HSBC and SABB pull off landmark sharia-compliant deal in Indonesia

As Islamic finance continues to extend its boundaries, Indonesian mobile telecoms operator Axis has laid down a few more milestones with its recent multi-tranche $1.2bn financing. This was the largest-ever sharia-compliant deal in Asian telecoms and the biggest in Indonesia’s private sector. It was also the first Islamic outing for Sweden’s export credit agencies, as well as for China Development Bank.

Axis, which received its licence in 2008, is owned by Saudi Telecom Company (STC) and Malaysia’s Maxis Communications, in which STC also has an indirect interest. STC recently upped its Axis stake from 51% to 80% and now fully consolidates the firm’s results, which included a doubling of revenues in 2010.

STC is the largest operator in its home market and, while listed on the Tadawul, is 70%-owned by the Saudi government. It has been building an international presence over the past five years and has interests in another nine countries – in and around the Gulf as well as in Turkey, South Africa and Malaysia. 

Positive outlook

STC has high hopes for the Indonesian market, where mobile and internet penetration rates have been growing steadily over the past few years. Half of the population is under the age of 30, providing the perfect profile for growth in phone usage and social networking. As a reassuring backdrop, Standard & Poor’s bumped up Indonesia’s BB credit rating to BB+ in April, with a positive outlook. Some expect it to rise to investment grade by next year.

Apart from being one of the last underdeveloped mass telecoms markets, Indonesia appeals to STC as the home of the world’s largest Muslim population, with strong links to Saudi Arabia. Saudi is host to a large population of Indonesian expatriate workers, and hundreds of thousands of pilgrims travel from Indonesia to Mecca each year. Right now, Axis is concentrating less on revenues and market share and more on building out the infrastructure required to ensure efficiency and enable user penetration. Having relied in part on a roaming agreement with another network, it will more than triple its population of communications towers in the next three years. Hence the need for finance.

Right relationship

STC turned to HSBC and its Saudi affiliate, Saudi British Bank (SABB), to do the groundwork. “It needed a relationship bank that understood it, and one with multi-jurisdictional and multi-product capability,” says Rajiv Shukla, HSBC Saudi Arabia’s head of global capital financing. The relationship seems to be in good working order elsewhere in the STC empire. Earlier this year HSBC Bahrain arranged $100m of a $280m seven-year Islamic facility for the group’s Bahraini telecoms subsidiary, VIVA. Saudi’s Samba Financial Group was responsible for the other $180m.

Axis’s needs were altogether greater. “It made sense to follow the model laid down by other sponsors and split the funding requirements into vendor finance and a commercial tranche,” explains Muhammad Farhan, head of Islamic finance at HSBC Saudi Arabia. The resulting deal, which amortises over seven-and-a-half years, is in three parts.

The first is a $450m loan facility arranged by Deutsche Bank and HSBC and underwritten by Deutsche and HSBC’s Saudi affiliate, Saudi British Bank (SABB). When Ramadan began at the start of August, it was still being syndicated, with the bulk of it expected to go to Middle Eastern banks, though a certain amount of Asian interest was also evident.

Next is a $400m facility for equipment purchases and civil works from China’s Huawei Technologies, underwritten by China Development Bank. Finally, there is a $350m facility for equipment purchases from Sweden’s Ericsson, funded by the Swedish Export Credit Corporation and backed by the Swedish Export Credits Guarantee Board. So far, so straightforward. Except that, as a Saudi entity, STC regarded it as extremely important that each tranche was compliant with sharia law.

This added layers of complexity, particularly as some of the parties had never participated in a sharia-compliant transaction before. The fact that discussions were first broached in the latter part of 2009 shows that there was no quick turnaround on this one.

“STC took the lead in the funding requirements for the roll-out,” says Mr Farhan. “It decided to raise the funding in Saudi Arabia, which is familiar with STC as a strong sponsor. Given STC’s credibility and the size of liquidity available locally, it was seen as the best choice.”

Flexible conditions

The commercial tranche took the form of a dual currency murabaha facility, effectively a sale of goods at an agreed price. An unusual feature is that, while the currency tranches are initially set at SR844m and $225m, they are resizeable, in response to the client’s desire for flexibility. “This means that the client can resize the tranches to draw in another currency, depending on liquidity, and can also accommodate any of its relationship banks that may want to join the facility later,” says Mona Altawil, HSBC Saudi Arabia’s head of debt capital markets syndication.

Changing local liquidity conditions may have influenced the client’s request. “Local banks are flush with Saudi riyal liquidity, and not US dollar liquidity, at the current time,” says John-Paul Way, head of SABB’s global banking division. “That’s a relatively recent phenomenon.”

Another significant element of the commercial tranche, as a cross-border transaction, was the provision of a political risk guarantee in relation to Indonesia from the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

MIGA’s participation in itself tends to reduce risk capital ratings and, in this case, allows lenders to allocate risk and reserve requirements in terms of the financing country rather than the host country. “That’s good for the client, since the political risk guarantee also means we can price relative to the benchmark of the financing country,” points out SABB global relationship manager Naif Alsudairy.

MIGA has issued guarantees for sharia-compliant transactions before now, but in this rare instance the guarantee itself was sharia compliant and approved as such by the sharia committee. “The MIGA guarantee is placed as an option for participating banks,” says Mr Shukla notes. “If the bank wants the benefit of the risk rating, it can opt in. If not, it can opt out.”

Learning curve

Sharia compliance for the vendor financing tranches imposed a steep learning curve for those involved. Export credit agencies have strict criteria on the treatment of late payments, for example, and yet sharia law insists that the ‘lender’ should gain no additional profit from a late payment situation. That was only one of many issues that had to be addressed and dealt with in the documentation to the satisfaction of Islamic scholars.

“The Swedish export credit agencies had a lot of questions and concerns,” Mr Farhan acknowledges, “and the persistence and persuasion of STC was critical. But they were open-minded. Everyone was willing, though it was a lot of work.”

China Development Bank was similarly new to the demands of sharia law, and the Huawei vendor financing had to take careful account of Chinese regulatory requirements if the bank was to be involved. One of its legal advisers noted that the deal should go a long way to helping Chinese banks understand the risks and rewards of Islamic finance, and could well open a new path for outbound finance from China.

As well as being a first for the Swedes and for China Development Bank, the deal represents the largest sharia-compliant export credit agency facility to date, anywhere. Among other superlatives, it involved the largest compliant hedge ever undertaken by an Asian corporate and was, all told, the biggest ever telecoms financing in Indonesia, Islamic or otherwise.

“Islamic finance continues to be a viable market-based alternative for clients,” says Fahad Alsaif, HSBC Saudi Arabia’s head of debt capital markets. “Its growth can be seen not only in terms of products and geographies but also in types of financiers – now including commercial banks, export credit agencies and multilateral institutions.”