Sabic Sukuk Ii: Case Study

3.1 Case Background.

A corporation may issue against the loans contracted by indivisible Islamic bonds of equal value. According to regulation of companies, Sukuk may be issued only in accordance with the following conditions:

- That the issuance of Sukuk be authorized in the company's bylaws.

- That a regular, general meeting adopts a resolution for their issuance.

- That the company's capital be paid up in full.

- That the value of the Sukuk issue does not exceed the value of the aid-in capital. [5]

The SABIC Sukuk has to also be approved by a Shariah Committee of a Saudi bank, which in this case is the SABB Amanah Shariah Supervisory Committee. It will be the first to be admitted on the official list of the CMA to assure transparency and to clear the vision for the investors, the first fully tradable Sukuk to be issued in the Kingdom, and the first to be settled and cleared through Tadawul (the Saudi Stock Exchange). The Sukuk will establish a template for other Sukuk and non-equity capital market issuances, thereby further facilitating innovation and economic growth in Saudi Arabia. Initially, issuance will be limited to financial institutions and major companies. Individuals, however, may participate through various bank investment funds. Other issuances will expand to cover individuals directly following the completion of essential mechanisms of the component authorities. The SABIC Sukuk is unique in many ways and with minimal risks. It is directly underpinned by a financially sound world-leading company with diversified investments in basic industries. SABIC has increasingly begun utilizing Islamic financing techniques for its fund raising. Sukuk demonstrates SABIC's continuous commitment towards developing the scope and breadth of Islamic financing. The SABIC Sukuk further demonstrates its events and activities to diversify the sources of finances for its investment projects, which will contribute to developing the Saudi capital market and help develop the Saudi economy. [5] [7]

SABIC launched the second issuance of Sukuk in July 2007 of a total amount up to SAR8 billion, SAR-denominated, 5-year effective tenure with bullet repayment plus 38 basis point (bps), as a margin paid quarterly. The minimum value set for each of these Sukuk is SAR 10,000. The minimum subscription shall be SAR 50,000 (10 Sukuk per subscriber). If the amount is greater than SAR 50,000, it will be calculated in multiples of SAR 10,000. The lead manager and book runner for this pioneering issuance is HSBC Group and Riyadh Bank. [7]

The major differences between the 1st and the 2nd issuance are:

- GCC-wide distribution

The 1st issuance was restricted to Saudi Arabia; however, the 2nd issuance may expand to GCC.

- Smaller Minimum Subscription Amount

It can be realized that 2nd issuance is more flexible comparing to the 1st one with the minimum subscription was SR 500,000 and the minimum value set for each Sukuk was 50,000. [7]

3.2 Study Objective

The objective of the case study is to analyze Petrochemical industry, why this Sukuk issuance, and the structure that chooses SABIC Mudaraba Sukuk.

3.3 Why does SABIC's Sukuk issuance for?

■ Diversify financing sources

- Adds diversity to financing strategy

- Repeats issuance as 2nd version

- Costs effective financing

- The 2nd issuance supports Capital expenditure

■ Contributing to the development of the non-equity (fixed income) capital market

- Continue a pioneering and innovative issuance

- Bring the highest global standards

- Setting templates for Saudi corporates

■ Portfolio diversification for investors

- Alternative non-equity instrument, balancing portfolios

- New asset class

- Benefits to public through holdings by Pension, Thrift plans, Mutual funds

- Trading or long-term hold

■ SABIC remains committed to

- contributing to the development of the Kingdom's financial and capital markets

- Promoting Islamic Finance

■ Growth prospects for Saudi petrochemicals remain fundamentally strong

■ SABIC is:

- Well-poised to meet the global industrial challenges

- Set to diversify its product portfolio and enhance its global standings.

■ SABIC takes the lead in

- Contributing to the development of the Kingdom's capital market

- Providing diversified investment opportunities for investors in the Kingdom. [3] [7]

3.4 Petrochemical Industry

Perspectives on its future growth and potential in the Kingdom, the Kingdom of Saudi Arabia in particular and GCC in general, emerging as the strategic hub for global petrochemical industry.

SABIC has many advantages to rationale for growth:

- Feedstock cost advantage

- Central geographic location

- A state-of-the-art infrastructure

- Solid marketing platforms

- Liquidity for project finance

- An admirable industrial harmony

- A sound macro-economic landscape [3] [7]

This chart shows the net income according to sales and can be realized that SABIC is the most profitable petrochemical player.