Mobily: Air freshened

Saudi Arabian mobile operator Mobily closed a $2.875 billion equivalent Islamic financing that is one of the largest and cheapest ever syndicated in the region. It cements the progress that Mobily has made in the country's mobile market since 2004, and gives it the medium-term flexibility and funding necessary to compete in this fast-growing sector.

Mobily's main shareholder is Etisalat, the incumbent telecoms operator of the United Arab Emirates. Etisalat owns 35% of the operator, with the Saudi public owning a further 20% and the General Organisation for Social Insurance owning another 15%. Minority shareholders include Abdulaziz Alsaghyir Commercial Investment (7.5%) Al-Jomaih Holdings (6%), Rana Investments (6%), Riyadh Cables (6%) and Abdullah & Said M. O. Binzagr (4.5%).

It has been operating in the country since 2004, when it paid $3.2 billion for the country's second GSM licence and first 3G licence, each with a term of 25 years. It closed a $2.35 billion bridge financing, a relatively straightforward one-year Murabaha, in 2005. The arrangers on that facility were Citigroup, Emirates Bank, National Commercial Bank and Saudi American Bank. It decided in mid-2006, to replace this with a longer-term Islamic deal. Mobily has been listed since December 2004, and Saudi shareholders like to see corporates using Islamic funding.

Mobily is the brand name for Etihad Etisalat, and at the end of 2006 had a market share of 34%. Mobily likes to take credit for increasing mobile penetration in the kingdom from 40% to over 90%. Certainly, its network is largely built out, and it is now concentrating on building out a fibre-optic network to allow for increased internet use.

Mobily mandated Citigroup and Samba as financial advisers on the long-term financing at the end of 2006. Their objectives were to raise a sufficient financing for the medium-term operation of Mobily, and not saddle it with a restrictive funding structure. As such, the financing would proceed along quasi-corporate lines, despite the operator's relatively short track record.

The biggest challenge for the advisers was that Mobily had already bought most of its equipment, which was valued at $1 billion and was thus unable to offer a sufficient set of assets as security for Islamic finance providers. The arrangers settled upon the concept of financing airtime, which has no precedents and the financing of which does not have a simple Arabic label.

To the small group of bankers that prepay for their mobile phone service the concept might seem reasonable. Airtime can, after all, be purchased at supermarkets and filling stations. But Mobily's airtime, while carrying a notional value of $2.875 billion equivalent, is only of value while the Mobily network is still operational, and is difficult to take security on, as distinct from network equipment or buildings.

Nevertheless, the advisers persuaded a well-respected group of Sharia scholars that the concept was valid, and Mobily mandated ABN Amro, Banque Saudi Fransi, Calyon, National Bank of Abu Dhabi, National Commercial Bank, Samba, and Saudi Hollandi Bank as arrangers. All seven have strong Islamic franchises and existing relationships with Etisalat, which, as a sponsor of the Thuraya satellite mobile project, launched the first ever Islamic financing for a telecoms project in 1999.

The main component of the Mobily refinancing is a SR9.1875 billion ($2.453 billion) refinancing, which has a seven-year tenor and is priced initially to yield the equivalent of 70bp over Libor. This facility's pricing and covenant package are governed by the borrower's financial metrics rather than coverage or subscriber numbers, and a decrease in leverage, expressed as debt to Ebitda, would result in lower pricing.

Rounding out the deal is a SR843.75 million one-year murabaha, and a SR750 million debt support murabaha, which has a five-year tenor and yields the equivalent of 70bp. The support facility eliminates the need for the borrower to fund a debt service reserve, which would lock up large amounts of cash that would otherwise be used for operations or to pay dividends.

In May 2007 the deal sold down strongly to participating banks, despite what maybe the lowest rate ever for an Islamic financing. Participants were Al-Rajhi, BNP, DBS, RBS, SCB, SG, Citigroup, ADCB, Commercial Bank of Dubai, Bank Al-Jazira, Fortis Bank, ING Bank, Bank Muscat, Riyad Bank, and Barclays. This large and diverse group shows that the Islamic premium, which previously haunted Saudi borrowers that wanted to support the Islamic market, has largely been eliminated.

Mobily also has very low levels of leverage, when expressed as a ratio of debt to equity. Its stock, like that of many Middle Eastern public companies, is far off its 2006 peak, but management is confident enough it its prospects that in January this year it proposed increasing the operator's share capital by 40%, or 200 million shares.

Mobily's peers will certainly want to examine the use of airtime-based financing structures. Borrowers with hard assets have found it easiest to access the Islamic market, but mobile operators in countries with robust Islamic banking systems now have an asset to offer up that can withstand the scrutiny of Saudi Sharia scholars, among the most demanding in the market.

Etihad Etisalat (Mobily)
Status: Closed 14 March 2007
Size: $2.875
Location: Saudi Arabia
Description: Refinancing on a corporate Islamic basis of bridge loan for GSM and 3G mobile operator
Sponsors: Etisalat (35%) Public shareholders (20%) General Organisation for Social Insurance (15%), Abdulaziz Alsaghyir Commercial Investment (7.5%) Al-Jomaih Holdings (6%), Rana Investments (6%), Riyadh Cables (6%) Abdullah & Said M. O. Binzagr (4.5%).
Financial advisers: Citigroup, Samba Financial Group
Lead arrangers: ABN Amro, Banque Saudi Fransi, Calyon, National Bank of Abu Dhabi, National Commercial Bank, Samba, and Saudi Hollandi Bank
Sponsor legal counsel: White & Case, Law office of Mohammed A. Al-Sheikh
Lender legal counsel: Baker & McKenzie
Technical adviser: Analysys
Consultants: PKF, KPMG