as the Mudarib. In this context, KNMC

contributes capital to the venture through KNMB and/

or directly to KNMB’s subsidiary companies, and they

will in turn manage the venture.


KNM Capital

4. Any profi t in the Mudabarah venture shall be shared

between KNMB (Mudarib) and KNMC (Rab al Maal) in

a fi xed pre-agreed ratio of 1:99. Pursuant to a Tanazul

(waiver), and from the onset, the Mudarib shall agree

to waive any profi ts due to it from the venture.

5. Pursuant to the Murabahah transaction(s), investors

shall immediately after the purchase of the identifi ed

asset(s), sell the same back to the issuer, who shall

issue the ICP/IMTN to evidence its obligations to pay

the investors the purchase price of RMX million plus

profi t (selling price) at maturity.

6. KNMB, on behalf of the issuer, shall remit funds into the

FSA 1 and FSA 2 in support of KNMC’s principal and

profi t payment obligations to the investors under the

ICP/IMTN program.

7. Upon the maturity of the ICP/IMTN, the issuer shall

utilize the funds in FSA 1 and FSA 2 to pay the selling

price to the investors.

The authors are from Aseambankers.

















Up to RM300 million (US$85.64 million) in nominal value Islamic commercial papers/Islamic medium-term

notes (ICP/IMTN) program under the Islamic principles of Murabahah and Mudarabah.

KNM Capital (KNMC).

KNMC is involved in the provision of funding and treasury services and all related treasury functions.

As at the 30 th June 2006, the board of directors consisted of Lee Swee Eng and Gan Siew Liat.

Up to RM300 million (US$85.64 million) in nominal value.

20 th October 2006 (fi rst issuance).

ICP – One, two, three, six, nine or twelve months.; IMTN – More than one year up to seven years.

Authorized paid-up capital as at the 30 th June 2006:

RM1 million (US$285,451) comprising 1 million ordinary shares of RM1 (US$0.29) each.

Buildings and lands owned by the subsidiary companies.

KNM Group (by virtue of the corporate guarantee).

Equity Trust (Malaysia).

Maybank Shariah Committee.

Tender, private placement, bought deal and/or book-building.

To redeem KNMB’s outstanding MUNIF under the MUNIF/IMTN program, for KNMB and/or the subsidiaries’

investments in connection with the expansion of plants in China, future investments and capital expenditure

and working capital purposes.

Short-term rating of MARC-1ID and a long-term rating of A+ID.

Page 15

Deals of the Year 2006 Handbook

Mobile Telecommunications Company

US$1.2 billion Murabahah Facility


Mobile Telecommunications Company (MTC) is the leading

and most experienced cellular operator in the Middle East

and Africa, with a portfolio of 5 Middle Eastern and 14 African

mobile operations. The company was established in 1983 to

provide cellular services in Kuwait and was the first public

listed cellular operator in the region. In addition to its original

operation in Kuwait (MTC Kuwait), MTC holds controlling

stakes in Fastlink in Jordan, MTC Vodafone Bahrain (MTC

Bahrain), a 30% interest in Atheer Telecommunications in

Iraq (MTC Atheer), and a four-year management contract

to operate Libancell (MTC Lebanon) on behalf of the

government of Lebanon. Since April 2005 MTC has also

held an 85% controlling stake in Celtel, operating in 14 sub-

Saharan countries.

Across these 19 networks, MTC operates a comprehensive

range of network technologies: 3G, EDGE, GPRS, GSM,

TACS and paging. It has over 13.7 million subscribers, 8,000

employees and roaming agreements with more than 210

partners worldwide. Three of its four networks (Kuwait,

Bahrain and Iraq) were rolled out on a greenfi eld basis.

The company is listed on the Kuwait Stock Exchange, with a

market capitalization of approximately US$12 billion. MTC’s

main shareholders are the Kuwait Investment Authority

(24.6%), a Kuwaiti government-owned investment fund and

National Investment Company (17.6%), a privately held

Kuwaiti investment company.


The mandated lead arrangers successfully closed the

syndication of a US$1.2 billion Murabahah facility for MTC.

A total of 28 fi nancial institutions from the MENA region, Asia

and Europe participated in what was one of the largest

Islamic fi nancing for 2006. Proceeds from the facility will be

used to refi nance the existing US$750 million Murabahah

facility for an additional period of 12 months and for general

corporate purposes.




Company International





Commodity Murabahah facility

Mobile Telecommunications

Company International

Cellular operator in the Middle

East and Africa with a portfolio of

5 Middle Eastern and 14 African

mobile operations

Chairman - Asaad Ahmed Al

Banwan; deputy chairman and

CEO - Saad Al Barrak; members

- Jamal Ahmed Al Kandary; Mishal

Al-Hama’ad; Abdul Mohsen Al-Faris;

Abdulaziz Yacoub Al Nafi si; Sheikh

Khalifa Ali Khalifa Al Sabah

DATE OF SIGNING 12 th December 2006


US$1.2 billion

DATE OF ISSUE 18 th December 2006

IMTN – More than one year up to

seven years.


1 year

PROFIT MARGIN Libor + 0.65%






ABC Islamic Bank, Arab Bank,

Calyon, Gulf International Bank,

Kuwait Finance House and National

Bank of Abu Dhabi

The facility was underwritten and syndicated by mandated

lead arrangers ABC Islamic Bank, Arab Bank, Calyon, Gulf

International Bank, Kuwait Finance House and National

Bank of Abu Dhabi. Gulf International Bank acted as the

investment agent.

MTC, which has been very active in bidding for and

acquiring mobile businesses over the past three years, has

historically relied on conventional facilities for debt funding

requirements. In line with the company’s overall strategy to

diversify sources of funding, MTC decided to tap the Islamic

market for the second time through this one-year Islamic

Murabahah facility.




Norton Rose

Mobile Telecommunications


General corporate purposes

The authors are from

ABC Islamic Bank.

Page 16

Deals of the Year 2006 Handbook

Qatar Real Estate Investment Company

US$270 Million Sukuk

Standard Chartered Bank (SCB) acted as joint lead manager

and joint bookrunner for the US$270 million Sukuk issue by

Qatar Real Estate Investment Company (QREIC). The Sukuk

were issued on the 31 st August 2006.

Not only was the deal the longest tenor Sukuk (10 years)

issued in the international capital markets to date, it was

also the fi rst corporate Sukuk issued out of Qatar. QREIC

Sukuk, the issuer, is the fi rst special purpose vehicle (SPV)

established in the Qatar Financial Center. It represented

Standard Chartered Bank’s fi rst Sukuk transaction arranged

in Qatar.

QREIC is a Qatari shareholding company that was

established in July 1995. The state of Qatar owns around

27% of the company through the Supreme Investment

Council, and QREIC’s shares are listed for trading on the

Doha Stock Market.

QREIC was established for the purpose of providing housing

and related support facilities to support the various social

needs of different industrial areas of Qatar. Its mission is to

continue to maintain its position as a leading residential

property development company in Qatar and conduct

business in compliance with Shariah principles.

The purpose of the Sukuk issue was to fi nance the

construction of two housing complexes to be located

in Dukhan and Mesaieed in Qatar (Musharakah assets),

which were being built by QREIC to be on-leased to Qatar

Petroleum (QP) on a Build, Operate, Transfer (BOT) basis.

The Sukuk issue was structured on the basis of Musharakah

(Shirkat-ul-Milk) and the purpose of the Musharakah was to

jointly own and construct the Musharakah assets.

The Sukuk issue had a tenor of 10 years based on a 2 + 8

year amortizing structure. An SPV (Qatar Sukuk) was formed

for the Sukuk issue in Qatar Financial Center. The SPV and

obligor entered into a Musharakah agreement as partners

where each Musharakah partner had an undivided

ownership of the Musharakah assets. The SPV issued Sukuk

certifi cates to fi nance its portion in the Musharakah,

whereas the obligor (QREIC) contributed its portion in kind.

The Sukuk certifi cates were issued in four tranches to allow

staggered drawdown of funds, as per the Musharakah

assets’ construction requirements.

Pursuant to a management agreement, the SPV appointed

the obligor as the managing partner to maintain the

Musharakah assets, etc on behalf of the Musharakah. Also,

the Musharakah partners appointed the obligor as the

procurer/contractor to construct the Musharakah assets.

The procurement agreement (Istisnah) set out the terms

on which the assets were to be constructed and included

provisions to ensure that the assets were constructed on

time and on budget.

The SPV and the obligor also entered into a forward lease

agreement through which the SPV, upon delivery of assets,

agreed to lease its share of the assets to the obligor for

the Sukuk tenor. During the construction period, return to

the Sukuk holders was made through advance rentals by

QREIC (lessee) to the SPV (lessor). The SPV (issuer) then

distributed the advance rentals to the Sukuk holders. After

the completion of the construction period and once the

lease had commenced, return to the Sukuk holders was

made from the lease rentals received by the lessor from

the lessee.

Once constructed, the Musharakah assets were leased to

Qatar Petroleum to service QREIC’s lease payments under

the QREIC lease.

QREIC, in its capacity as a lessee and as Musharakah partner,

had separately given irrevocable unilateral undertakings

(purchase undertakings) to the issuer to purchase all of the

Musharakah assets/units either at the end of the lease term

or on the occurrence of an event of default.

As primary security, QREIC had assigned all its rights under

the QP lease and construction agreements to the security

agent (on behalf of the SPV). The Sukuk issue was also

secured through the assignment by QREIC of all payments

to be made in respect of the performance bonds and at

the same time, QREIC had ensured that at all times there

was assignment of insurance not less than 120% of the

outstanding in respect of the certifi cates.

The structure and documentation of the Sukuk issue was

approved by Standard Chartered Bank’s Shariah Supervisory

Committee, which includes the two well-known scholars,

Sheikh Nizam Yaqubi and Dr Abu Sattar Abu Guddah. The

Sukuk issue was also approved by the Shariah Fatwa and

Control Authority of Qatar National Bank Al Islami and the

Shariah Supervision Board of Dubai Islamic Bank.

Roadshows for the QREIC Sukuk issue were held in Bahrain,

Doha (Qatar) and Dubai (UAE) which were largely attended

by various banks, fi nancial institutions, mutual funds,

investment companies, etc. The fi rst funding of US$100

million generated a highly successful order book, with total

fi rm orders of US$421 million (4.21 times oversubscribed). The

total order book refl ected 59% of orders from non-Islamic

institutions and although the issue was unrated and included

a 10-year tenor, the order book included investors from

both Europe and Asia. The allocations refl ected 90% banks

and 10% non-banks (non-banking fi nancial institutions,

insurance fi rms and pension funds).

The authors are from Standard


Page 17








Sukuk Musharakah

QREIC Sukuk, a special purpose company incorporated in the Qatar Financial Center (QFC).

Qatar Real Estate Investment Company (QREIC)

To meet the long-term housing needs of Government entities, mainly Qatar Petroleum (QP) and QP

affi liates, and developing real estate projects within housing areas of the industrial belts in Qatar.

Chairman and managing director - Khalid Bin Khalifa Bin Jassim Al-Thani

Vice-chairman - Saud Bin Nasser Bin Jassim Al-Thani

Mohammed Abdulattif Al Menah

Mohammed Ali Al Kubaisi

Mohammed Ismail Mandani

Professor D. Abdulaziz Abdulrahman Kamal

Abdullah Bin Ahmed Al Suwaidi

DATE OF LISTING 31 st August 2006


US$270 million

DATE OF ISSUE First funding date – 31 st August 2006

Second funding date – 30 th November 2006

Third funding date – 28 th February 2007

Fourth funding date – 31 st May 2007

MATURITY August 2016



















US$ LIBOR + 120 basis points

The authorized share capital of the issuer is US$50,000 ordinary shares of US$1 each, 250 of which have

been issued. All of the issued shares are fully-paid and are held by Maples Finance Limited (in its capacity

as share trustee) under the terms of a trust for charitable purposes.

In 32 equal quarterly installments after a grace period of 2 years from the fi rst funding date.


All of the capital of the Musharakah, including all assets acquired after, from or through the application

of the Sukuk proceeds (Musharakah assets).

Qatar National Bank and Qatar National Bank Al Islami.

Dubai Islamic Bank, Gulf International Bank, Standard Chartered Bank (SCB) and Qatar National Bank.

Clifford Chance (for English law) and the Law Offi ce of Ahmed Abdel Latif Al Mohannadi, managed by

legal consultant Gebran Majdalany (for Qatari law).

Qatar National Bank, Dubai Islamic Bank, Gulf International Bank and Standard Chartered Bank.

Qatar National Bank

Shariah Fatwa and Control Authority of Qatar National Bank Al Islami.

Reg S Issue listed on the Luxembourg Stock Exchange.

To fi nance the construction of two housing complexes to be located in Dukhan and Mesaieed in Qatar

which were being built by QREIC to be on-leased to Qatar Petroleum (QP) on a BOT basis.

Not rated


Page 18

Deals of the Year 2006 Handbook

SABIC Sukuk: The Debut Sukuk

in Saudi Arabia

In the past two years there has been a surge in the number

of high-profile Sukuk instruments issued in the GCC and

South-East Asia, yet none had originated from the Kingdom

of Saudi Arabia until the issuance of the SABIC Sukuk. This

is despite the Kingdom having the largest domestic capital

market of all of the GCC countries (in terms of market

capitalization of its stock exchange) and, moreover, that it

has been a pioneer in the establishment and development

of Islamic banking and finance. It is a major member

country of the Organization of the Islamic Conference (OIC)

and the Islamic Development Bank (IDB) – to which it is the

host country – it is home to the world’s largest Islamic bank

(in terms of assets) and, through private initiatives, was

behind the establishment in the 1970s of two of the major

international Islamic banking conglomerates.

The SABIC Sukuk was issued on the 29 th July 2006, and

anticipation accompanying the issue was considerable, as

it was the fi rst time that Saudi nationals and residents were

able to invest in a local currency, fi xed income instrument

that had been vetted by the Shariah Supervisory Committee

of a Saudi Arabian Bank (SABB Amanah). As would naturally

occur with a fi rst-time issuance, SABIC and its lead manager

HSBC had set the platform for Sukuk issuance in the Saudi

Arabian market. This involved preparing the offering

documents to high international standards and addressing

a number of issues, some of which are described in this brief

case study.


The challenge in structuring the Sukuk was to obtain

approval from a Saudi Arabian Shariah committee on a

Sukuk structure – something that no previous Sukuk issued

had achieved. A further challenge was that SABIC is a

holding investment company with few tangible assets,

aside from its equity investments in its affi liates.

Most Sukuk are based upon the Ijarah (leasing) template,

with the purchase and pre-arranged resale of an asset to the

obligor at a pre-agreed price. These Sukuk, and variations

of this structure (including some of the Mudarabah or

Musharakah Sukuk recently issued), may not be approved

if vetted by a Shariah committee of a Saudi Arabian bank

as the general consensus amongst these committees is

that a purchase combined with a resale at a fi xed price

is not permissible. One of the concerns of the committees

with this arrangement is that the ownership (and hence

the purchase) is not true ownership (and hence a true

purchase), as the terms of ownership completely restrict

the owner’s ability to sell the asset (or the Mudarabah/

Musharakah investment) in the open market at a market

price – the purchaser/owner is compelled to sell to the

obligor at a pre-determined price. Another concern of Saudi

banks’ Shariah committees of the purchase and resalebased

structures is that the resale is at a pre-determined

price and not at the prevailing market price. Please note

that this is only our understanding of the concerns of these


“The marketing services

income represents a good

proxy for SABIC corporate risk”

The unique structure that was tailor-made for SABIC is a

Sukuk Istithmaar (Investment Sukuk). This Sukuk structure

is not based upon the structure of any previous Sukuk,

although an investment Sukuk is one of the main categories

of Sukuk types included in the Accounting and Auditing

Organization for Islamic Financial Institutions (AAOIFI)

Shariah Standards.

The Sukuk assets represent an investment, for 20 years, in

limited rights and obligations of SABIC in certain marketing

contracts that underpin the marketing services that

SABIC provides to its manufacturing affi liates. SABIC itself

is a holding company which has an equity stake in many

affi liate companies that produce petrochemicals, steel

and fertilizers (and other intermediate goods). In addition

to being a holding company, managing and coordinating

its investments, SABIC itself has a research and technology

unit (holding over 200 registered patents) and a marketing

business unit. Its marketing unit undertakes the service of

marketing and selling the products of certain of its affi liates

to companies located in Saudi Arabia and across the globe

to over 100 countries. This marketing unit incurs certain costs

(the costs of marketing and selling products to thousands

of global customers) and receives fees in return for

conducting these services. The scope of its marketing and

selling activities are documented in marketing agreements

signed between SABIC and its affi liates.

The marketing unit has an established history of providing

exemplary service and earning signifi cant net revenues

for SABIC, as marketing fees earned are based upon sales

levels achieved. As the SABIC group’s own net income

is based upon sales of the group, the marketing services

income represents a good proxy for SABIC corporate risk.

The structure of the Sukuk entitles Sukuk holders, for 20 years,

with a right in the defi ned net income from these marketing

services subject to certain terms and conditions outlined

in the Sukuk offering circular. The net income derived from

this investment is paid quarterly to Sukuk holders, up to a

specifi c amount (based on a benchmark linked to SIBOR)

and surplus income is kept as a reserve. The reserve is used

as a buffer protection to safeguard Sukuk holders in the


Page 19

Deals of the Year 2006 Handbook

SABIC Sukuk (continued...)

unlikely event that net income for any period unexpectedly

falls below the specifi c amount.

In addition to acting as a buffer, money accruing to the

reserve is used to pay, every 5 years throughout the 20-year

life of the Sukuk, an extra amount equal to 10% of the face

value of the Sukuk. Thus, by the end, an amount of 40% of

the face value (as well as the quarterly return) would have

been paid to Sukuk holders. Also, at the end of the Sukuk’s

life – whether 20-years or earlier if the Sukuk is purchased by

SABIC before then – any remaining balance in the reserve

is paid to SABIC as an incentive. The rationale for paying

this is to provide SABIC with a strong incentive to continue

providing the marketing services to a high and profi table


In addition to the 10% extra amount paid to Sukuk holders

every fi ve years, SABIC provides Sukuk holders with a

purchase undertaking under which it undertakes (as direct

SABIC credit risk), to purchase the Sukuk for a specifi c

amount on each date. The purchase undertaking is both

irrevocable and individual so that Sukuk holders may

individually exercise their option (not needing a minimum

level) requiring SABIC to purchase the Sukuk from them.

The purchase price decreases over time, representing

the remaining life of the Sukuk (as it is a 20-year fi nancial

instrument). The price decreases from 90% of the face

value at the end of year 5 to 60% in year 10 and 30% in 15;

at the end of year 20 the Sukuk has no value as its life has


Therefore, if the Sukuk holders exercise their option for SABIC

to purchase the Sukuk at the end of year 5, they will receive

an aggregate of 100% of the face value; 90% as a purchase

price and a 10% extra amount. If Sukuk holders choose

not to sell to SABIC at the end of the fi rst fi ve years (SABIC

has no option to refuse, it is the right of Sukuk holders), the

aggregate amount receivable declines to 80% in year 10,

60% in year 15 and just 40% in year 20.

Therefore, we expect that Sukuk holders would naturally

elect to sell to SABIC at the end of year 5, thereby achieving

a 100% return of the face value and earning a quarterly

return refl ective of SABIC risk during these 5 years. Although,

importantly, SABIC does not have a call option to prepay

the Sukuk and investors are not compelled to exercise their

put option.

Diagram 2: Repayment Profile

Face value received














(10% of face




(90% of

face value)



(20% of face




(60% of

face value)



(30% of face




(30% of

face value)



40% of face



As one of the key objectives of the Sukuk was to develop

the local capital markets, distribution of the Sukuk was

limited to Saudi nationals or permanent residents of Saudi


Diagram 1: Transaction Structure


7. SABIC undertakes to buy Sukuk at years 5, 10 and 15

6. Extra income

placed in Reserve^

1. Sukuk




during the

Sukuk life


Sukuk LLC




2. SABIC issues Sukuk (representing ownership in Sukuk


3. Sukukholders pay issue proceeds

4. SABIC manages the Sukuk assets for the Sukukholders

5. Quarterly distributions to Sukukholders are paid from

income of the Sukuk assets

(Income from Sukuk assets expected to comfortably

exceed coupon and extra amount)





^ Upon maturity and after making all Sukuk-related payments, any amount

remaining in the reserve goes to SABIC for managing the Sukuk assets.


Page 20

Deals of the Year 2006 Handbook

SABIC Sukuk (continued...)

Arabia. Also, the offering documents were prepared

according to international standards of disclosure. This

restriction was possible as there was estimated to be a

suffi cient level of demand and liquidity in the local market.

The Sukuk was the fi rst capital market instrument in the

Kingdom to be approved by the Capital Market Authority

(CMA), which in turn was offered to the public on a bookbuilding

basis. This was an important achievement as SABIC

aimed to attract new relationships outside of its extensive

banking relationships – entities targeted included pension

funds, insurance companies and mutual funds, corporates

and institutions. Demand for the Sukuk was strong, with

confi rmed orders of over SR4.3 billion (US$1.15 billion) raised

in a relatively short period of time at a competitive price.

Diagram 3: Investor Type

World Leaders in Shariah-compliant

Banking & Finance Training

Bank 36%


Mutual & other

funds 49%

Corporate &



As there was no precedent in the market, the trading

mechanism for the Sukuk had to be formulated from

scratch with the domestic stock market (Tadawul) and the

mechanism was tested with other market-making banks

before the launch to guarantee smooth trading in the

secondary market. The system used was Tadawul’s existing

Equator platform where trades are matched electronically.

Since the launch, trading in the secondary market has been

active and has been increasing in volume.


The SABIC Sukuk is an important step in the development of

the Sukuk as a viable Shariah compliant fi nancial instrument.

It has a fi rm basis in Islamic Shariah, being modelled on an

investment in an existing business activity, yet achieves a

credit risk profi le familiar to sophisticated capital markets


It is hoped that this Sukuk structure and this issuance will

herald the further development of the Kingdom’s capital

markets, effi ciently bringing together the vast capital

resources that have blessed the Kingdom with effi cient and

profi table users of capital such as SABIC.

The authors Hissam Kamal and

Sheikha Al Sudairy are from HSBC

Amanah. The views expressed in this

article are those of the authors and not of HSBC.

Risk Management in Islamic Banking & Finance

7 th – 10 th May, Kuala Lumpur

Islamic Treasury Simulation

13 th – 15 th May, Dubai

Structured Islamic Real Estate Finance & Investment

28 th – 30 th May, Kuala Lumpur

Islamic Financial Engineering and Advanced Products

11 th – 14 th June, Kuala Lumpur

Essentials of Islamic Finance & Banking

25 th – 28 th June, Hong Kong

Structuring Islamic Financial Products

9 th – 12 th July, Zurich

Legal & Documentary Issues in Islamic Financial Products

16 th – 18 th July, Kuala Lumpur

Structuring Islamic Financial Products

20 th – 23 rd August, Johannesburg

Undertaking Effective Shariah Control for Islamic Banking

27 th – 29 th August, Kuala Lumpur

Legal & Documentary Issues in Islamic Financial Products

2 nd – 4 th September, Dubai

Managing the Shariah Advisory Process

21 st – 23 rd October, Bahrain

Managing Islamic Funds

21 st – 22 nd October, Dubai

Sukuk & Islamic Capital Markets: Products & Documentation

26 th – 29 th November, Kuala Lumpur

Islamic Financial Engineering and Advanced Products

9 th – 12 th December, Dubai

Legal & Documentary Issues in Islamic Financial Products

10 th – 12 th December, Bahrain

Contact us at +603 2143 8100

Page 21


Saudi Basic Industries Corporation






Sukuk Istithmaar (Investment Sukuk)

Saudi Basic Industries Corporation (SABIC)

Manufacturing of chemicals, fertilizers, plastics and metals.

Seven members – fi ve of whom are representatives of the Government of Saudi Arabia:

chairman - His Highness Prince Saud bin Thunayan Al-Saud; vice-chairman and chief executive officer

- Mohamed H Al-Mady; deputy minister of planning - Ahmad I Al-Hakami; deputy minister for industrial

affairs - Saleh E Al-Husseini; ministry of finance representative - Abdulmuhsin Ibn Abdulaziz Al-Faris; private

sector representative - Mohammed S Abanumay; private sector representative - Abdullah M Al-Issa.

SR3 billion (US$800 million)


MATURITY First put option 15 th July 2011 (fi nal expiry date, if not previously expired: 15 th July 2026).



















3-month SAR SIBOR + 40 bps.

Quarterly payments

SR25 billion (US$6.67 billion)

20-right limited rights and obligations in contracts underlying SABIC’s marketing business.

HSBC Saudi Arabia

Banque Saudi Fransi, Gulf International Bank, National Commercial Bank, Saudi British Bank, SAMBA, Saudi

Hollandi Bank.

Baker & McKenzie

Local counsel: Torki Al-Shubaiki in association with Baker & McKenzie

Clifford Chance

Local counsel: Al-Jadaan Law Firm

HSBC Saudi Arabia, Banque Saudi Fransi, Gulf International Bank, National Commercial Bank, Saudi British

Bank, SAMBA and Saudi Hollandi Bank


SABB Amanah

Dematerialized registered form

To fi nance part of SABIC’s capex program and general corporate purposes.

Not rated (issuer rated A+)

Page 22

Cross Border Deal of the Year

Deals of the Year 2006 Handbook

The US$330 million Dubai Financial acquisition of a 40%

equity stake in Bank Islam Malaysia Berhad (BIMB) was a

unique deal in 2006 in which Citigroup acted as the sole

advisor and arranger.

Pre-funding was provided by Citigroup through a Shariah

compliant bridge facility, hedging the underlying currency

exposure with a ground breaking Islamic cross-currency

swap. The bank also led the dual-tranche Islamic syndication

for the take-out of the bridge facility.


After 6 months of negotiation and after facing serious

competition from the other buyers, in May 2006, the Board

of Bank Islam Holding (Malaysia) fi nally approved the sale

of a 49% stake in its wholly owned subsidiary bank to Dubai

Financial and Malaysia’s Lembaga Tabung Haji through an

issue of shares.

Dubai Financial opted to secure fi nancing in Malaysian

ringgit to mitigate the currency risk and take advantage

of the prevailing lower ringgit interest rates. Dubai

Financial chose Citigroup to enable payment of RM828

million (approximately US$230 million) for its portion of the

subscription to the share issuance in early October 2006.

Citigroup, as the sole mandated lead arranger and

bookrunner, provided a fully underwritten US$ equivalent

of the Islamic bridge facility structured as a Murabahah

transaction. As the payment of the acquisition price was

to be in ringgit, the whole amount of the US$ Islamic bridge

facility was swapped into ringgit through a commodity

based Shariah compliant cross-currency swap.


Citigroup initially bridged Dubai Financial for the acquisition.

The syndication was then launched and the senior phase

of the syndication was subsequently closed in a relatively

short time frame.

The total amount of the syndication is US$330 million which

was used to take out the bridge facility, and the balance

utilized for general corporate purposes.

This transaction represents the debut Islamic fi nancing

facility for Dubai Financial. The facility is structured as a dualtranche

fi nancing to accommodate Shariah structuring

requirements of various Islamic banks. Tranche “A” is based

on a revolving commodity Murabahah based mechanism

commonly used for fl oating rate Islamic fi nancings in

cases where the purchaser does not have underlying

tangible assets. Tranche “B” is based on a fi xed rate ‘Share

Murabahah’ structure whereby the shares of BIMB have

been used as the underlying assets.


This facility represents the fi rst truly integrated M&A, fi nancing

and hedging package structured Islamically which brings

together the Middle Eastern and Asian Islamic markets.

Various phases of the transaction dovetail seamlessly

to provide the client an end to end Shariah-compliant




The transaction establishes the viability of the Islamic

fi nancing to be applied as a comprehensive M&A, fi nancing

and hedging package. The acquisition was, at the time,

the largest ever investment in an Islamic fi nancial institution

by foreign fi nancial and strategic investors in Malaysia and

the single largest investment for Dubai Financial in Asia.

This is expected to have a multiplier impact on the growth

of Islamic fi nance in Malaysia as the new capital of RM1

billion will allow BIMB to pursue new growth opportunities in

Malaysia’s fast-growing Islamic banking sector.

Moreover, through its alliance with Dubai Investment Group,

BIMB will tap into Islamic banking opportunities in the Middle

East, as well as explore other diversifi ed fi nancial services

such as investment banking and asset management.

The acquisition fi nancing deal also underpins Dubai

Financial’s presence in the international fi nancing arena.

The facility was oversubscribed at a sub-underwriting level

through seven mandated lead arrangers and attracted

a cross-section of investors from different regions. The

facility delivered the same effi ciency as expected from a

conventional transaction.

This deal represents potentially the most signifi cant crossborder

transaction Islamically structured, integrating two

hubs of the Islamic market.

As the payment of the acquisition was to be in ringgit,

the whole amount of the US$ Islamic bridge facility was

swapped into ringgit through the largest Shariah compliant

cross-currency swap transaction to date.

Dubai Financial LLC is part of

Dubai Group, with a balance

sheet in excess of US$2 billion

and focussing on strategic investments in the fi nancial

services sector.

Citigroup has been a leader in the

Islamic Finance business for more

than 20 years and has successfully arranged Islamic

transactions for issuers across the globe.

Page 23

2/8/07 10:22:07 AM



Dubai Financial

Dubai Financial












Dubai Financial (DF) evolved from a fund management entity to become the direct investment vehicle

for Dubai Investment Group. Its core practice is the identifi cation and acquisition of fi nancial services

companies, to build long term value through state-of-the-art governance. Identifying opportunities across

the banking, foreign exchange, brokerage and asset management sectors, Dubai Financial will reinforce

the Group’s position as the principal entity mandated to drive its activities in the regional and international


Chairman - Dr. Abdullah Mohd Tahir

Managing Director - Zukri Samat

Director - Mohd Bakke Salleh

Director - Noorazman A. Aziz

Director - Zahari @ Mohd Zin Idris

Director - Burhanuddin Ahmad Tajudin

Director - Salih Amaran Jamiaan

Director - Zaiton Mohd Hassan

Director - Ismee Ismail.

US$300 million

17 th October 2006


Denton Wilde Sapte


Citi Islamic Investment Bank

Syndicated loan with Shariah compliant US dollar Malaysian ringgit cross currency swap.

Dubai Investment Group’s acquisition of 40% of BIMB, the founding Malaysian Islamic bank, and an important

capital contribution to the bank’s capital base and its capacity to grow its domestic business as well as to

expand crossborder.

Page 24

Deals of the Year 2006 Handbook

Abu Dhabi Islamic Bank

US$5 billion Trust Certificate Program

Abu Dhabi Islamic Bank PJSC (ADIB) established a US$5

billion trust certificate program in December 2006, making it

the largest program, conventional or Islamic, in the region.

The first Sukuk under the program, which were issued in

the same month with an aggregate size of US$800 million,

attracted both conventional and Islamic investors based in

the Middle East, Europe and Asia. The ADIB Sukuk program

was the first such program to be listed on the London Stock

Exchange after the implementation of the Prospectus

Directive, which, among other things, sought to harmonise

the listing regime in Europe and significantly changed the

disclosure requirements relating to listing prospectuses.

Notwithstanding this, it is notable that, despite providing

listing rules for multiple asset classes, regulations made

under the Directive failed to identify Sukuk as a separate

asset class. It was interesting to notice that the two principal

European exchanges, on which Sukuk are listed, treat Sukuk

differently when applying their listing rules.

The ADIB Sukuk program utilised a co-ownership structure

(Sharikat al-Milk), which is summarised in the diagram



(as seller)

Master Purchase

Agreement and


Purchase Contract


Price for



Return on




(as managing


ADIB Sukuk

Company Ltd.


ADIB Sukuk

Company Ltd.


Master Trust

Deed and


Trust Deed


of Sukuk






(as purchaser)



Amounts and

Dissolution Amount


Price for



The key features of this structure are:

• Investors purchase the Sukuk and ADIB Sukuk

Company uses the purchase monies received to buy

a co-ownership interest in a pool of Shariah compliant

assets originated by ADIB

• ADIB agrees to manage the co-owned pool of assets

and pay ADIB Sukuk Company its co-ownership share

of revenues received from the pool in an amount

suffi cient to pay periodic distributions on the Sukuk.

If the relevant co-ownership share is insuffi cient to

fund the full periodic distribution, ADIB will provide

additional Shariah compliant funding to ADIB Sukuk

Company to enable the full payment to be made

• At redemption of the Sukuk, ADIB re-purchases ADIB

Sukuk Company’s co-ownership interest in the pool

and the purchase monies are used to repay the


ADIB, which was established by the Government of Abu

Dhabi in 1997 and commenced operations in 1998, was

one of the fi rst Islamic banks to be established in the UAE.

It operates retail, commercial, corporate, treasury and

investment banking divisions through an extensive network

of branches located across the UAE. ADIB sought to access

the capital markets by establishing a Sukuk program in

order to take advantage of the time and cost savings

inherent in the program structure. In contrast to standalone

issuances, all of the principal terms of the Sukuk structure are

determined at the outset and the relevant Shariah scholars

can issue their fatwa confi rming that the structure is Shariah

compliant as soon as the program is established.

The principal agreements involved included a master

purchase agreement, under which ADIB (acting as seller)

agrees to sell to ADIB Sukuk Company, from time to time, a

co-ownership interest in a portfolio of Ijarah assets originated,

co-owned and managed by ADIB (the trust assets). The

composition of the trust assets in relation to each issue and

the purchase price for such assets are agreed by ADIB

and ADIB Sukuk Company upon each issuance under the

program and a supplemental purchase contract is entered

into between them to record the agreement.

Under a management agreement, ADIB (acting as

managing agent) agrees to maintain the co-owned Ijarah

assets with the same degree of care and skill that it would

exercise in respect of its own assets and in a manner which

is not repugnant to the Shariah. ADIB also maintains a

collection account in respect of each series of Sukuk issued.

Amounts credited to a collection account include revenues

received from the co-owned assets that are attributable to

ADIB Sukuk Company’s co-ownership share. The revenues

that represent profi t returns from the underlying assets are

used to pay periodic distributions in respect of the Sukuk. On

the other hand, revenue that represent principal payments

in respect of the underlying assets, are reinvested in new

Shariah compliant assets. If the profi t returns in any period

are insuffi cient to fund the periodic distribution payment

due in respect of the Sukuk for that period, ADIB agrees to

provide Shariah compliant funding to ADIB Sukuk Company

to enable it to make the necessary payment. On the other

hand, if there are more profi t returns than are needed to

pay the relevant periodic distribution amount, these are

paid to ADIB as an incentive fee.

Pursuant to a purchase undertaking deed, ADIB (acting as

purchaser) agrees to repurchase the issuer’s co-ownership

interest in the relevant trust assets at their market value,

as determined by ADIB. However, ADIB also covenants

to ensure that the market value of the trust assets is never

less than the face amount of the outstanding Sukuk. This

ensures that the price paid by ADIB will be suffi cient to meet

the issuer’s obligations to pay Sukukholders any amounts


Page 25

Deals of the Year 2006 Handbook

ADIB Sukuk Program (continued...)

due following redemption of Sukuk upon maturity or earlier

if an event of default occurs. An interesting feature of the

Purchase Undertaking Deed is that, unlike on many previous

Sukuk transactions, English law governed it. The undertaking

given in this document is a unilateral promise by ADIB.

English law clearly recognises such undertakings provided

that certain formalities are complied with, essentially being

the fact that they are recorded in a deed. This point has

been commented on favourably by rating agencies when

looking at subsequent transactions.

Another unique feature of the ADIB program is that it is

the fi rst Sukuk documentation in the UAE to contemplate

the issuance of subordinated Sukuk. Although the Sukuk

actually issued by ADIB were not subordinated, any

subordinated Sukuk that might be issued in the future under

the program would be subordinated using the contingent

debt subordination mechanism, whereby ADIB’s payment

obligations under the Management Agreement and the

Purchase Undertaking Deed only become due and payable

if and to the extent that ADIB has suffi cient trust assets to

pay any holders of senior obligations in full prior to making

payments in respect of subordinated Sukuk. The contingent

debt subordination method does not violate the pari passu

insolvency rule in the UAE, which states that all creditors

must be treated equally, as ADIB’s subordinated obligations

under the two agreements do not arise as long as ADIB has

suffi cient funds to pay such holders. As Sukuk represent

undivided benefi cial interests in trust assets, the Sukuk were

suffi ciently subordinated by subordinating ADIB’s payment

obligations under the management agreement and the

purchase undertaking deed and there was no need to

include subordination language in the Sukuk themselves.

The establishment of the ADIB program and initial issuance

exemplifi es the complexities of structural innovations

and market potential for Sukuk. With an estimated 30%

growth rate for 2007 and beyond, the primary Sukuk

market currently exceeds an aggregate issuance value of

approximately US$45 billion and secondary Sukuk trading

averages over US$10 million trades daily. Given that almost

every Sukuk issued to date has been oversubscribed, there

is no indication that investor demand will taper. As the

market continues to fl ourish and mature, Sukuk structures

will continue to evolve.

Roger Wedderburn-Day is a partner in the international

capital markets department of Allen & Overy LLP in London.

He is head of the fi rm’s emerging markets practice and,

together with Anzal Mohammed and Sahar Kianfar, was

responsible for documenting the ADIB Sukuk program. He

has worked on numerous other debut Sukuk transactions

and conventional fi nancings for borrowers based in the

Middle East and elsewhere. Anzal Mohammed is a senior

associate at Allen & Overy LLP in Dubai. He has extensive

experience in working on Islamic and other capital

markets transactions in the Middle East and elsewhere

and advised on the ADIB Sukuk program. Sahar Kianfar

is an associate at Allen & Overy LLP in London. She has

worked on several Islamic and conventional fi nancings

for borrowers based in the Middle East and elsewhere

and also advised on the ADIB Sukuk program.

Mark your calendars this year! Join us at the acclaimed

13 th and 14 th August 2007

Mandarin Oriental Kuala Lumpur

Experience the industry’s best Islamic finance event at the

Mandarin Oriental Kuala Lumpur on 13 th & 14 th August 2007


Page 26


ADIB Sukuk Company





Trust Certifi cates / Sukuk Program.

ADIB Sukuk Company Ltd.

The Issuer was established as a special purpose vehicle for the sole purpose of issuing the Sukuk under the

program and entering into the transactions contemplated under the program.

Guy Major Senior (Maples Finance Limited); Carlos Farjallah (Maples Finance Limited); Stephen O’Donnell

(Maples Finance Limited).

DATE OF LISTING 30 th November 2006.





Program: US$5,000,000,000. First issue: US$800,000,000. Subsequent issues may vary.

First issue: 11 th December 2006. Subsequent issues will vary.

First issue: December 2011. Subsequent issues may vary.

First issue: None. Subsequent issues may vary.

PAYMENT SCHEDULE First issue: The 12 th of March, June, September and December of each year, commencing in March 2007.

Subsequent issues may vary.














The authorized share capital of the Issuer is US$50,000 ordinary shares of US$1 each, 250 of which have been

issued. All of the issued shares are fully-paid and are held by Maples Finance Limited (in its capacity as share

trustee) under the terms of a trust for charitable purposes.

Certain Ijarah assets originated by Abu Dhabi Islamic Bank PJSC; specifi c assets may vary per issue under

the program.

HSBC Bank plc.

First Issue: HSBC Bank plc. Subsequent issues may include additional arrangers and/or managers.

To the dealers and the delegate as to English and UAE law: Allen & Overy LLP; to the Issuer as to Cayman

Islands law: Maples and Calder; to ADIB as to English and UAE law: Norton Rose.

Auditors to ADIB and Issuer: Deloitte & Touche.

Abu Dhabi Islamic Bank PJSC.

First Issue: HSBC Bank plc. Subsequent issues may include additional underwriters.

Trustee: ADIB Sukuk Company Ltd.

Delegate: HSBC Trustee (C.I.) Limited.

Abu Dhabi Islamic Bank PJSC’s Fatwa & Shariah Supervisory Board, whose members include: Sheikh

Muhammad Taqi Al Uthmani, Dr. Abdul Sattar Abu Ghudda, Dr. Jasem Ali Al Shamisi and Sheikh Nizam

Muhammad Yaqoubi.

To raise capital for Abu Dhabi Islamic Bank PJSC.

RATINGS First issue: Moody’s: A2; Fitch: A.

Subsequent issues may vary.





Abu Dhabi Islamic Bank

ADIB was established in 1997 by Emiri Decree. Its main shareholders comprise of local prominent families;

including the ruling family, which own about 27% of company shares and the Abu Dhabi Investment Authority

(ADIA),holding 10%. ADIB is one of four Islamic banks in the UAE and serves upper and middle-tier clients in

the retail and corporate segments. As at end of September 2006, it led a 32-branch network supported by

78 ATMs.

US$5 billion EMTN Program

HSBC Trustee (C.I) Limited, acting as the trustee’s delegate

Page 27

Deals of the Year 2006 Handbook

Rafflesia Capital’s Exchangeable

Trust Certificates

On the 27 th September 2006, UBS Investment Bank

successfully launched and priced what is believed to be

the world’s first Shariah compliant exchangeable trust

certificates. The Sukuk, exchangeable into the equities

of Telekom Malaysia, were issued by Rafflesia Capital,

a Labuan (Malaysia) incorporated special purpose

company, for Khazanah Nasional, the investment arm of

the Government of Malaysia.

This was the largest ever exchangeable issue to come out

of Malaysia and the largest exchangeable issue out of

Asia – excluding Japan – in 2006. The offering comprised

US$750 million of periodic payment trust certifi cates (due

in 2011), upsized from the initial deal size of US$500 million

on the back of strong investor demand. The offering was

launched with a yield range of 5-year US dollar swap -32.5

bps to +42.5bps (equivalent to 4.925% to 5.675%) and a

premium of 17–20%, fi nally pricing at a tight 5.07% (swap

+3 basis points). The fi nal pricing was set at a yield of 5.07%

and a premium of 19%, which was above the mid-point of

the indicated range.


What was so remarkable about this transaction was its

unique and innovative structure – we believe this is the fi rst

Sukuk structure to be backed by Shariah compliant fi nancial

assets (equities of Telekom Malaysia). Previously, the Sukuk

market was predominantly comprised of Sukuk structured as

trust certifi cates, representing ownership of physical assets.

This meant that potential issuers with inadequate physical

assets – including holding companies and investment fi rms –

were excluded. This deal establishes a structural framework

so that these issuers can have access on the basis of their

Shariah compliant fi nancial assets.

Another challenging aspect of structuring this transaction

was designing the mechanism for payment of coupons on

the Sukuk, which were structured as premium redemption

instruments paying a coupon of 1.25%. Unlike the

redemption amount, which is guaranteed by Khazanah

Nasional pursuant to a Unilateral Purchase Undertaking,

the periodic Sukuk coupons could not be guaranteed and

had to be paid from the dividend income derived from the

equities of Telekom Malaysia. Investors’ concerns regarding

the uncertainty of coupon payments were addressed by

creating a sinking fund account for the benefi t of the

investors, wherein dividends from the underlying equities

were accumulated to ensure the availability of funds from

which to make payment of periodic coupons over the life

of the transaction.


The motivation of Khazanah Nasional for this deal was

to reinforce Malaysia’s reputation as an international

Islamic banking hub; to continue Malaysia’s tradition of

innovation in Islamic banking; and to tap into Middle

Eastern liquidity as an alternative funding source. Therefore,

a key performance indicator for Khazanah Nasional was

the acceptability of this structure to both conventional

and Islamic investors globally, and distribution of the Sukuk

to Middle Eastern fi nancial institutions. Given Malaysia’s

prominent commitment to the development of Islamic

fi nance, it was crucial that UBS Investment Bank structured

the transaction in a way that was both Shariah compliant

and priced at levels attractive to Islamic and conventional



Being the fi rst Shariah compliant exchangeable Sukuk, UBS

Investment Bank, along with representatives of the other

joint lead managers, undertook an extensive pre-marketing

exercise wherein selected Middle Eastern fi nancial institutions

in Kuwait, Qatar, the UAE and Bahrain were educated on

the various aspects of the Sukuk and encouraged to return

their feedback on the product features.


The groundbreaking nature of the deal combined with the

investor education conducted during the pre-marketing

phase motivated Islamic investors to buy in at below their

benchmark investment yield levels. The issue generated

demand in excess of US$3.2 billion, with over 100 investors

participating, implying a subscription level of 6.6 times the

base deal size. UBS Investment Bank generated 57% of this

US$3.2 billion demand. Approximately 44% of the Middle

East allocation was made to clients of UBS Investment




The Sukuk was structured as exchangeable trust certifi cates

representing the benefi cial ownership of the investors in

the underlying fi nancial assets (Telekom Malaysia equities).

It was therefore imperative from a Shariah compliance

perspective that Telekom Malaysia be Shariah compliant at

the time of issuance of the Sukuk and remain so throughout

the tenure of the Sukuk. For this purpose, the Shariah

advisors of the three joint lead managers approved the

following criteria for determining the Shariah compliance

of the company:


Page 28

Deals of the Year 2006 Handbook

Rafflesia Capital’s (continued...)


There was very strong interest from all groups of investors

globally; the allocation by investor type is shown below.

Allocation by investor type



ME Conv.


Hedge Funds


Source: UBS Investment Bank, September 2006

A designated calculation agent periodically applies the

above-mentioned tests to the relevant fi nancial statement

of Telekom Malaysia and forwards the results to a group

of three Shariah scholars appointed by Raffl esia Capital,

which issued the Sukuk, on behalf of Khazanah Nasional.

If there is a sustained breach of the Shariah compliance

tests, the Shariah scholars have the discretion to declare

Telekom Malaysia non-Shariah compliant, which gives the

investors the right to have their respective Sukuk redeemed

by Khazanah Nasional at an agreed price.


The timing of the transaction and its execution were key

factors to the success of the offering. Given the complexity

and objectives of the transaction, a detailed timetable was

prepared. Adequate time was factored in for investors to

understand the new structure and also assess the credit

quality of Khazanah. UBS Investment Bank conducted

continuous education and feedback sessions with Middle

Eastern investors to provide them with comfort. Investors

had a week to analyze the underlying asset and participate

in the transaction.

The result of this careful planning was signifi cant interest

and demand, not only from Islamic and Middle Eastern

investors, but also from conventional investors. The Fed

Funds rate was widely forecast to remain constant, with the

expectation that this would result in tightening of the swap

rates as a result of improving sentiments. Over the period

of the book building, the US dollar swap rates tightened by

around 25 basis points, which was fully captured in the fi nal

pricing to the benefi t of the issuer.





Source: UBS Investment Bank, September 2006

Allocation was greatest among hedge funds, which were

allocated 33% of the offering; outright investment accounted

for 23% of allocation; and Islamic and conventional Middle

Eastern investors were each allocated approximately 14%

of the total issue size.


In the press the deal was unanimously perceived as a highly

successful offering. The Sukuk – and the UBS team in charge

of the transaction – gained a number of prestigious awards

in connection with the deal and it has also been nominated

for a number of other major awards to be announced

during the fi rst quarter of 2007.

UBS Islamic Finance Group is a

dedicated team of specialists

focused on the structuring and

execution of Shariah products,

giving customers access to innovative Shariah compliant

investments and services across a range of asset classes

including commodities, equities, fi xed income, foreign

exchange and alternative investments. For further

information please contact the UBS Islamic Finance

Group on: Islamic-fi

Page 29

Deals of the Year 2006 Handbook

Al-Waha Petrochemical Company

A Brief Case Study


This US$526 million Islamic project financing was originally

developed by the Al-Zamil Group of Saudi Arabia to

leverage competitive advantage for users of liquid

petroleum gas (LPG) in Saudi Arabia, due to the Saudi

government’s policy of promoting the development of a

domestic petrochemical industry. (Domestic consumers of

LPG are able to obtain a reliable source of LPG at a price

significantly below international prices.)

As a result of a feasibility study conducted by Chem Systems,

the Al-Zamil Group decided to pursue the development of

a propane dehydrogenation (PDH) plant integrated with

a polypropylene (PP) plant and obtained an allocation of

propane feedstock from Saudi Aramco. After the formation

of Sahara Petrochemicals in May 2004, with a capital of

SR1.5 billion (US$400 million), to act as a holding company

for this project and other investments in the Kingdom’s

petrochemical industry, development of the project

was taken up by Sahara in anticipation of the formation

of Al-Waha. Recognizing the importance of having an

experienced polyolefi n industry company involved in the

project, the Al-Zamil Group held discussions with a number

of potential co-investors.

Ultimately, Basell was selected as the preferred partner.

Basell was formed in 2000 as a 50:50 joint venture between

BASF and Shell, combining all of the partners’ polypropylene

and polyethylene plants, together with certain ethylene

crackers. Basell is the largest producer of polypropylene

globally and the largest producer of polyethylene in Europe.

The precursor companies to Basell were the polypropylene

producers Targor, 100% owned by BASF at the time of the

merger; Montell, 100% owned by Shell; together with Elenac,

a 50:50 BASF/Shell joint venture in polyethylene. On the 1 st

August 2005, Basell was acquired by Access Industries, a

privately held, New York-based industrial holding company

founded in 1986 with investments worldwide in the oil,

aluminum, coal and telecommunications sectors.

The Al-Waha plant is being developed in Al-Jubail Industrial

City on the eastern coast of Saudi Arabia on a plot of land

leased from the Royal Commission for Jubail & Yanbu.

The concept of the project is to take propane gas and

dehydrogenate it to produce a polymer grade propylene

stream. The propylene produced will then be used by

the PP plant to produce homopolymers, produced by

polymerization of propylene alone, and copolymers which

include a small percentage of ethylene in the polymer

chain. The plant will comprise two principal production

units: a 460,000 tpa propane dehydrogenation (PDH) unit

and a single polypropylene (PP) unit with a capacity of

450,000 tpa. There will also be various additional facilities for

power supply, waste water treatment and cooling seawater

supply. The plant is to be constructed and commissioned

over a period of 35 months pursuant to a lump sum turnkey

EPC contract with a consortium of Tecnimont and Daelim.


Total project costs: US$939.2 million

Financing plan

Source Amount (US$ m) %

Equity 328.7 35.0

SIDF loan 106.7 11.4

Bank facilities/PIF loan 503.8 53.6

Total 939.2 100.0


Total facility size: US$526.5 million split as:

• Base facility (to cover base project cost): US$503.8


• Standby facility (in respect of potential increases to

base project costs): US$22.75 million.

• The sponsors will contribute US$12.25 million in respect

of potential increases to base project costs in addition

to the base equity contribution of US$328.7 million.


The Islamic facility has been structured on the basis of:

(i) Musharakah Mutanakissa and Musharakah alal

Musha’ (co-ownership arrangement);

(ii) Agad Tarweed (procurement); and

(iii) Ijarah Mawsufah fi al Dimmah (forward lease


• A co-purchase agreement was signed between

the investment agent (on behalf of the participants

or banks) and Al-Waha, pursuant to which Al-Waha

agreed to take all necessary steps to construct the


• The participants will fund a portion of the costs incurred

by Al-Waha under the engineering procurement

construction (EPC) contract and will have an ownership

interest in the plant equivalent to the amount of funds

plus accrued funding costs.

• At the end of the construction period, the participants

will lease their ownership interest in assets to Al-Waha

for a period of 11 years.

• In the post-completion period, Al-Waha will purchase

portions of assets owned by the participants

at six-monthly intervals pursuant to a purchase



Page 30

Deals of the Year 2006 Handbook

Al-Waha Petrochemical Company (continued...)

• An account structure was established at the

fi nancial close to facilitate the operation of a cash

waterfall mechanism. Prior to project completion,

the account structure will work so that funds from the

sponsors, participants and SIDF/PIF will fl ow through a

disbursement account. Following project completion,

the waterfall mechanism will follow the principles

of a typical project fi nance structure, which treats

operating costs as the most senior item of expenditure,

followed by lease rentals and debt service obligations

to the SIDF and PIF.


• The Al-Waha Petrochemicals Company US$526 million

Islamic project fi nancing facility was recognized as


the Islamic project fi nance deal of 2006.

• This is a unique transaction as it was the fi rst private

petrochemical project fi nancing in Saudi Arabia to be

completely underwritten and fi nanced in a Shariah

compliant manner.

• ABC Islamic Bank and Arab Banking Corporation were

mandated lead arrangers for this facility, along with

Gulf International Bank, Bank Saudi Fransi, Bank Saudi

Hollandi, Bank Al-Jazeera and Saudi British Bank.

• The Islamic fi nancing structure was approved by Dr

Mohamed Ali Elgari, Sheikh Nizam Yaquby and Dr

Muhammad Imran Usmani.

Al-Waha Petrochemical Company

The authors are from

ABC Islamic Bank




Musharakah mutanakissa and Musharakah alal musha’ (co-ownership arrangement), Aagad tarweed

(procurement) and Ijarah mawsufah fi al dimmah (forward lease agreement)

Al-Waha Petrochemical Company

Petrochemical production and sales

DATE OF SIGNING 14 th November 2006


US$526 million

DATE OF ISSUE 14 th November 2006










14 years

From fi nancial close until fi nancial completion date – 2.05% p.a;

From fi nancial completion date until the 7th anniversary of fi nancial close – 1.95% p.a;

From the 7 th to the 10th anniversary of fi nancial close – 2.10% p.a;

From the 10 th anniversary of fi nancial close until the fi nal maturity date – 2.25% p.a;


ABC Islamic Bank and Arab Banking Corporation, Gulf International Bank, Bank Saudi Fransi, Bank Saudi

Hollandi, Bank Al-Jazeera and Saudi British Bank

Norton Rose

Construction of petrochemical plant

US$328.7 million




Petrochemical plants in Jubail


Dr Mohamed Ali Elgari, Sheikh Nizam Yaquby and Dr Muhammad Imran Usmani

Page 31

Deals of the Year 2006 Handbook

East Cameron Gas Sukuk:

The Dawn of a New Frontier


It is a well-established fact that Sukuk instruments are fast

becoming the instrument of choice for corporate and

sovereign debtors who are seeking to tap into the rather

liquid Islamic capital markets. Despite the rapid growth

in the utilization of Sukuk instruments to finance projects,

acquisitions and, in some instances, general financial

needs of corporations in Islamic jurisdictions, such growth

is yet to follow suit in non-Islamic jurisdictions such as the

United States, the European Union and South East Asia

(besides Malaysia).

This article argues that, with the appropriate level of

research, structural innovation and co-operation with

experienced fi nancial institutions and structuring fi rms in

Islamic jurisdictions, Western corporations can attract Islamic

investments through the utilization of Sukuk instruments

that are backed by assets in non-Islamic jurisdictions.

While setting aside theoretical and technical aspects, I

will discuss in this article, some of the key considerations

surrounding the structuring, documentation and closing

of the East Cameron Gas Sukuk transaction (ECP Sukuk)

in an attempt to support the notion that Islamic structures

are, to a great extent, compatible with some of the well

established investment and fi nance techniques currently

used in Western jurisdictions including the United States.


Many of the members of the legal teams that advised

the parties to the ECP Sukuk transaction will now agree

that Shariah fi nance and investment precepts are likely

to prove compatible with some of the established legal

principles in force in the established Western jurisdictions. In

the United States in particular, a complementary situation

can exist between the precepts of Islamic fi nance and the

fundamentals of American oil and gas law. The successful

closing of the ECP Sukuk transaction, which constitutes the

fi rst-ever Sukuk backed by oil and gas assets in America (as

described in more detail below), supports the foregoing

conclusion. In fact, one can argue that American oil and

gas law, under which oil and gas rights are characterized as

severable and alienable real property with well-recognized

legal attributes, satisfi es a number of Shariah requirements.

In fact, such characterization, with its well-defi ned scope

and its ability for ring-fencing, would facilitate to a great

extent the structuring of Sukuk instruments that are linked to

US oil and gas rights.

In many key states where a signifi cant portion of petroleum

is produced both onshore and offshore, namely Texas and

Louisiana, oil and gas jurisprudence recognizes that oil

and gas in the ground, and certain rights granted in such

property, are in effect real estate. This characterization,

and the concomitant benefi ts associated with real property

rights, extends to grants of royalty interests. Because oil and

gas law allows for an owner of the surface estate to sever

the interests in the oil and gas underneath, an owner of the

mineral estate is entitled to convey a partial interest—or a

purely passive royalty interest (entitling the holder thereof to

a cost-free stream of income from production)—to a third

party without transferring rights to control the surface tract

or to conduct petroleum operations. Therefore, with the

well-established rules of a real property regime, the owner

of an interest in oil and gas property may transfer a nonoperating,

purely economic interest to a third party who

would then hold such an interest as real property. This ability

to transfer what is effectively a Shariah compliant interest to

a third party who would then hold such an interest in real

property, fi ts – subject to appropriate structuring -- into the

paradigm of asset-backed Islamic fi nance and hence can

be securitized in the context of a Sukuk product. In fact, as

Shariah precepts encourage calculated risk sharing, Islamic

investors may elect to participate in the risks and rewards

associated with the production of underlying assets.



As previously discussed, the ECP Sukuk, which closed in

July 2006, entailed creativity in introducing a structure that

applies traditional US oil and gas law to Islamic fi nancing.

Such natural fi t aside, the deal required careful structuring

to meet both the Shariah requirements and the tax,

bankruptcy, corporate, regulatory and securities laws

of multiple non-Islamic jurisdictions. The Sukuk provided

an alternative to traditional borrowing, and allowed this

ultimate issuer to take advantage of a largely untapped

resource: liquidity in the Muslim world.

Success Factors and Indicators

The success of the Sukuk can be attributed to a number of

considerations, including that oil and gas assets constitute

are generally deemed to be Shariah compliant assets.

In addition, the nature of oil and gas rights under US law

facilitated the successful utilization of Sukuk instruments

in the context of a US asset-based lending. A sign of the

success of the transaction stems from the fact that it was

purchased by both Islamic investors and conventional

Western investors in a combined Regulation S international

offering and a Regulation D US private placement. The Sukuk

was underwritten and arranged by banks in both London

and Beirut, with legal assistance provided by counsel in

both Dubai and Houston. In addition, the ECP Sukuk was

the fi rst US Sukuk or, generally, Islamic securitization product

to be rated by Standard & Poor’s and was also the fi rst to

utilize hedging mechanisms. Arguably, it is one of the fi rst


Page 32

Deals of the Year 2006 Handbook

East Cameron Gas Sukuk (continued...)

true securitizations to comply with Shariah both in and

outside Islamic jurisdictions.

Use of Proceeds

Under the proposed structure, the proceeds of the issue

of the Sukuk will support capital and operating costs

associated with drilling and operating wells in the Gulf of

Mexico for a Texas-based oil and gas company. To avoid

spoliation of the deal due to association with riba (prohibited

interest), the funds raised through the offering were also

used to eliminate nearly all of the company’s outstanding

conventional debt, leaving it with a debt to equity ratio

acceptable from an Islamic perspective. For a combination

of reasons, including international tax planning and

bankruptcy remoteness, an intermediary issuer (a Cayman

Islands exempted limited liability company) issued the Sukuk

certifi cates and entered into a funding arrangement with

a US-based special purpose vehicle, with the proceeds of

such issue and the funding arrangement fl owing back to

the oil and gas operating company.


The attorneys and bankers structuring the deal had to

overcome the diffi culties arising from the issuance of Sukuk

in connection with assets based in a non-Islamic jurisdiction.

An overriding royalty interest was chosen as the asset to

support the Sukuk. The properties burdened by the royalty

consist of federal leases located off the coast of Louisiana.

The oil and gas company that owns and operates the leases

sold the royalty to a specially created entity. This special

purpose entity, which will hold the royalty for the duration

of the transaction (absent a default), was established using

traditional structured fi nance techniques to maximize its

bankruptcy remoteness. The structure employed in the

transaction was also designed to take advantage of certain

production payment bankruptcy law protections. Such

special purpose entity which now holds the royalty interest

takes no part in the conduct of the drilling or production

on the property but holds a passive and non-working

interest that entitles it to a portion of the stream of income

generated by the sale of production from the burdened

leases. Given the location of the offshore properties, the

property rights analysis was based on the application of

Louisiana law (under federal law, federal offshore leases

are generally governed by the laws of the adjacent state).

The transaction was structured so that the sale of the royalty

interest would most likely be considered a true sale of a

real property interest under Louisiana law. The fact that the

conveyance of the royalty was designed to be a true sale

of real property helped the deal from both a bankruptcy

and a Shariah perspective. The investors share in the profi ts

or losses derived from the success or failure of the underlying

asset. In fact, from the perspective of Shariah, the Sukuk

certifi cates represent an undivided benefi cial ownership in

the real property (in other words, the royalty).

Investors’ Return and Securitization Considerations

The Sukuk holders can expect to receive a fi xed return

consisting of periodic payments of profi t sharing from the

income generated from the royalty, as well as payments

toward the redemption of the principal. The investors’ return

(structured as profi t sharing) and the repayment of the

investors’ principal will depend on the performance of the

underlying asset, in conformance with Shariah principles.

As such, and absent a corporate guarantee, which would

effectively shift the risk from the assets to the company,

this was one of the fi rst true securitization transactions in

the Islamic fi nance and investment industry whether in or

outside Islamic jurisdictions. Therefore, the Sukuk offering

was non-recourse in that the ultimate issuer (the oil and gas

operator) is not obligated to repay the Sukuk holders if the

royalty cannot generate suffi cient funds. The investors will

bear the risk of the oil and gas reserves being insuffi cient to

fully support the issuance of the Sukuk, the risk of a natural

disaster knocking out production and price fl uctuation


Reserve Reports and Credit Enhancements

In addition to a comprehensive due diligence exercise,

including a detailed oil and gas reserve report and an

audit of that report, the structure included a number of

mitigating factors and credit enhancements to reduce risk,

including reserve accounts, security interests, conservative

modeling, and some Shariah-compliant hedges. None of

such mitigating elements, however, effectively shifts the risk

away from the assets to the originator itself. The projected

return—at more than 11 percent—refl ects the calculated

risk associated with the transaction.

Shariah Compliance

The lead managers retained two international Shariah

scholars, one based in Bahrain and the other based in the

United States, at an early stage of the structuring phase. In

addition, the lead managers and the legal advisors had

regular and detailed interactions with such scholars at

the various stages of documenting the transaction. They

reviewed the deal and issued a fatwa, making it possible

to market the Sukuk to Islamic investors. Moreover, the

ECP Sukuk transaction required a careful consideration of

all of the issues raised in this article, including bankruptcy,

tax, and securities law concerns, as well as the practical

diffi culties of cross-cultural co-operation

In sum, the efforts extended and the creative structuring

applied by bankers, originator, Shariah scholars and

lawyers, allowed for the closing of this fi rst-ever U.S. Sukuk

offering in the amount of US$165.7 million. This, in turn, may

well encourage future economic co-operation between

the United States and the Muslim world.


With the liquidity and growing prominence of the

Islamic fi nance and investment industry, Western energy

companies have an alternative source of funding that

they can tap into. In particular, given their attributes,

Sukuk instruments seem to provide an ideal format for such


Page 33

Deals of the Year 2006 Handbook

East Cameron Gas Sukuk (continued...)

deals. As the secondary market develops, trading in Sukuk

backed by Western energy assets (including renewable

energy assets given Shariah’s emphasis on ethical and

green investments) may become commonplace. The

connection between Islamic investment markets and the

United States remains in its nascent stages, but the fi rst U.S.

Sukuk should encourage optimism on both sides of the

cultural divide. It is expected that the successful closing of

the ECP Sukuk transaction is likely to usher a new era in which

Islamic fi nance and investment techniques can be utilized

to successfully provide an alternative source of fi nance

to companies and projects in non-Islamic jurisdictions.

While most of such transactions are likely to be complex,

hence requiring detailed analysis of legal, regulatory, tax,

bankruptcy, securities and other considerations, the Islamic

fi nance and investment industry appears to have attracted

experienced professionals who will play, along with Shariah

scholars and attorneys, a pivotal role in the emergence of

a new stream of Sukuk transactions involving assets in non-

Islamic jurisdictions.

Ayman H. Abdel - Khaleq

is partner at Vinson & Elkins

LLP in Dubai. He has expertise in representing Middle

Eastern and international fi nancial on structuring and

documenting Shariah compliant investment and fi nance









East Cameron Gas Sukuk

Sukuk Al Musharakah

East Cameron Partners

East Cameron Gas Company

East Cameron Partners is an independent oil and gas exploration and production company, based in

Houston Texas.

US$167.67 million



July 2019 (13 years from closing)

COUPON 11.25%















Quarterly based on volume produced

Overriding royalty interests in oil and gas assets in the Gulf of Mexico, USA.

BSEC S.A and Merrill Lynch

Baker Hostetler

Vinson&Elkins LLP


East Cameron Partners

Sheikh Yusuf Talal De Lorenzo & Sheikh Nizam M S Yaqoobi

Regulation S international offering and a Regulation D U.S. private placement

The proceeds of the issue of the Sukuk will support capital and operating costs associated with drilling and

operating wells in the Gulf of Mexico for a Texas-based oil and gas company.

CCC+ (Standard & Poor’s)

Page 34

Deals of the Year 2006 Handbook



In January 2006, HSBC Amanah acted as mandated lead

arranger and sole bookrunner for a US$200 million international

Murabahah syndication for PT Pertamina (Persero).

Pertamina is the Indonesian state-owned oil company and

indeed is one of the largest oil companies in Asia.

The US$200 million Murabahah syndication is a follow-up

transaction to Pertamina’s fi rst Murabahah syndication in

December 2004, which was successfully oversubscribed at

US$322 million. In the fi rst syndication, HSBC Amanah also

acted as mandated lead arranger and sole bookrunner.

Since 2004, Indonesia became a net importer of oil. The

Murabahah facility provided fi nancing for Pertamina for its

large crude oil import requirements, most notably during a

period of high oil prices. The US$200 million syndication was

fully utilized by Pertamina for a series of oil imports during



The Pertamina Murabahah transaction is a landmark transaction

in many respects:

• The Murabahah syndications for Pertamina are pioneering

Islamic facilities for Indonesia. Not only were

these the largest Islamic fi nancings in the country, the

syndications were also the fi rst Islamic fi nancing syndications

in the Indonesian market. Its structuring and

execution required intensive interactions with local

regulators and Shariah boards. The successful execution

of these syndications has set a platform for future

Islamic fi nancing syndications in the country.

• There were overwhelming interest from both conventional

and Islamic investors in the Murabahah facilities;

the second syndication attracted participation from

participant banks in the fi rst syndication as well as new

fi nancial institutions, which consisted of both Islamic

and conventional banks. The facility was distributed

52% to the Middle East and 48% to East Asian investors

including onshore banks in Indonesia.

• The fi nancing facility was competitively priced in comparison

with Pertamina’s existing facilities, and has set

a new benchmark for the company’s subsequent fi -













The authors are from HSBC Amanah


Syndicated Murabahah Facility

US$200 million

PT Pertamina (Persero)

The Hongkong and Shanghai Banking

Corporation Ltd. (HSBC) acting as agent

for Financiers

An international syndicate of banks.

Distribution of participation was 52%

Middle East and 48% East Asia.

Pertamina is Indonesia’s state-owned oil

company involved in both exploration

and production activities as well as

refi nery and distribution of oil products

Any type of crude oil and/or other oil

products or commodities needed for

Pertamina’s internal consumption

Suppliers of crude oil and/or oil products

or commodities identifi ed by Pertamina

and approved by the banks

The purchase price for the commodity

payable by the purchaser to suppliers

PROFIT MARGIN The Murabahah profi t margin is

determined based on a spread over 6-

months LIBOR as reference rate

• The transactions successfully introduced Pertamina

and Indonesia to the global Islamic investor base, and

enabled the company to diversify its funding to a new

investor base which was a key objective of Pertamina’s

management. The entrance of foreign investors

from the Middle East refl ected a turning point for Indonesia

and bodes well for the prospect of increasing

foreign direct investment from a previously untapped

source. Indeed, since the fi rst syndication in 2004 the

market has witnessed increasing efforts to structure

and execute other Islamic fi nancing transactions for

the country.







180 days

The payment of each purchase of

commodity by the purchaser from the

seller consists of the purchase price for

each disbursement and the agreed

Profi t Margin

Clifford Chance

HSBC Amanah

HSBC Amanah

Page 35

Deals of the Year 2006 Handbook

Sohar Aluminium Smelter Project Islamic

Finance Facility

The approximately US$2.5 billion Sohar Aluminium smelter

project (the Sohar Aluminium Project), which closed in

December 2005, was a landmark deal in the Middle East

and particularly in Oman. The Sohar Aluminium Project

was the first greenfield aluminium smelter to be built in the

Middle East in the last 25 years and will be able to produce

350,000 tonnes of aluminium ingots per year, representing

an important step for Oman’s economy as it seeks to

diversify its economic base. Capitalizing on Oman’s oil

and gas reserves, it is anticipated that the Sohar Aluminium

Project will contribute significantly to Oman’s GDP and in

doing so create significant employment opportunities.

The Sohar Aluminium Project – whose sponsors are Oman

Oil Company, Abu Dhabi Water and Electricity Authority

(ADWEA) and Alcan – will consist of a primary aluminium

smelter including carbon and casting facilities, raw materials

handling facilities, unloading and uploading facilities at the

port of Sohar, storage facilities in the Sohar Industrial Area

and a 1,000mw combined gas cycle turbine power plant

to power the aluminium smelter.

The fi nancing plan for the project involved US$1.545 billion

of external indebtedness and approximately US$900 million

in equity. The commercial debt component consisted of a

US$1.2 billion commercial bank tranche and a US$85 million

letter of credit facility. An important component of the

fi nancing was a US$260 million Islamic fi nancing tranche.

The Islamic fi nancing tranche represented, at the time of

signing, the fi rst Islamic fi nancing tranche in a multi-sourced

project fi nancing in Oman. The US$260 million Islamic facility

was arranged by leading regional and international banks:

the Islamic arrangers were ABN AMRO Bank, Citibank, Arab

Bank, Calyon, Gulf International Bank, WestLB, Royal Bank

of Scotland, Abu Dhabi Commercial Bank, BNP Paribas,

Société Générale and Standard Chartered Bank.

Islamic fi nancing tranches using the Istisnah (a sale of

assets to be constructed) and Ijarah (an Islamic lease)

combination had been successfully used elsewhere in the

Gulf in large fi nancings, including the US$530 million Islamic

tranche in the Qatargas II fi nancing in 2004. Since the Sohar

Aluminium smelter project, the structure has also recently

been used as part of the fi nancing plan for the US$5.8

billion fi nancing for the US$9.9 billion Petro-Rabigh project

in Saudi Arabia.

In Sohar, the Ijarah/Istisnah combination was documented

with an Istisnah agreement, a forward lease agreement

(Ijarah fi l Zimma), a service agency agreement, sale and

purchase undertakings, an investment agency agreement

and a common terms agreement.


The Istisnah agreement operates during the construction

phase of the Sohar Aluminium Project. Under the terms of

this agreement, the Sohar Aluminium Project company (the

company) undertakes to develop the Islamic fi nanced

assets (including certain gas turbines, generators and

electrical transmission equipment) on behalf of a special

purpose company (SPC) owned for and on behalf of

the Islamic participants by the Islamic facility agent. The

company undertook to develop the Islamic fi nanced

assets in accordance with the specifi cations of the EPC and

EPCM construction contracts (the company was permitted

to subcontract such obligations to another person) and to

arrange for delivery of such assets on or before a specifi ed

completion date. When the Islamic fi nanced assets

are delivered to the company in accordance with the

foregoing requirements, title to (and possession of) such

assets passes to the SPC.

As consideration for the company procuring the Islamic

fi nanced assets, the SPC is to pay the company the

amount of the facility via “phase payments” (broadly

equivalent to advances under a conventional commercial

bank facility) and such phase payments are made subject

to the same conditions precedent to drawdown as under


EPCM Contractor


Assets developed

Islamic SPC

Phase Payments


On completion of Assets, title

transfers of Islamic SPC


Page 36

Deals of the Year 2006 Handbook

Sohar Aluminium (continued...)

the commercial bank tranche. The Istisnah agreement also

contains a mechanic to enable the Islamic participants to

receive liquidated damages payments in the event that

the Islamic fi nanced assets are not delivered on time or

are not delivered at all. (The quantum of such liquidated

damages is the same as the lease payments that would

otherwise have been due and payable under the lease



At the same time as entering into the Istisnah agreement,

the company entered into a lease agreement (Ijarah fi l

Zimma) with the SPC for the operational phase of the project

(the period following delivery of the Islamic fi nanced assets

to the SPC pursuant to the Istisnah agreement until a date

equivalent to the fi nal maturity date under the commercial

bank tranche). Under the lease agreement, the company

leases the Islamic fi nanced assets from the SPC in return

for lease payments (comprising of a fi xed and a variable

element). The lease payments under the lease agreement

are broadly equivalent to the principal and interest

payments under the commercial bank tranche and are

made at the same times as the equivalent payments under

the commercial bank tranche.


As per other Ijarah/Istisnah fi nancings, the SPC (in its

capacity as lessor) is responsible for all major maintenance

(repair, replacement and maintenance of a capital

nature without which the Islamic fi nanced assets could not

reasonably be used by the company). Such obligations,

together with insurance obligations and obligations to

pay ownership taxes, are subcontracted to the company

(acting in its capacity as service agent) via a service

agency agreement. The company is responsible for all

repair and maintenance (other than major maintenance)

in accordance with the lease agreement.


The company is entitled to terminate the lease agreement

voluntarily – in much the same way as the company would

be entitled to cancel and/or prepay the commercial

bank tranche. The Islamic facility agent and SPC (in its

capacity as lessor under the lease agreement) grant in

favor of the company (in its capacity as lessee under the

lease agreement) a sale undertaking pursuant to which

they undertake to sell the Islamic fi nanced assets to the

company at an exercise price equal to an agreed “lease

termination payment”. (This corresponds to a voluntary

prepayment of the entire amount outstanding under the

Islamic facility).

Likewise, in certain default scenarios, the Islamic facility

agent and SPC are entitled to require the company to

repurchase the Islamic asset and to terminate the lease

agreement. The company (in its capacity as lessee under

the lease agreement) grants in favour of the Islamic facility

agent and SPC (in its capacity as lessor under the lease

agreement) a purchase undertaking, pursuant to which it

undertakes to purchase the Islamic fi nanced assets from

the SPC when a “purchase event” has occurred and is

continuing at an exercise price equal to an agreed “lease

termination payment.” (A purchase event arises when an

event giving rise to a mandatory prepayment (applicable

to the Islamic facility and requiring prepayment in full of the

Islamic facility) has occurred, or a decision has been taken

in accordance with the fi nance documents to accelerate

and exercise other remedies).

On receipt of the relevant “lease termination payment”

or at the end of the lease period, on payment of the fi nal

lease payment, the assets will be transferred back to the



In Sohar, the Islamic participants agreed to enter into a

“common terms agreement” together with the commercial

Rental Payments

Islamic SPC

Lease of Assets


Title to Assets reverts at end of



Page 37

Deals of the Year 2006 Handbook

Sohar Aluminium (continued...)

facility participants. The common terms agreement

provided for common representations and warranties,

covenants, conditions precedent and events of default

between the Islamic participants and the commercial

banks providing the commercial bank tranche and letter

of credit facility. The terms of the agreement were adapted

to address the particular Shariah concerns of the Islamic

participants. The Islamic participants were also party to

an inter-creditor agreement with the company’s other

fi nanciers, including the commercial facility participants

and hedging counterparties.

An important element of the structure that was used in

the Sohar fi nancing and which has been used elsewhere

in Ijarah/Istisnah fi nancings in the Middle East is the use of

the SPC to act (on behalf of the Islamic participants) as

the “purchaser” under the Istisnah agreement and the

“lessor” under the lease agreement. The SPC structure has

perceived benefi ts for both the Islamic participants (such

as protecting the participants from the risks associated with

the ownership of the Islamic fi nanced assets, e.g. potential

environmental liabilities) and the company (the Islamic

fi nanced assets are not held by the Islamic participants

directly and therefore are isolated from the risk of insolvency

to an Islamic participant).

The relationship between the SPC and the Islamic participants

is governed by an investment agency agreement

which also includes mechanics for the Islamic participants

to make contributions towards phase payments, regulates

payments to and from the SPC by the Islamic participants

and also transfers by the Islamic participants. In addition,

the Islamic participants provided the security trustee (on

behalf of the wider lending group) with security over the

SPC’s shares and the Islamic fi nanced assets. This security

was provided to secure the Islamic participants’ performance

of their obligations under the inter-creditor agreement

and to ensure that the Islamic participants would not

have preferential access to the Islamic fi nanced assets

(which for structural reasons are otherwise not part of the

security pool available to the wider lending group).

Craig Nethercott is a partner

in White & Case’s global

Energy, Infrastructure,

Project and Asset Finance

Practice. He has worked on a variety of project fi nance

transactions throughout the Middle East (including Islamic

fi nancings in Egypt, Yemen, Oman, Qatar and Saudi Arabia).

Craig most recently advised Saudi Aramco with respect

to the Rabigh Project.

Nick Collins is a senior associate in White & Case’s global

Energy, Infrastructure, Project and Asset Finance Practice.

He has worked on a variety of project fi nance transactions

throughout the Middle East, including the representation

of the project company and the project sponsors on the

Sohar Aluminium Project.

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Page 38


Sohar Aluminium Company LLC



US$1.545 billion fi nancing comprising US$1.2 billion commercial tranche; US$260 million Islamic facility;

US$85 million letter of credit.

Sohar Aluminium Company LLC





Primary aluminium smelter with an initial nameplate capacity of approximately 350,000 tonnes per

annum (together with associated power generation and related desalination plant)

Oman Oil Company (40%), ADWEA (40%) and Alcan (20%)

US$1.545 billion fi nancing comprising US$1.2 billion commercial tranche; US$260 million Islamic facility;

US$85 million letter of credit facility.

FINANCIAL CLOSE 23 rd December 2005
























11 th December 2005 (Signing of fi nance documents)

15 years each

15 years

45 bps to completion, 60 bps years 3 to 7, 75 bps years 8 to 10, 90 bps years 11 onwards

Mohsin Tayebaly & Co.

187,500 Rial Omani divided into 187,500 shares with a nominal value of 1 (one) Rial Omani.

•Gas Turbines c/w generators, step-up transformers, starting devices, lube oil skids, air/water coolers,

air inlet fi lters, fuel oil and gas trains, diverter damper and by-pass stacks.

•Heat recovery steam generators c/w main stacks, boiler feed-water pumps, de-aeration tanks.

•Steam Turbines c/w generators, step-up transformers, steam valve systems, main condensers, HP

steam piping, condensate return pumps and sea-water pumping station.

•Electrical transmission and distribution system comprising dual overhead line system to the smelter,

gas insulated switchgear substation, 220kV cabling to all 6 generators and the Transco grid station.

•Reverse Osmosis plant c/w storage tanks for potable and de-mineralised water, water forwarding

pumps and water mains to smelter.

White & Case LLP

Allen & Overy LLP



ABN AMRO Bank, Abu Dhabi Commercial Bank, Arab Bank & Oman Arab Bank, Arab Banking Corporation,

Bank Muscat, BNP Paribas, Calyon, Citigroup, Export Development Canada, Gulf International Bank,

ING, Mizuho Corporate Bank, The Royal Bank of Scotland, Société Générale, Standard Chartered Bank,

Sumitomo Mitsui Banking Corporation, WestLB

Commercial tranche: Citigroup Corporate and Investment Banking, ABN AMRO Bank, Sumitomo Mitsui

Banking Corporation and Export Development Canada; Islamic tranche: Citigroup Corporate and

Investment Banking, ABN AMRO Bank and Sumitomo Mitsui Banking Corporation

Citigroup and ABN AMRO Bank

Gulf International Bank

Sohar Aluminium Company LLC approached the underwriters to underwrite up to US$1.545 billion. The

debt was successfully taken up at sub-underwriting level by the other mandated lead arrangers.

To fi nance a portion of the costs relating to the construction and start up requirements of the Project

and towards the provision of Acceptable Credit Support for the Debts Service Reserve Account in

accordance with the Accounts Agreement.

Page 39

Deals of the Year 2006 Handbook

Sitara Chemical Industries Privately

Placed Sukuk Issue

Standard Chartered Bank acted as the mandated lead

arranger and sole bookrunner for a PKR1,100 million

(US$18.3 million) local currency Sukuk issue for Sitara

Chemical Industries. This deal was completed in June 2006

and boasts double market firsts in Pakistan:

• First local currency Sukuk issued by a local corporate

in Pakistan.

• First Sukuk issue for Standard Chartered in the Pakistan


Sitara Chemicals is one of Pakistan’s leading companies,

playing a vital role in the promotion of Islamic banking in the

country. Sitara Chemical Industries (SCIL) is the largest entity

of the Sitara Group in Pakistan and is the market leader in

the manufacture of Chlor-Alkali products with membrane

technology. SCIL was incorporated in 1981 and began

producing caustic soda in 1985. The plant’s capacity was

gradually increased over the years to the current level of

545 metric tonnes a day. In addition, various by-product

facilities have been added and expanded to cope with

growing demand. The company entered into the textile

spinning business in 1995. Its specialty chemicals and export

division was established in 2001 and the agri-chemicals

division was added in 2003.

SCIL has been striving for many years to get out of

conventional interest-based fi nancial arrangements. The

company issued Musharakah term fi nance certifi cates

(MTFCs) at the end of 1999, and the proceeds were used

to repay the single interest-based long-term facility then

outstanding, which was otherwise repayable in installments

by the end of year 2007.

Since the fi rst issue of MTFCs, the sponsors of the company

have achieved complete Islamization of their fi nancial

dealings. The recent fi nancing of the expansion project

through a PKR1.1 billion (US$18.12 million) local currency

(LCY) Sukuk issue was another milestone for the company,

as well as for Pakistan’s Islamic banking industry.

The structure and documentation of the Sukuk issue was

approved by Standard Chartered Bank’s Shariah Supervisory

Committee, which includes the two well-known scholars,

Sheikh Nizam Yaqubi and Dr Abu Sattar Abu Guddah.

The Sukuk issue had a tenor of 5 years and was structured

on the concept of Shirkat-ul-Milk, wherein the participants/

certifi cate holders, after acquiring benefi cial ownership of

the project assets, entered into a Musharakah agreement

with Sitara Chemicals. The certifi cate holders provided

their share of the Musharakah assets to Sitara Chemicals

in quarterly rent payments. The rent payments were

benchmarked to KIBOR in addition to an agreed margin and

an incremental rent amount based on actual production.

At the same time, Sitara Chemicals provided a one-way

purchase undertaking to the trustee (acting on behalf of the

certifi cate holders) to periodically purchase the certifi cate

holders’ share in the Musharakah so that the ownership of

the Musharakah assets is completely transferred to Sitara

Chemicals at the end of 5 years from the date of issue.

The concept of Sukuk is based on the premise that any

Islamic fi nancing contract representing ownership in a

tangible asset can be bought or sold, and hence can be

securitized in the form of tradable securities. The Sukuk

issued to date in the GCC region have used Special Purpose

vehicles (SPV) as the issuing entity, where the ownership

of the assets remains with the SPV and the SPV issues the

Sukuk certifi cates to fi nance the investors’ contribution in

the assets.

“Since the first issue of

Musharakah term finance

certificates, the sponsors of

the company have achieved

complete Islamization of their

financial dealings”

The SCIL Sukuk issue differs from the capital market Sukuk

issued in the GCC region to date, mainly because it does

not involve the formation of an SPV, because the capital

markets laws in Pakistan presently do not allow SPVs to

acquire/own the benefi cial or legal title of tangible assets.

In SCIL’s case, a trustee was appointed to act on behalf

of the participating banks (Sukuk holders). The Sukuk

certifi cates have been issued by SCIL as the issuer which

represents the certifi cate holders’ share in the Musharakah

assets. The legal title and ownership of the Musharakah

assets remains with SCIL, however, the benefi cial ownership

is shared by both SCIL and the trustee (acting on behalf of

the certifi cate holders).

The SCIL Sukuk issue was a privately placed issue participated

in by fi ve banks in Pakistan, namely the National Bank of

Pakistan, Allied Bank, Dubai Islamic Bank Pakistan, First

Habib Bank Modaraba and Meezan Bank as trustee to the

Sukuk issue.

The authors are from Standard


Page 40








Sitara Chemical Industries

Privately placed Sukuk issue

Sitara Chemical Industries(SCIL)

Manufacturing of chemicals (caustic soda)

Chairman - Haji Bashir Ahmed

Chief executive - Muhammad Adrees

Javed Iqbal

Muhammad Anis

Imran Ghafoor

Haseeb Ahmed

Rukhsana Adrees

Nominee director - Rashid Zahir

Not listed

PKR1.1 billion (US$18.12 million)


MATURITY June 2011




















KIBOR + 165 basis points plus incremental rental. Incremental rental is linked to quarterly production level

agreed with SCIL and is subject to ceiling of 0.05%.

In 12 equal quarterly installments after a grace period of 2 years from the date of issue.

PKR300 million (US$4.94 million)

Project assets include but are not limited to all fi xed assets of BMR and the expansion of the 210 metric

tonnes a day caustic soda plant located at 32 km, Faisalabad–Sheikhupura Road, Faisalabad (Musharakah


Standard Chartered Bank

Standard Chartered Bank

Mohsin Tayebaly & Co.

Standard Chartered Bank



Meezan Bank

Standard Chartered Shariah Supervisory Committee

Private placement to banks and fi nancial institutions

To fi nance the expansion of SCIL’s caustic soda plant

Not rated


Page 41

Deals of the Year 2006 Handbook

Garanti Leasing US$41.5 Million

Islamic Financing Facility

Citi Islamic closed a very successful Murabahah syndication

for Garanti Leasing in September 2006. The transaction

represents the largest Islamic facility for a non-banking

financial institution in Turkey.

Garanti Leasing has demonstrated an impressive market

performance since its establishment and is leading the

market with more than 20% market share. The company

is focused on small ticket businesses where the portfolio

is well diversifi ed in several sectors like textile, machinery

and equipment production, construction, fi nance, trade,

wood production, tourism and agriculture. The synergies

between the parent, Garanti Bank, and the company exist

on several platforms; contributing to the success of the

leasing business.

the syndication was oversubscribed and upsized from

US$30 million to US$41.5 million. The transaction achieved

the company’s objective of investor diversifi cation and

attracting new investors, both Islamic banks and the Islamic

windows of conventional banks.

Distribution Profile (by region):

Middle East


Europe 12%

This deal represents refi nancing of the existing Murabahah

transaction where the syndication proceeds have been

used to fi nance the growing business of the company,

particularly in small and medium-size enterprises. The Turkish

leasing industry has demonstrated a strong growth, in line

with the upsurge in the domestic economy. This transaction

has a valuable impact on the Turkish leasing sector, setting

new benchmarks in the industry, both from the amount and

tenor perspectives, as well as setting aggressive pricing

benchmarks for players in the leasing industry.

Distribution Profile (by investor type):

Islamic window






Citi Islamic combined the strengths of its regional and global

distribution teams and distributed the transaction in the

Middle East and Europe simultaneously. As a consequence,



Murabahah syndication

Garanti Leasing

The authors are from Citigroup




Garanti Leasing

Chairman - Ergun Ozen; vice-chairman and executive director 2/8/07- 10:22:07 Turgay AM Gonensin; member of the board

and executive director - Dr A. Kamil Esirtgen, Suleyman Sozen; member of the board - Ali Temel, Muammer

Cuneyt Sezgin, Gerard Ryan; member of the board and general manager - Selami Ekin

US$41.5 million

DATE OF LAUNCH August 2006

MATURITY 2 years after the signing date (signing date: 28 th September 2006)







European Islamic Investment Bank, Emirates Bank International, First Gulf Bank, Faisal Islamic Bank of Egypt,

Dubai Bank, The Arab Investment Company

Norton Rose

Citi Islamic Investment Bank Shariah Advisory Board

Page 42

Deals of the Year 2006 Handbook




Nakheel Development


page 05

Not only is Nakheel an excellent example

of a structured Ijarah transaction, it

is the largest ever Sukuk issuance to

date. Proceeds are being used to fund

Nakheel’s landmark real estate projects throughout the

UAE. But the Nakheel Sukuk builds on the PCFC Sukuk

convertibility model. The Sukuk permits investors to have the

option of taking part in any Nakheel IPO, acquiring shares

at a preferential price, and allowing investors the option

to hold onto the bond. This is an evolutionary step beyond

the PCFC Sukuk model. The largest ever Sukuk issuance,

and one of the ten largest convertible bond issuances

ever globally, Nakheel demonstrates the relative attraction

of GCC assets and GCC government-linked companies

to global investors, including investment in the GCC real

estate sector. The underlying leasehold estate structure

gives investors a secure means of participating in Nakheel’s

core business whilst achieving a predictable, attractive

current income.

Honorable Mention: Were the Nakheel Sukuk not so fi lled with

unique features appended to the lease relationship, a classic

aircraft lease deal like Etihad Airways would have stood out.




page 08

After a great deal of talk and many

broken promises by bankers, KPJ

Healthcare (KPJ) broke through and

offered units in the fi rst Islamic REIT.

Playing on its existing market position as the largest private

healthcare group in Malaysia, KPJ fi rst covered many

milestones: fi rst Asian healthcare REIT, fi rst listed Islamic REIT

globally, fi rst REIT launched and listed in Malaysia under

the Securities Commission’s guidelines for Islamic REITs.

Generating cash for KPJ’s expansion, the REIT allowed KPJ

to maintain healthcare management roles as well as to

retain its brand. The six properties acquired by the REIT will

distribute up to 99% of income to investors for the fi nancial

years ending 2006 to 2009. KPJ REIT has a solid expansion

plan as it is given a fi rst right of refusal to acquire existing

local or overseas hospitals managed by the KPJ Group with

yield enhancing prospects. Low risk stable rental income

streams proven by leading profi table hospital operators

based on long-term lease agreements with the KPJ Group

for 15 years with an option to renew for another 15 years.

In the lease agreements, all the future maintenance costs

will be borne by the KPJ Group. With the volume of parties

owned by KPJ Group, the REIT may be expanded. This

transaction sets a new benchmark and paves the way for

future Islamic REITs. At the same time, the successful launch

of an Islamic REIT model establishes a platform for regional,

international growth for KPJ.


KNM Capital


page 12

KNM’s transaction is the fi rst of its kind

where a combination of Murabahah

and Mudharabah principles were used

to facilitate an Islamic Commercial

Papers/Medium Term Notes (ICP/MTN) program. The ICP of

up to RM150 million (US$40.56 million) issued under the ICP/

MTN program are underwritten whilst the MTN are not. This

seven-year deal was structured to allow a shelf structure

whereby the subsequent tranches are issued without a new

prospectus. The proceeds raised from the issuance of the

ICP/MTN may be applied by KNMC, KNM’s funding entity,

to KNM and/or its other subsidiaries for the redemption

of existing facilities, to make new industrial investments in

China, to make new capital investments, and for general

KNM working capital. This transaction applies a blend of the

older Malaysian innovations and the latest developments

from the Malaysian Islamic bond market.

Honorable Mention: Aabar was an excellent runner up serving

for the corporate expansion of Aabar Petroleum in the ASEAN



Page 43


Dubai Dinner Photos


Al Nojoom Ballroom,

Shangri-La Hotel, Dubai

Monday, 12 th March 2007

Shangri-La Hotel, Dubai

Turkey Deal of the Year - Garanti Leasing

South Africa Deal of the Year

Absa Capital

Pakistan Deal of the Year

Sitara Chemical Industries Sukuk

Oman Deal of the Year

Sohar Aluminum

Murabahah & Kuwait Deal of the Year

MTC Murabahah Facility

Musharakah & Qatar Deal of the Year


IPO & Bahrain Deal of the Year

Albaraka IPO

Structured Finance Deal of the Year

East Cameron Gas Sukuk

Ijarah & Real Estate Deal of the Year

Nakheel Sukuk

Sukuk & Saudi Arabia Deal of the Year


I-Reit Deal of the Year

Al Aqar KPJ Reit

Equity Deal of the Year

Abu Dhabi Sukuk Program

Project Finance Deal of the Year

Al-Waha Petrochemical Project

Cross Border Deal of the Year

Dubai Financial Acquisition

Corporate Finance Deal of the Year

KFH Murabaha Facility

Deal of the Year & UAE Deal of the Year

PCFC (DP World)


Malaysia Dinner Photos


Nusantara Ballroom,

Sheraton Imperial Hotel,

Kuala Lumpur

Wednesday, 28 th March 2007

Best Islamic Banks 2006 & Deals of the Year 2006 Awards Dinner Kuala Lumpur

Keynote Address

Ijlal Alvi, IIFM

Malaysia Deal of the Year

Raffl esia Capital

Deal of the Year & UAE Deal of the Year

PCFC (DP World)

Cross Border Deal of the Year

Dubai Financial Acquisition

Indonesia Deal of the Year

PT Pertamina (Issuer)

I-Reit Deal of the Year

Al Aqar KPJ Reit

Indonesia Deal of the Year

PT Pertamina Murabahah Syndiction

Sovereign Deal of the Year

Raffl esia Capital

Cross Border Deal of the Year

Dubai Financial Acquisition (Issuer)

I-Reit Deal of the Year

Al Aqar KPJ Reit (Issuer)

Trade Finance Deal of the Year

PT Pertamina Murabahah Syndiction

Mudarabah Deal of the Year

KNM Capital

Innovative Deal of the Year

Raffl esia Capital

Mudarabah Deal of the Year

KNM Capital (Issuer)

Kuwait Finance House

Deals of the Year 2006 Handbook

Deals of the Year Results (continued...)


Mobile Telecommunications Company International (MTC)


page 16

A traditional participant in the interest

markets, Mobile Telecommunications

Company (MTC) returned to the Islamic

market for the second time. Two important

reasons for this were MTC’s discovery that Islamic providers

can be effi cient and deliver on pricing competitively to

traditional banks. One of the largest Islamic facilities in the

market, the deal was syndicated prior to fi nancial close,

demonstrating the attractiveness of the obligor, the Kuwait

market, and the Islamic alternatives. The use of Murabahah

to access funds from serial sales of commodities and their

deferred purchase payment by the obligor is the tried and

true method of Islamic fi nance. When well-executed, it is

an excellent tool to draw world class companies like MTC

to expand its tapping of the Islamic market space.

Honorable Mention: Pertamina US$200 million Syndicated



Qatar Real Estate Investment Company (QREIC)


page 17

The QREIC Sukuk was the fi rst corporate

Sukuk in Qatar and the fi rst transaction

to be issued by a special purpose

vehicle (SPV) domiciled in the Qatar

Financial Centre. Unlike the Qatar Global Sukuk, the

QREIC issuance benefi ted from the drafting of specifi c

regulations/exemptions (including a tax letter) to ensure

that the SPV had a similar status to issuers located in other

offshore jurisdictions. This creates a replicable role model

for the Qatar market that meets international standards.

In addition to using a procurement agreement to appoint

QREIC to construct the project (which is a relatively new

concept in Islamic fi nance), a second purchase undertaking

was required in respect of the forward lease agreement,

enabling the lessor to sell the leased assets to the lessee on

a continuing event of default. Whilst purchase undertakings

in respect of the Musharakah are more common, the

concept of a ‘lease’ purchase undertaking (and any

second purchase undertaking) is novel development in

this declining Musharakah transaction. The Musharakah

is structured to fund in stages, refl ecting the needs of the

underlying obligor QREIC to fund according to its project

needs. The fi rst 10-year issuance in the GCC, the deal enjoys

a high degree of security given the control of the properties

by the Musharakah.

This issuance is a signifi cant development in the opening

of the Qatar market for domestic corporate issuances as

well as signaling the formal opening of the Qatar Financial

Centre for domestic and global Sukuk.

Honorable Mention: East Cameron Gas Company represents

a very strong competitor, but covers other unique territory for

which it is acknowledged below.




page 19

This was the fi rst ever Sukuk in Saudi

Arabia, and has set the benchmark

for subsequent Sukuk issuances. SABIC,

despite many really good entries, stands

out as the deal that opens Saudi Arabia, the largest GCC

country. Prior to SABIC’s Sukuk issuance, there were no

public non-equity capital market issuances by any issuer

other than the Central Bank Saudi Arabia Monetary

Agency (SAMA). SABIC’s decision to issue Sukuk instead

of borrowing conventionally related to a desire to diversify

fi nancial sources, deepen the Saudi Arabian market and

promote Islamic fi nance in the Kingdom. As the fi rst tradable

public issuance of Sukuk in Saudi Arabia, the SABIC deal

has defi ned the challenges to forming an effi cient market,

as well for the opportunities of issuing Islamic securities for

Saudi Arabian corporates.


Dubai Financial


page 23

This transaction cements the growing

co-operation between the GCC

and Malaysia, turning the talk about

harmonization into a business reality

and allowing for greater synergy in Islamic fi nance. The

transaction was a complex blend of bridge funding for

Dubai Investment Group’s acquisition of 40% of BIMB, the

founding Malaysian Islamic bank, and an important capital

contribution to bank’s capital base and its capacity to grow

its domestic business as well as to expand cross-border.

The transaction embedded a US dollar Malaysian ringgit

Shariah compliant swap. Some cross-border deals were

more complex by their components, but Dubai Financial

earns precedence for its successful merging of GCC

interests with the Malaysian market in a direct investment

in an established institution. This investment required a GCC

entity to buy into a Malaysian entity with distinct operating

methods; and the Malaysian institution to adapt to the GCC

style in a way that does not disturb the bank’s effectiveness

in the local market. But, despite similar home currency pegs

to the dollar, the inbound investment was in US dollars and

required a fi ve year Shariah compliant hedge, given the

next investment in local currency.

Honorable Mention: The Albaraka IPO and PCFC were strong

contenders in this same category.


Page 46

Deals of the Year 2006 Handbook

Deals of the Year Results (continued...)


Abu Dhabi Islamic Bank


page 25

Traditional banks have long supplemented

their tier one capital with tier

two issuances via trust certifi cates. Recent

experimentation with Musharakah

forms has allowed the development of this Islamic equity

model in a manner that is consistent with western-style

trust certifi cate programs. The Abu Dhabi Islamic Bank Sukuk

Program for US$5 billion of trust certifi cates issued the

fi rst US$800 million in December 2006. The second program

launched by an Islamic fi nancial institution, this program is

the largest in scope and the fi rst program to be listed on

the London Stock Exchange with investment grade rated

certifi cates. The deal has built-in fl exibility to allow redrawing

on a periodic basis over the life of the transaction up to

the maximum volume of certifi cates authorized. The scope

and structure of this issuance allows for a signifi cant growth

of the Islamic market by increasing the capital access of

Islamic banks.

Honorable Mention: The Albaraka IPO and the Sharjah Islamic

Bank trust certifi cates also were top drawer equity transactions.



Rafflesia Capital (Khazanah Nasional)


page 28

In a year of widespread innovation,

Khazanah Nasional’s debut global

Islamic bond wins over impressive

competition. The deal represents the

world’s fi rst Shariah compliant exchangeable bond based

on the ownership concept of the underlying shares, whilst

preserving a typical feature of an exchangeable bond.

The transaction generated funds for Khazanah whilst

creating an opportunity for investors to convert their bond

units into shares of an underlying Khazanah controlled

company – Telekom Malaysia. The deal creates unique

business elements allowing investors to participate in a

fl agship company, and prospectively to convert into that

company’s shares, whilst having a direct obligation of

Khazanah, yet preserving Khazanah’s capacity to buyout

the position of the investors. This was not only a highly

creative transaction in its own right, but it was the largest

exchangeable instrument issued in Asia in 2006. Given the

diverse universe of government-linked entities in the Islamic

world, this deal established a useful role model for both

funding, and government-linked entity risk and portfolio


Honorable Mention: The PCFC Sukuk, Dubai Financial, and

Abu Dhabi Investment House structured trade Mudarabah by

Abu Dhabi Commercial Bank all represented signifi cant and

important innovations in the fi eld.


Al-Waha Petrochemical Project


page 30

Al Waha, despite many very good

entries, was well ahead of the pack. This

is believed to be the fi rst limited recourse

greenfi eld project in Saudi Arabia to be

fi nanced without any interest bearing commercial bank

debt, relying on funding from the shareholders and Saudi

government agencies, as well as the Islamic facility. In itself,

the Islamic structure is based on co-ownership of certain

project assets. Traditionally, project fi nance structures

have required a conventional loan tranche, and have

never enjoyed a completely Shariah compliant fund and

security package. Moreover, instead of applying Istisnah or

a forward lease, a Musharakah method was used, which

may recreate more deal fl exibility over the long term.

Honorable Mention: Aabar was an excellent runner up serving

for the corporate expansion of Aabar Petroleum in the ASEAN




East Cameron Gas Company (ECP)


page 32

This structured deal has everything:

a formerly bankrupt obligor, a

complicated capital structure to

replace, a participation in oil and gas

production and the fi rst approval of a traditional hedge for

gas prices. It is also the fi rst signifi cant US Sukuk to be issued

globally, and to be heavily acquired in the US market. East

Cameron is a tribute to the structuring skills of BSEC S.A. and

its ability to partner with a global brand to produce a highly

structured deal with attractive outcomes for the obligor

and the investors.



Pertamina (Persero)


page 35

Pertamina (Persero), the state-owned oil

company, is the fi rst Indonesian company

to tap the overseas Islamic fi nance

investor base. Its second syndication

attracted participation from several existing banks in the

fi rst syndication as well as new participants, representing

both Islamic and conventional banks. Competitively

priced, the fi nancing for oil imports during a period of high

oil prices eased the cash fl ow burdens of the buyer, and

further reinforced interest from the offshore Islamic investor

base in Indonesia.


Page 47

Deals of the Year 2006 Handbook

Deals of the Year Results (continued...)


Sohar Aluminum


page 36

Sohar is the fi rst Omani obligor to take

the Islamic market in a signifi cant way.

Oman has long been considered to

be the most diffi cult market for Islamic

fi nancial institutions to penetrate. This high profi le deal in the

local market led by Citibank should provide clear evidence

of the benefi ts of Islamic fi nance to local corporates.


Sitara Chemical Industries


page 40

This is the fi rst local currency Sukuk issued

by a local corporate in Pakistan and the

fi rst Sukuk issue for Standard Chartered in

the Pakistan market. This privately placed

Sukuk issue is structured on the basis of co-ownership of

assets (“Shirkat-ul-milk”), whereby Sitara Chemical Industries

(SCI) and the Sukuk holders will jointly own the fi xed assets

relating to SCI’s caustic soda plant. SCI will be appointed

as managing co-owner on behalf of the Musharakah,

pursuant to the management agreement. Further, SCI will

use the Sukuk holders’ portion of the Musharakah assets

in return for periodic rental payments linked to a known

benchmark and agreed threshold level of production, as

per the payment agreement.

Honorable Mention: Tuwairqi, WAPDA


Garanti Leasing


page 42

Turkey has long been viewed as an

important market for Islamic fi nance

and many important Islamic investors

have long standing projects in the Turkish

market. But, convincing leading Turkish fi nance houses

and corporates to seek fi nance structured on Islamic

principals has been challenging. Citibank’s arrangement

of a corporate fi nancing based on Murabahah for Garanti

Leasing is a signifi cant success in this line. Garanti is one

of the country’s most important fi nancial groups, and

their agreement to tap the Islamic market is hoped to be

a stepping stone for more widespread Islamic corporate

fi nance in Turkey.

Page 48

Dubai Financial is a subsidiary of Dubai Investment Group LLC (DIG). DIG is the global

financial investor of Dubai Holding. Headquartered in the Emirate of Dubai and with local

offices stretching from New York through London to Kuala Lumpur, DIG focuses on long and

short term investments with the potential to deliver exceptional and sustainable performance.

DIG is structured as a conglomerate of investment companies operating around core

expertise in the asset classes of Global Securities, Real Estate and Fund Management. Dubai

Investment Group has created and manages a diversified and rapidly expanding portfolio of

direct and indirect investments. It focuses on key sectors including Financials, Industrials,

Telecommunications and Hotels.

Dubai Financial (DF) evolved from a fund management entity to become the direct

investment vehicle for Dubai Investment Group. Its core practice is the identification and

acquisition of financial services companies, to build long term value through state-of-the-art


Identifying opportunities across the banking, foreign exchange, brokerage and asset

management sectors, Dubai Financial will reinforce the Group’s position as the principal

entity mandated to drive its activities in the regional and international markets.

Among its investments, Dubai Financial owns a 70% stake in Dubai Bank, 35% ownership

in Marfin Financial Group, a leading banking institution in Greece, and 68% of Thomas Cook

India Ltd., India’s leading Travel and Foreign Exchange house. Dubai Financial has, most

recently, acquired the rights of Thomas Cook in 15 countries in the Middle East including

UAE and Saudi Arabia.

Dubai • New York • London • Hong Kong • Kuala Lumpur

A subsidiary of Dubai Investment Group

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