Saudi Aramco, the world’s largest oil and gas producer and also the world’s most valuable company by assets, in its first-ever debt sale has chosen a hybrid sukuk to kick off a series of large domestic offer of riyal-denominated Islamic bonds.
That leads to the question: What is a hybrid sukuk? What are its benefits and why would an oil giant such as Saudi Aramco choose an apparently highly complex debt structure for its first issuance?
Against what would probably first come to mind, a hybrid sukuk is not a combination of a normal sukuk and a conventional bond. That way, the debt instrument would immediately loose its Shariah-compliance.
On the contrary, a hybrid sukuk – also called mixed-asset sukuk – is a structure in which the underlying pool of assets consists of two or more Islamic finance contracts that can comprise of istisna, murabaha, mudaraba and Ijarah at the same time and in the same structure which is then called hybrid.
Such a structure allows the issuing company or entity to take into account the diversified demands of various investors, allowing for a wider portfolio of assets classes that, in turn, aim at a greater mobilisation of funds.
In short, a hybrid sukuk is used when a broad range of possible investors is being addressed and when there are hopes that as much money as possible will be raised – which, by the way, gives an indication how desperately Saudi Aramco is seeking to balance its finances in the current low oil price environment.
Reportedly, the first Saudi Aramco sukuk is expected to fetch up to $2bn of fresh money, and it’s just part of a whopping $10bn sukuk issuance programme launched by Aramco to tap new sources of finance ahead of its planned partly stock listing next year.
As per its hybrid structure, at least 51% of the Aramco sukuk’s raised funds would be used in a mudaraba agreement, a profit partnership in which one partner provides capital and the other provides labour and/or business and management expertise. The proceeds of this part of the hybrid sukuk could be invested in Aramco’s operative business and used for general corporate purposes. The remainder of the funds comes from a murabaha facility which could be used to buy or finance through a special purpose vehicle, normally an intermediary bank or asset manager, tangible assets such as machinery, corporate property, commodities, products and services.
Basically, the concept compares to a conventional securitisation structure where debt receivables are sold to a special purpose vehicles, which issues bonds for investors to finance the structure.
The particular 51:49 share in Saudi Aramco’s new hybrid sukuk is owing to the necessity that the majority of the sukuk must be normally made up of tradable Islamic contracts such as mudaraba to allow the entire sukuk to be traded on secondary markets. However, there have been cases where even a minority of 30% of tangible assets included in the pool of assets has been accepted by the relevant Shariah scholars.
“Hybrid sukuk are among the favourable emerging type of sukuk in the Islamic capital market worldwide,” says Hafas Furqani, scholar at the International Shariah Research Academy for Islamic Finance, or ISRA, in Kuala Lumpur.
“It is viewed as one of the innovative products in the Islamic capital market compared to the plain vanilla sukuk structures that are basic and standard, which do not add value such as the option to exchange or convert into equity at a specified time,” he adds, pointing at the characteristics of a hybrid sukuk of holding both debt and equity. This grants the sukuk holder the right to convert his sukuk certificates to shares or equity ownership of the issuer, in this case Saudi Aramco, which makes a perfect case for the oil giant’s upcoming initial public offering.
In other words, a hybrid sukuk has much of the characteristics of a reverse convertible bond used in the conventional financial world, and is additionally Shariah-compliant.
Furqani expects that amid ongoing capital markets uncertainty, companies will continue to look at hybrid sukuk structures as part of their infrastructure funding options. Nevertheless, their complexity could be an obstacle since it is sometimes difficult to obtain Shariah approval, and there could be regulatory and taxation issues in some countries that need to be resolved.
Originally published on www.gulf-times.com