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Sudanese Sukuk

March 2007
Alpen Capital makes history with Sudan's largest offshore borrowing. Mike Gallagher reports on the landmark issuance.
Sudan, the largest country in Africa and potentially one of the wealthiest, has a rich colonial past and less glorious present, ravaged as it has been by decades of civil war and several famines. It effectively operated as two separate entities, separated by resources and religion and was generally ignored by everyone until word started to slip out that oil had been found.

Then things started to change. Foreign direct investment began pouring in, initially from European and American oil companies and latterly from Chinese and Indian firms that have been looking to capitalize on the large deposits of precious resources the country has in abundance beneath its scorched plains.

Sudan has a long and well-earned reputation in Islamic finance. Many of the landmark innovations in Shari'ah funding have come from Sudan and it always had a very progressive attitude when it came to Islamic finance.

But apart from that, not a lot has been going on. A few foreign Islamic banks have been circling, looking for opportunities, but have been wary about becoming too involved in the notoriously volatile country, lest they get their fingers burned. Global Investment House recently bought a bank there, but it is early days.

So when word emerged that a Sudanese company called Berber was looking to raise capital to finance the construction of a new cement plant, people started to take notice and Alpen Capital , a Dubai-based investment bank was quick to realise the potential.

Alpen Capital took a long hard look at the options and decided that a Sukuk offering seemed to make sense and quickly got its team together. The total capital needed to finance the construction of the plant was thought to be in the region of $200 million and Alpen decided that it would be advantageous if they raised it by splitting the offering into two tranches. One locally based in Sudan and another to be offered to interested parties in the GCC region.

Sanjay Vig, the executive director from Alpen Capital gave an insight into the company and the history.

" Berber cement is a company created by four shareholders from the Middle East and two from Sudan. They decided to create a cement company because Sudan today is a phenomenal market where 90 per cent of cement requirements are being imported.

The Arab Investment Company Saudi Arabia, Islamic Cooperation for Private Sector Development and National Holding Company own 40 per cent of the company. Then there are two large Sudanese companies called Danfodio and High Tech that own 40 per cent." National Cement UAE, which is part of the Al Ghurair group that created this company holds 20 per cent of it.

The proposed plant has an estimated capacity of around 4,800 tonnes per day and its attraction became obvious when the government of Sudan gave them land and mining rights in the city called Berber, located north of Khartoum.

"The projected cost," Vig said "is estimated at $200 million, out of which equity is $70 million and the debt component is $130 million. Alpen Capital was mandated by Berber Cement to advise and raise the $130 million." Because the project was in Sudan and some of the shareholders were Islamic, Alpen believed the transaction would succeed if it was Islamic.

"So from that perspective we spoke to Liquidity Management Centre Bahrain , ( LMC ), which effectively has four shareholders," Vig explained. LMC is owned by Kuwait Finance House , Bahrain Islamic Bank , Dubai Islamic Bank and the Islamic Development Bank (IDB) and was created for the purpose of promoting Sukuk. So Alpen Capital gave the transaction to LMC to structure the transaction.

Alpen Capital thought that it would be better for everyone involved if they decided that the finance period required should be seven years. Alpen estimated that it would take two years for the project to start commercial production and that it would take five years for repayments to finish, post production.

"Now you know how the banks see Sudan from a risk perspective; so we spoke to the promoters and they agreed to guarantee the debt, pro rata as per their shareholding. So Alpen Capital decided that if that is the case, if we try to sell Sudan cement in the Middle East, it will not work."

Alpen structured the Sukuk in such a way that 60 per cent of the financing would be guaranteed by the GCC shareholders and 40 per cent of the borrowing would be guaranteed by the Sudanese shareholders.

"So we have broken the transaction up," Vig said. "The 60 per cent section will be the GCC tranche. The intent was to sell it to the GCC so that it would be guaranteed by GCC shareholders, effectively mitigating the cross border risk. We knew that would make the Sukuk much more marketable to GCC investors and this transaction has already been oversubscribed.

We closed the book the moment it went to 120 per cent because the banks were adamant that they would like to hold the portion that they had provided the commitments for. So there was no reason to go to syndication.

Now we are in the process of closing the Sudan portion of $52 million. Sudanese banks are currently evaluating it and we are quite confident that within a fortnight from now we should have approvals available for this particular portion. We already have principle commitments and now those institutions are seeking their board approvals and credit committee approvals to provide their commitments on this account."

Vig has been going to Sudan for over six years and says he has seen phenomenal changes and described the country as being in the middle of an economic boom. GCC investors are known to have been keeping a close eye on the country for a long time and Vig said "the investors decided that it made a lot of sense to set up a cement plant there because Sudan is effectively importing 90 per cent of its cement requirements. The entire plant is only being commissioned for domestic consumption and it does not have any plans to export cement because the local demand is so strong."

Vig said that Berber Cement feels it is too early for them to talk about expansion, but they feel the marketability of the cement would never be a problem because it is a completely new plant.

Berber has hired an Indian company called Development Consultants Private Limited to supervise the civil engineering plans and also has brought in a Chinese company called CNBM to build the contract on a turnkey basis, "so the project has in a sense been handed over," Vig said. "I would say that they are already in the process of development and advanced payments have been made, so as far as the promoters are concerned they have committed to the project."

This project is situated on the river Nile and has a limestone crushing plant situated on the western bank of the river in what is widely considered to be a reasonably sized project.

The cost savings come from the fact that Berber Cement will be an integrated plant. It will not have to import the raw materials because it has acquired the mining rights which are guaranteed for 35 years and the mine is situated opposite the plant, which cuts down on logistics costs and raw materials will be delivered straight from the mines to the plant.

The current capacity of cement plants in Sudan is only about 500,000 tonnes, whereas the overall demand could rise up to 4 million tonnes over the next few years, according to Vig.

"Now once we have the financing arranged there will be financial closure; but the very fact that the promoters have gone ahead and committed well before financial closure, goes to indicate their belief in the plant and their commitment to the project. They are of the view that even if they find that if there are any gaps in the financing which is not anticipated, they would be willing to bridge the gap," Vig explained.

"The point is that all these parties are people who have other investments in Sudan or are otherwise very strong supporters of the country. The Al Ghurair Group has other investments in Sudan, while the IDB is otherwise there in its support of development in the country. It has a kind of an infrastructure touch to it in the sense that it will contribute to the infrastructure development of the country, but as far as ambition is concerned? There is already a huge capacity there and the demand is already there and it is only going to contribute to that demand."

Vig admitted that Alpen Capital have already been sounded out by a lot of other companies who have been looking at investing in Sudan and said that they are very keenly watching the structure and the success of the financing, making the Sukuk a landmark transaction from any point of view.

© Banker Middle East 2007