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Presentation on pre-export / Islamic finance . 29 April 2011 Edward Baring and Alexander Zalivako. Scope of Talk. Why pre-export financing? Common structures Bankability of export contracts Structuring security over export contracts and accounts. Why Pre-export financing?.

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presentation on pre export islamic finance

Presentation on pre-export / Islamic finance

29 April 2011

Edward Baring and Alexander Zalivako

scope of talk
Scope of Talk
  • Why pre-export financing?
  • Common structures
  • Bankability of export contracts
  • Structuring security over export contracts and accounts
why pre export financing
Why Pre-export financing?

Advantages for a borrower:

  • Banks make specific allocations for pre-export financing
  • Lower interest rate
  • Potentially - lighter general covenants
  • No “true” security granted

Disadvantages for a borrower:

  • Require co-operation from independent offtakers
  • Not non-recource financing → pre-export financing will still impose considerable restrictions on the borrower’s business
  • Commodity risk → prices fluctuation/export (currency) restrictions
bankability of export contracts commercial issues
Bankabilityof Export Contracts – Commercial Issues
  • Long-term contracts (mitigates the risk that the contracts will not be renewed)
  • Equal supplies in each quarter (to ensure compliance with short-term cover ratio)
  • Committed volumes (i.e. a strict obligation on the offtakers to buy volumes). Therefore spot contracts only permissible if there are also committed back-up contracts
  • The obligation of the offtaker to increase committed volumes, if that is required for the borrower to comply with its obligations under the facility agreement (primarily, to deal with the price risk)
  • Clarity as to how the price is calculated and the obligation not to change this method
  • Payment terms
bankability of export contracts legal issues
Bankability of Export Contracts – Legal Issues
  • Unrestricted assignment must be permissible
  • Confirmation from an offtaker that it has received no prior notice of assignment or charge
  • No set off, counterclaim in respect of any payment from an offtaker
  • All receivables shall be credited to: (1) the collection accounts; and (2) after an EoD to such other account as the agent may direct
  • No termination, amendment without agent's consent for BOTH offtaker / exporter (save for technical amendments)
  • After an EoD, the offtaker shall accept and comply with any instructions from the agent
  • The law and the forum for the offtake contracts shall be the same as law and forums for the assignment / facility agreement, i.e. English law, LCIA Court, English courts
structuring security export contracts
Structuring Security – Export Contracts
  • English law export contract:
    • English law assignment of contract rights
  • Export contract governed by other laws:
    • English law assignment of contract rights → Assignability issue
    • Local law pledge of rights (?)
structuring security export contracts10
English law

accepted and tested structure for taking security

availability of English law contractual concepts

Law governing export contracts remains applicable to a wide range of issues (assignability issues; relationship with debtor)

Local law

no perfect contractual security structure

limited value of warranties and representation; no indemnity concept

Structuring Security – Export Contracts

Conclusion: Lenders will expect: (1) English law export contracts or as an alternative export contracts governed by other laws with English law stand-by contracts and (2) English law security assignment

structuring security bank accounts
Structuring Security – Bank Accounts

Security mechanisms in relation to a bank account under Kazakhstan law:

  • pledge of rights to a bank account
  • direct debit rights of a creditor in relation to a debtor's bank account

Security mechanisms in relation to a bank account under English or other Western European law:

  • charge/pledge over the bank account

Relevant considerations:

  • Efficiency of security enforcement
  • Currency control regulations
our pre export finance experience
Our pre-export finance experience
  • Gazprom Neft on a US$1.5 billion pre-export finance facility arranged by Societe Generale, Natixis and BTMU. This facility was secured by the cash flows from oil export contracts and contained an embedded hedging mechanism
  • BNP Paribas and ING Bank on the secured interest rate hedging arrangements for Eurochem in relation to its exposure under a US$1.5 billion pre-export finance facility
  • Barclays, Banco Santander, BNP Paribas, Calyon, Deutsche Bank and Société Générale on a US$1.35 billion secured loan facility for Russian oil company Rosneft
  • Deutche Bank on a US$500 million pre-export financing facility for Rosatom
  • Calyon and Deutsche Bank as arrangers on a US$750 million secured syndicated pre-export finance facility to Anglo-Russian joint venture TNK-BP
  • ABN AMRO Bank, Citigroup and BNP Paribas on a US$1 billion secured pre-export financing facility to OAO TNK
  • BNP Paribas on a US$187.5 million secured pre-export bridge facility to Tatneft
  • ING Bank on a US$450 million pre-export finance syndicated facility to SUAL in respect of aluminium
  • ING Bank as mandated lead arranger on a US$500 million pre-export finance facility to TAIF-NK, one of the fastest expanding oil companies in Russia
summary
Summary

There is no “silver-bullet” structure. Every pre-export financing must be tailored to the needs and business of an individual borrower.

slide15

Islamic finance: Structures and opportunities

29 April 2011

Nadim Khan, Partner, Herbert Smith LLP

overview
Overview
  • What is Islamic finance?
  • Islamic finance in perspective
  • The principal techniques / contracts
  • Murabaha
  • Ijara
  • Istisna’a
  • Shari’ah approval and our role
  • Conclusion
what is islamic finance
What is Islamic finance?
  • No single definition though widely understood to mean commercial financial activity that complies with principles of Islamic jurisprudence i.e. Shari’ah
  • Modern Islamic finance products aim to achieve similar business goals offered by conventional products e.g. banking, investing, funding
  • Shari’ah has guidance on what is acceptable/not acceptable behaviour in Muslim life
  • This includes economic and commercial activity
  • Common misconceptions - no requirement for Islamic parties per se

- not limited to specific geographical areas/industry sectors e.g. Middle Eastern oil production

islamic finance in perspective
Islamic Finance in perspective
  • Market strength - no longer a niche area - “Islamic Finance has become a recognised and specific class of its own”*

- market growth exceeding 10% p.a. over the last decade*

- Islamic finance industry worldwide estimated at US$895 billion** to US$1 trillion in 2010**

  • Beyond the Middle East

- up to 40% of Middle Eastern sukuk (bond) issuances subscribe for by non-Islamic investors in Europe and Asia

- seen by many as a credible source of debt and capital market liquidity

- legislative changes in Europe and Asia to accommodate and attract Islamic finance

  • *Source: Standard & Poor’s Islamic Finance Outlook 2009
  • ** Source: The Banker
  • *** Source: Ernst&Young 2011
islamic finance the principal techniques
Islamic finance – the principal techniques
  • Contract based
    • the Shari'ah has an established framework of commercial contracts and legal relationships
  • The principal Islamic contracts
    • Murabaha – cost plus financing
    • Istisna'a – permits goods to be financed whilst under construction or manufacture
    • Ijara/Ijara-wa Iqtina – leasing and leasing with a purchase option
    • Mudaraba – trust financing (used to enable syndication)
    • Musharaka – joint venture
    • Sukuk – Islamic bonds
a murabaha trade

1.

Bank appoints Customer as Agent to acquire Asset

3.

Delivery of Asset

BANK

CUSTOMER

(as Agent)

SUPPLIER

2.

Purchase of Asset - immediate cash settlement with monies from Bank paid to the Supplier

4.

Title to Asset vests with the Bank but not possession, which remains with Customer

5.

Title

to Asset

6.

Deferred Sale Price e.g. 90 days later

CUSTOMER

(as Purchaser)

A Murabaha trade
ijara wa iktina lease with a purchase option
Ijara wa Iktina - lease with a purchase option

(3) Service Agent assumes Lessor’s

responsibilities

for insurance

etc

Service Agent

(Customer as agent

for the Lessor/

Financier )

1(b) Purchase price

Lessor/Financier

"Owner"

Vendor / Customer

(1a) Title transfer

(5) Purchase Undertaking

(4) Sale Undertaking

(2a) Lease

(2b) RentalPayments

  • Notes
  • Vendor/Customer – Financier - parting with possession of assets and charging for use (usufruct)
  • Lessor and Customer leasing arrangements
  • Financier – Service Agent - insurance, major maintenance, ownership taxes Lessor’s responsibility passed through to Service Agent
  • Sale Undertaking (call option in favour of Customer). Upon exercising the call the Customer can make a final payment to acquire title to the assets
  • Purchase Undertaking (put option in favour of the Financier) used on default termination

Customer

istisna a development financing
Istisna’a – development financing

$100 (i.e. drawdown)

Financier

Manufacturer

Purchase Contract (Istisna’a)

Title to Asset

Sale Contract or Lease (Ijara wa Istisna’a)

$110

Title

  • Notes
  • Allows finance to be provided for pre-delivery or during development / construction period
  • Once built and delivered to Financier, then for example can have:
    • Sale to Customer at fixed price mark up
    • or
    • Lease to Customer for longer term financing (Ijara wa Iqtina).

Customer

s hari ah approval and our role
Shari’ah approval and our role
  • Shari’ah approval is an additional step to the Financier’s credit approval
  • Approval is typically given by the Financier’s Shari’ah Supervisory Board
  • Islamic banks/other banks participating in the provision of Islamic financial services have their own Shari’ah boards. Also, there are a number of Shari’ah advisory services
  • Herbert Smith’s Islamic finance team works closely with Shari’ah scholars to structure deals and address technical issues that arise in the finance documents
  • Typically, finance documents themselves will be governed by appropriate laws of a jurisdiction, e.g. Russian law or English law
conclusion
Islamic Finance should be viewed as an important source of liquidity

The government of Kazakhstan is proactively promoting Islamic finance

Islamic finance is tried and tested (though developing)

Shari’ah principles mean Islamic investors face different

risks – more awareness of these

Increasing trend in many regions for sponsors to

consider Islamic finance

Developments in Kazakhstan

In 2007, a memorandum of understanding between BTA and Emirates Islamic Bank to promote Shari’ah-compliant banking in Kazakhstan and other CIS states was signed

In 2009, Kazakh legislation was amended to facilitate various Islamic financial transactions

In 2010, Abu Dhabi-based Al Hilal Bank opened the first Islamic bank in Kazakhstan, with plans to invest as much as $1 billion over the next two years

Kazakhstan will revive plans this year for a $500 million debut sukuk issue with plans to attract up to $10 billion in Islamic finance over the next five to seven years

Conclusion
profiles of our herbert smith team
Profiles of our Herbert Smith Team

Nadim Khan

Partner, Finance Division, Dubai

Nadim heads up Herbert Smith's finance practice in the Middle East and is also head of the firm's Global Islamic Finance Group. He has been based in the Middle East for over nine years and has advised on a number of the leading financing transactions in the region. He has also advised on the structuring and development of a number of "first of its kind" Islamic financing products including: Qatar Islamic Bank on its inaugural US dollar denominated sukuk issuance which raised US$750 million for Qatar's largest Shari'ah-compliant lender; Al Salam Bank of Bahrain on a Shari'ah compliant mezzanine facility for the re-financing for 5 Canada Square, Canary Wharf, London integrated within a senior, junior and mezzanine financing structure; BNP Paribas on one of the first ECA-covered multi-tranche Islamic financings for the development of a cement plant in Jordan.

Nadim has been distinguished as "one of the outstanding practitioners in Islamic finance" by Guide to the World's Leading Islamic Finance Practitioners 2010.

nadim.khan@Herbertsmith.com

T: +971 4 428 6305

M: +971 50 559 4521

profiles of our herbert smith team26

edward.baring@herbertsmith.com

T: +7 495 783 7495

M: +7 985 969 8014

Profiles of our Herbert Smith Team

Edward Baring

Partner, Banking & Finance, Moscow

Edward is an English law banking and finance partner specialising in commodity finance, real estate finance, acquisition finance, and syndicated loans. He has developed a particular expertise in the energy finance sector advising international banks on loan facilities to major Russian oil and gas companies. He also has experience in transactions involving multilateral financial institutions, development banks and export credit agencies.

Edward is recommended as a leading individual in the Russian banking market by Chambers & Partners, Legal 500 and IFLR1000.

edward.baring@herbertsmith.com

T: +7 495 783 7495

M: +7 985 969 8014

profiles of our herbert smith team27
Profiles of our Herbert Smith Team

Alexander Zalivako

Associate, Banking and Finance, Moscow

Alexander is a Russian-qualified lawyer specialising in banking and finance. He has developed a particular expertise in trade finance, real estate finance and in the energy and natural resources sector. Alexander also has considerable experience in banking regulatory matters and debt capital markets transactions.

alexander.zalivako@herbertsmith.com

T: +7 495 363 6514

M: +7 985 233 5342