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Saturday, 28 July 2007

Saudi Arabia's Sukuk Market Poised to Take Off

"Saudi Arabia's fledgling sukuk market is beginning to take off, with deals increasing in size and asset pools increasing in sophistication," explains Andrew Coats, partner at City-based international law firm Clifford Chance, to Arab News. Clifford Chance are acting for the lead arrangers in two current transactions - the stand-alone SR5 billion issuance announced yesterday by Saudi Electric Company (SEC) which matures in 2027; and the second issuance by Saudi Basic Industries Corporation (SABIC) which is in the process of finishing its book-building exercise, before announcing the final value of the issuance. The Capital Market Authority (CMA), however, a few days ago did raise the ceiling cap for domestic sukuk issuances from SR5 billion to SR8 billion. Both issuances are pioneering new asset pools that are being securitized. In the case of SEC, the primary supplier of electricity and the fourth largest company by asset value in Saudi Arabia, the specified pool of assets are "SEC's rights under the Council of Ministers Resolution 169 relating to electricity-related supply and licensing to maintain and read electricity meters and the distribution of bills, and the related entitlement to levy and receive charges for these services." The specified asset pools covers hundreds of thousands of numbered electricity meters throughout Saudi Arabia. "This is a ground-breaking transaction, not only in terms of size, but in terms of transaction structure, with the sukuk assets consisting of SEC's meter reading and maintenance tariffs relating to a specified pool of electricity meters," adds Coats. In the case of SABIC, the pool of assets comprises payment entitlements under marketing agreements, which SABIC has with petrochemical producers. SABIC has transferred a percentage of these rights and obligations into the sukuk through a similar custodian structure, SABIC, Sukuk LLC, a wholly owned subsidiary of the issuer. The SABIC Sukuk II matures in 2027, although sukuk-holders will be entitled to sell the sukuk to the issuer at the purchase price at the end of every five years. The margin of the sukuk has been fixed at 38 basis points over SIBOR. The sukuk, which has a minimum subscription of SR50,000, will be listed on the Tadawul with a further listing possible at a later stage on the DIFC. Both issuances, which are essentially public offerings under the new CMA regime, do not involve any special purpose vehicle (SPV) structure. According to Coats of White & Case, which together with its associated Saudi Arabian firm, Al-Jadaan Law Firm, acted for the sole lead manager HSBC Saudi Arabia Limited, the SEC sukuk issuance was publicly offered in Saudi Arabia and heavily oversubscribed, and is the largest sukuk or bond issuance by a Saudi Arabian entity to date. It follows the SR3 billion domestic sukuk issued by SABIC in September 2006, the first such issuance in the Kingdom, which was confined to Saudi investors, following the adoption of a stand-alone Sukuk Law in Saudi Arabia. The latest SABIC issuance is similarly based on a pool of assets comprising specified payment entitlements under marketing agreements, which SABIC has with petrochemical producers. - (MenaFn, 28 July 07)

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