In early March, Saudi Aramco and Sumitomo Chemicals wrapped up financing arrangements for a $9.9 billion petrochemical plant in the coastal city of Rabigh, marking the largest project financing to date in Saudi Arabia. Just as significantly, the funding package also included the largest-ever long-term Islamic finance tranche for any project financing in the Middle East.
But the Rabigh complex is only the latest project in the region to incorporate Islamic financing, underscoring the boom in the Islamic finance market. As ever-larger infrastructure development projects proliferate across the Middle East, Islamic financing is becoming an increasingly important component of the funding packages.
Craig Nethercott and Mohammed Al-Sheikh, co-heads of White & Case's Islamic Finance practice, and Christopher Cross, one of the lead partners on the White & Case team that advised Saudi Aramco on the Rabigh plant financing, share their views on the factors driving the growth of Islamic financing and the outlook for the future.
Q: The Rabigh petrochemical project included the largest long-term Islamic project financing to date in the Middle East. How significant a development is this?
Craig Nethercott:The deal is significant in a number of respects. It's the first time, to my knowledge, that a significant long-tenor Islamic tranche has participated in a multi-sourced financing in Saudi Arabia – where the Hanbali school of Islamic jurisprudence is followed.
Traditionally, Islamic finance institutions have been concerned with the pricing and tenor of the big sponsor project financings. The Islamic tranche also saw the participation of Bank Al Bilad – a newly-established Islamic institution – and the Islamic Development Bank. Both institutions delivered incremental additional lending capacity to the project.
Christopher Cross:Given the success to date and the profile that the Islamic institutions have earned, we would also expect to see these institutions develop other financial instruments over the next few years to manage their significant positions in deals such as Rabigh. So, while project financings are a real spur to activity, other products and opportunities will result.
Q: Aside from Rabigh, what other recent major project financings have included an Islamic tranche, and can we expect more to come?
Mohammed Al-Sheikh:To name but two, the financings for a roughly $2.4 billion aluminum smelter complex in Sohar, in Oman, and the groundbreaking Qatargas II LNG project each contained significant Islamic finance participation.
The Sohar structure contained the first project finance Islamic facility in Oman, while at the time it closed, in late 2004, the Qatargas II financing was not only the largest long-term Islamic project financing but also the first for either Qatar Petroleum or ExxonMobil, the sponsors of the project.
On the basis of recent activity and market appetite, we can certainly expect more of the same, with the only change being that the average size of such Islamic facilities is likely to become larger.
Craig Nethercott:The key to growth of Islamic finance participation in significant projects will be the development of products to allow institutions to more easily digest the long tenor deals. Also, I would expect to see greater interest in transactions when pricing recovers – pricing on the mega-deals in the Middle East is currently at historically low levels. At such low levels, it's difficult for some institutions to participate. Historically – with few exceptions – there has been very little cross-border Islamic lending. Qatari institutions have participated in Qatari transactions and UAE-based institutions have participated in UAE transactions. I would expect to see more cross-border activity in the future.
Q: Why has the use of Islamic finance rocketed in recent years?
Christopher Cross:Growth in Islamic financing is being driven by a number of factors. General consumer demand for Sharī'a-compliant financial services and products, both at a retail and institutional level, is growing rapidly. In addition, sustained high oil prices have further increased the impact of oil wealth in the Gulf region and increased demand for suitable investment vehicles.
Furthermore, virtually every Gulf economy is investing in upgrading its natural resource development and industrial infrastructure, usually using project finance structures to fund the investment. The cost of these projects often numbers several billion dollars, and now that Islamic financing components in these project financing structures have become familiar to the market, they are growing rapidly in size.
On the financial institution side, the growth of available liquidity in the Gulf region has supported the creation of more regional Islamic lending capacity. Craig pointed out several examples earlier. In addition, a number of international lending institutions have seen real benefits in expanding into Islamic lending – and this allows them to increase their participation, alongside their commercial tranche, in mega-projects. Rabigh is a recent example of this.
Q: With all this growth, are there any numbers tracking the proliferation of Islamic financial institutions?
Christopher Cross:Yes. As a matter of fact, according to a recent study by the International Monetary Fund there are now more than 300 Islamic finance institutions worldwide – compared with only one in 1975 – with assets estimated at more than $250 billion. These assets are estimated to be growing at more than 15 percent annually.
Q: Aside from what was been happening in the world of project finance, what have been the most recent significant developments in Islamic finance?
Mohammed Al-Sheikh:It's hard to single out any one particular recent development as the most significant in Islamic financing. There are a number of recent innovations that reflect the growing maturity of the market. For example, Dow Jones Indexes and Citigroup recently announced that they'll launch the first index to track the global performance of Islamic bonds, or sukuk. In fact, the sukuk recently launched by the Ports, Customs and Free Zones Corporation of Dubai, weighing in at a mighty $3.5 billion, shows just how far the market has come.
Christopher Cross:From a project finance perspective, we would expect to see an Islamic bond/sukuk tranche becoming an attractive feature of financing plans in the near term in the Middle East.
Q: Are any countries in particular leading the development of Islamic finance?
Craig Nethercott:It would be unfair to single out any country in particular as leading the development of Islamic finance. Certainly in the Middle East the Umm Al Naar and Shuweihat transactions in Abu Dhabi broke some significant ground in incorporating Islamic finance tranches in big projects. Each of the Qatargas II transaction in Qatar and the Sohar smelter transaction in Oman certainly benefited from some of the structures developed in the Abu Dhabi transactions. However, there is significant support throughout the Middle East for the development of Islamic finance participation in transactions. There is a deep well of funding available – countries throughout the Gulf have enormous, capital-intensive development plans – and Islamic finance is an obvious and popular resource to draw upon.
Q: White & Case recently announced the formal launch of an Islamic Finance unit. Why was this?
Mohammed Al-Sheikh:White & Case has been advising on Islamic financing issues for years, but as an institution we hadn't formalized these capabilities to the outside world, and we made the decision to do so, given the rapidly increasing interest in Islamic finance that we've seen across our client base. We wanted to provide a clearer picture of what we do to both current and future clients. With a team comprising twenty-five lawyers throughout our global network of offices, primarily based in our London, New York, Paris, Riyadh and Washington, D.C., offices and drawn from our asset finance, banking, capital markets, corporate and project finance practice groups, we think we've got most bases covered.
Craig Nethercott and Christopher Cross are, respectively, London- and New York-based partners in White & Case's global Energy, Infrastructure and Project Finance practice.
Craig Nethercott has worked on a variety of project finance, banking and trade finance transactions in the Middle East, Africa and Asia in the oil and gas, mining, energy and infrastructure sectors. He was previously resident for White & Case in Saudi Arabia for over a year and a half, where he was involved in project finance,Sharī'a and corporate transactions.
Christopher Cross has worked on a wide range of commercial, joint venture, merger and acquisition and project financing transactions in the Middle East, Europe, the United States and South America, concentrating on the oil and gas, energy, infrastructure, and transportation sectors.
Mohammed Al-Sheikh heads White & Case's Riyadh office through the Firm's association with the Law Office of Mohammed Al-Sheikh. He is engaged in general corporate practice and concentrates in particular on international commercial and financial transactions, including privatization, telecommunications, project finance, energy and cross-border projects. He joined White & Case from the World Bank.
Craig Nethercott and Mohammed Al-Sheikh are also co-heads of White & Case's Islamic Finance unit.