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Deals of the Year 2006 Handbook Sitara Chemical Industries Privately Placed Sukuk Issue Standard Chartered Bank acted as the mandated lead arranger and sole bookrunner for a PKR1,100 million (US$18.3 million) local currency Sukuk issue for Sitara Chemical Industries. This deal was completed in June 2006 and boasts double market rsts in Pakistan: • First local currency Sukuk issued by a local corporate in Pakistan. • First Sukuk issue for Standard Chartered in the Pakistan market. Sitara Chemicals is one of Pakistan’s leading companies, playing a vital role in the promotion of Islamic banking in the country. Sitara Chemical Industries (SCIL) is the largest entity of the Sitara Group in Pakistan and is the market leader in the manufacture of Chlor-Alkali products with membrane technology. SCIL was incorporated in 1981 and began producing caustic soda in 1985. The plant’s capacity was gradually increased over the years to the current level of 545 metric tonnes a day. In addition, various by-product facilities have been added and expanded to cope with growing demand. The company entered into the textile spinning business in 1995. Its specialty chemicals and export division was established in 2001 and the agri-chemicals division was added in 2003. SCIL has been striving for many years to get out of conventional interest-based nancial arrangements. The company issued Musharakah term nance certicates (MTFCs) at the end of 1999, and the proceeds were used to repay the single interest-based long-term facility then outstanding, which was otherwise repayable in installments by the end of year 2007. Since the rst issue of MTFCs, the sponsors of the company have achieved complete Islamization of their nancial dealings. The recent nancing of the expansion project through a PKR1.1 billion (US$18.12 million) local currency (LCY) Sukuk issue was another milestone for the company, as well as for Pakistan’s Islamic banking industry. The structure and documentation of the Sukuk issue was approved by Standard Chartered Bank’s Shariah Supervisory Committee, which includes the two well-known scholars, Sheikh Nizam Yaqubi and Dr Abu Sattar Abu Guddah. The Sukuk issue had a tenor of 5 years and was structured on the concept of Shirkat-ul-Milk, wherein the participants/ certicate holders, after acquiring benecial ownership of the project assets, entered into a Musharakah agreement with Sitara Chemicals. The certicate holders provided their share of the Musharakah assets to Sitara Chemicals in quarterly rent payments. The rent payments were benchmarked to KIBOR in addition to an agreed margin and an incremental rent amount based on actual production. Page 40 At the same time, Sitara Chemicals provided a one-way purchase undertaking to the trustee (acting on behalf of the certicate holders) to periodically purchase the certicate holders’ share in the Musharakah so that the ownership of the Musharakah assets is completely transferred to Sitara Chemicals at the end of 5 years from the date of issue. The concept of Sukuk is based on the premise that any Islamic nancing contract representing ownership in a tangible asset can be bought or sold, and hence can be securitized in the form of tradable securities. The Sukuk issued to date in the GCC region have used Special Purpose vehicles (SPV) as the issuing entity, where the ownership of the assets remains with the SPV and the SPV issues the Sukuk certicates to nance the investors’ contribution in the assets. “Since the rst issue of Musharakah term nance certicates, the sponsors of the company have achieved complete Islamization of their nancial dealings” The SCIL Sukuk issue differs from the capital market Sukuk issued in the GCC region to date, mainly because it does not involve the formation of an SPV, because the capital markets laws in Pakistan presently do not allow SPVs to acquire/own the benecial or legal title of tangible assets. In SCIL’s case, a trustee was appointed to act on behalf of the participating banks (Sukuk holders). The Sukuk certicates have been issued by SCIL as the issuer which represents the certicate holders’ share in the Musharakah assets. The legal title and ownership of the Musharakah assets remains with SCIL, however, the benecial ownership is shared by both SCIL and the trustee (acting on behalf of the certicate holders). The SCIL Sukuk issue was a privately placed issue participated in by ve banks in Pakistan, namely the National Bank of Pakistan, Allied Bank, Dubai Islamic Bank Pakistan, First Habib Bank Modaraba and Meezan Bank as trustee to the Sukuk issue. www.islamicnancenews.com The authors are from Standard Chartered. TERMSHEET Sitara Chemical Industries INSTRUMENT Privately placed Sukuk issue ISSUER Sitara Chemical Industries(SCIL) PRINCIPAL ACTIVITIES Manufacturing of chemicals (caustic soda) BOARD OF DIRECTORS Chairman - Haji Bashir Ahmed Chief executive - Muhammad Adrees Javed Iqbal Muhammad Anis Imran Ghafoor Haseeb Ahmed Rukhsana Adrees Nominee director - Rashid Zahir DATE OF LISTING Not listed ISSUE SIZE PKR1.1 billion (US$18.12 million) DATE OF ISSUE June 2006 MATURITY June 2011 COUPON KIBOR + 165 basis points plus incremental rental. Incremental rental is linked to quarterly production level agreed with SCIL and is subject to ceiling of 0.05%. PAYMENT SCHEDULE In 12 equal quarterly installments after a grace period of 2 years from the date of issue. AUTHORIZED PAID-UP CAP OF SCIL PKR300 million (US$4.94 million) IDENTIFIED ASSETS Project assets include but are not limited to all xed assets of BMR and the expansion of the 210 metric tonnes a day caustic soda plant located at 32 km, Faisalabad–Sheikhupura Road, Faisalabad (Musharakah assets). SOLE MANDATED LEAD ARRANGER Standard Chartered Bank ARRANGERS/ MANAGERS Standard Chartered Bank LEGAL COUNSEL Mohsin Tayebaly & Co. FINANCIAL ADVISOR Standard Chartered Bank GUARANTOR N/A UNDERWRITERS N/A TRUSTEE Meezan Bank SHARIAH ADVISOR Standard Chartered Shariah Supervisory Committee METHOD OF ISSUE Private placement to banks and nancial institutions PURPOSE OF ISSUE To nance the expansion of SCIL’s caustic soda plant RATINGS Not rated DIVIDEND PER UNIT N/A www.islamicnancenews.com Page 41