Just as Western European banks were getting more and more comfortable with Islamic structures, Zain KSA's $2.6 billion bridge refinancing had to contend with double crises – a global lending crunch and default concerns surrounding two large Saudi family conglomerates – Saad Group and Ahmad Hamad al-Gosaibi & Bros Co (AHAB).

As well as these issues, the financial advisers and lead arrangers, Al Rajhi Capital, Banque Saudi Fransi and Calyon, were up against a tight timeframe – the $2.5 billion Shariah-compliant bridge loan signed in 2007 was due to expire in the summer of 2009.

Ultimately a two-year $2.5 billion murabaha refinancing was put in place, reaching financial close on 19 August, and upsized to $2.6 billion on 11 October. The refinancing was structured as a bridge with a balloon, to capture as much liquidity as possible from a constrained lending market. The original plan had been to have a refinancing with a six, seven or eight-year maturity, and this will probably be a viable option once the markets recover.

In more benign times Zain KSA, as the third largest mobile operator in Saudi, would have benefited more from local bank participation, but due to the Saad and AHAB conglomerate defaults most Saudi banks had stopped lending in mid-2009. Aside from the financial advisers which stepped up as mandated lead arrangers, only one other Saudi bank, SABB, participated in the deal.

The facility has a margin of 425bp over Libor and banks were offered tickets of $150 million for a fee of 150bp and 135bp for a $100 million ticket. The two-year facility can be extended by a year. The borrower has the first six-month extension option, and the lenders have a subsequent six-month option.

While the success of the deal hinged on the interpretation of Zain KSA as an important piece in the overall Zain Group and on Zain's relationship banks, the parent did not want to directly guarantee the deal. Rather, the deal has a blend of limited recourse and non-recourse characteristics.

The Kuwaiti parent, Zain Group, is a 25% shareholder in Zain KSA and offers the deal contractual support to ensure that the business plan is fully funded even in certain downside scenarios so that Zain KSA can meet its ongoing debt service obligations. The parent is also mitigating the refinancing risk by assuming a portion of the liquidity risk (up to an unspecified portion of the $2.6 billion) if a refinancing struggles in the market.

Given that Zain's $6.1 billion purchase of Saudi's third GSM licence was only completed in mid-2007, the key metric that banks are relying on is the robust capital structure rather than Ebitda. Zain KSA is covenanted not to raise additional debt and is levered at conservative debt equity split of 50/50, its parent Zain Group also has corporate covenants which restricts its debt based on certain multiples of its earnings before interest and depreciation.

The time constraints meant no export credit agencies were involved in the financing, but the documentation allows for ECAs to join the facility, which is anticipated during 2010 – both Nokia Siemens and Motorola are supplying equipment to Zain's network. If Zain KSA delivers on its business plan through 2010 and the markets recover, a further refinancing is possible in 2011.

Zain KSA refinancing
Status: Financial close 19 August 2009; facility upsized 11 October 2009
Description: $2.5 billion murabaha refinancing
Sponsor: Zain KSA
Financial advisers and lead arrangers: Al Rajhi Capital; Banque Saudi Fransi; Calyon
Participants: ANB, NBK, SABB, Gulf Bank, Standard Bank
Borrower legal counsel: Al-Jadaan & Partners; Clifford Chance
Lender legal counsel: White & Case
Technical consultant: Analysys Mason