MIGA recently closed its second transaction supporting a project with an Islamic financing structure—the first was for a port project in Djibouti back in 2007. For this new project, MIGA provided political risk insurance to two financial institutions, Deutsche Bank Luxembourg and Saudi British Bank, for their $450 million financing to the Indonesia telecoms company PT Natrindon Telepon Selular, or NTS.The company is majority-owned by Saudi Telecom, and the deal formed part of an overall $1.2 billion financing to help NTS greatly expand its GSM network in Indonesia.
MIGA is behind the transaction because the new financing will help the company increase network quality and expand coverage, getting telecommunications to lower-income segments of the Indonesian market as well as to remote islands of the archipelago.
Unlike the Djibouti transaction, which involved Musharaka financing, the NTS project involved a particular type of Islamic finance known as Murabaha financing. It essentially involves a sale and purchase of commodities. There are four basic steps, which happen instantaneously, and four basic players:
Step 1. Financier buys commodities at market price from a commodity seller.
Step 2. Financier sells the commodities to the project company at a deferred price, with a profit component, so that the sales price plus the profit component matches an amortization schedule on a loan.
Step 3. The project company sells the commodities to a commodity purchaser at the sales price.
Step 4. The commodity purchaser sells the commodity back to the original seller at the sales price.
Since this all happens instantaneously, the commodities never actually change hands, and the transactions are recorded by book entry only so that the financier directly funds the project company. However, though this mechanism—unlike a loan—there is no actual "interest" component, which is prohibited under Islamic law.
Although the concept is fairly simple, the documentation was far from it. To add to the complexity, there were a number of novel issues to be addressed. To give a few examples: (1) there are three separate tranches of funding, and MIGA is covering a minority share of the financing, which had implications for MIGA's policy covenants; (2) two separate currencies are being utilized, whereas the MIGA guarantee was only in US Dollars, so the potential currency fluctuations needed to be tackled; (3) There were challenging details to work out over coverage of principal and profit (analogous to the interest component of a conventional loan), which resulted in MIGA covering 100% of principal of a loan for the first time. (4) there is additional sponsor support and we had to ensure that there was no overlap in coverage; (5) the financing was being syndicated after closing, potentially to a sukuk issuance, and the banks wanted to ensure that syndicates had could "opt-out" of MIGA cover; (6) as the project company is responsible for paying the premium, special provisions and timing arrangements needed to be included for any instance where it may fail to do so; and (7) MIGA had to obtain reinsurance from the private market, so all of these special provisions were subject to reinsurance approval.
As the attorney on the transaction, I was responsible not only for drafting the MIGA guarantees—including negotiating and drafting all of these special provisions—but also reviewing all of the underlying documentation. For me, this was the most complicated transaction I have ever worked on, and it was a huge challenge for the team to tackle all of the issues that needed to be addressed.
In the end, however, we did finally come to agreement on all points, and were able to issue MIGA's first-ever contract of guarantee for Murabaha financing. This is an important demonstration of MIGA’s increasing flexibility and, given the growing role of Islamic financial markets in supporting projects in developing countries, it was indeed a landmark transaction.