Cementing Islamic firsts in Jordan
In July 2008, BNP Paribas closed a US$113mn cross-border financing in support of a greenfield cement plant and a 50MW captive power plant in Jordan. The funds were raised on behalf of Al Qatrana Cement Company, a subsidiary of Saudi-listed Arabian Cement Company.
This financing is one of the first export credit agency (ECA)-covered Islamic murabaha financings. It is also the first facility to be covered by the Finnish ECA Finnvera as well as the first Islamic multisourced ECA financing with participation from two ECAs.
The transaction sets a further benchmark by being one of the few ECA transactions closed in the Kingdom of Jordan, as well as the first cross-border financing transaction for Saudi Arabian Cement.
Commenting on the significance of this deal, Chahid Jarmouni, vice-president, structured finance, Gulf and Middle East, BNP Paribas, remarks: “In terms of debt capital markets, this transaction is a sizeable one and among the three largest ones done in Jordan over the past two years. In terms of ECA financing, as far as we know, this has been the first one for many years in the country. We hope this milestone financing (ECA cover, islamic compliant and structured financing) in the Jordanian market will open it to new sources of financings for a country with numerous developments and strategic growth opportunities.”
The project sponsor, Arabian Cement, is one of the main cement producers in Saudi Arabia. When looking for financing options to fund its greenfield cement project in Jordan, it showed interest in ECA-backed financing to fund commercial contracts signed with German cement line supplier KHD and Finnish power generator manufacturer Wartsila.
To address the sponsor’s requirement to have a sharia-compliant structure, BNP Paribas came up with an innovative structure that enabled ECAs to cover the various murabaha facilities.
The deal consists of three asset-type murabaha master facilities to support the equipment imports. There are also two associated commodity-type murabaha master facilities raised to fund costs not eligible for asset murabahas such as local services and ECA premiums.
Under the terms of financing agreements, there is an embedded interest rate hedging solution arranged by BNP Paribas to meet the sharia constraint of a fixed profit rate to lock in the sale price at the time the murabaha trade is made.
There is a also a separate sharia compliant forex forward agreement which aims to provide Al Qatrana with a hedging solution against the euro/dollar forex risk by locking in a single euro/dollar forward rate for all transactions from the outset.
This agreement is in place given that payments to the suppliers are due in euros while the murabaha financing facilities are denominated in US dollars to take advantage of the Jordanian dinar pegged to the US dollar.
A murabaha is an Islamic financing tool whereby the financing bank purchases an asset from an equipment supplier, such as power plant equipment, against a certain cost price, and then sells it to the purchaser with immediate transfer of title but deferred payment of a sale price. The sale price consists of the cost price plus a mark-up or profit, given that the collecting of interest is prohibited in Islamic financing.
According to Islamic principles, there has to be an underlying tangible asset in a murabaha financing. Yet the contracts for the power plant in Jordan also included services related to installation and supervision.
Therefore, a separate commodity murabaha facility to finance these intangible services was required. In addition, the export credit insurance premium due to Finnvera was not eligible under the terms of the asset murabaha.
In a commodity murabaha scheme, the financing bank and purchaser sign a deferred payment-based commodity trade through commodity brokers in an amount corresponding to the borrower’s funding needs.
Instead of equipment or machinery, the underlying asset would be a tradable commodity.
Borrower: Al Qatrana Cement Company
Amount: US$113mn (total project costs US$345mn)
Mandated lead arranger: BNP Paribas
ECAs: Euler Hermes and Finnvera
Law firms: Herbert Smith (lenders); Simmons & Simmons (borrower)
Tenor: 7 years
Date signed: July 2008