Rebecca Clow and Jonathan Lawrence share how a joint venture of two Australian solar companies managed to fund their project in Indonesia through an Islamic bond in Labuan. This article was first published in K&L Gates' Legal Insight.
SGI-Mitabu, a joint venture of two Australian solar companies, The Solar Guys International and Mitabu Australia, has revived its plans to fund its Indonesian 250 megawatt solar project with Islamic compliant funding. The solar project will require up to AUD550 million of financing. Commencing in July 2015, the first phase of the project will be funded through an offer of AUD150 million of sukuk (a type of Islamic investment instrument, similar to a bond).
SGI-Mitabu will offer its sukuk in Labuan, Malaysia. Labuan is an island off the coast of Borneo, which was designated as an International Offshore Financial Centre in 1990, making it Malaysia's financial hub. Labuan is an established location for companies in the region seeking to access alternative sources of capital because of the ability to raise funds in several currencies and its well developed regulatory regime for Islamic finance. The regime addresses the potential double taxation associated with the transfer of the underlying asset, which is often involved in an Islamic finance transaction.
While nearby Malaysia has become a major hub for raising and trading sukuk outside the Middle East, Australia has yet to implement the recommendations identified in a report in 2010 to facilitate Islamic finance (such as the issue of sukuk) in Australia. This means that Australian companies who want to use Islamic financing techniques must either seek advance rulings from the Australian Taxation Office for their particular transaction or look abroad.
SGI-Mitabu's sukuk issue is set to be the first Islamic finance offering by an Australian corporate and could provide a useful example of alternative sources of capital to other companies.
What is a sukuk?
A sukuk is a type of asset based financing structure, similar to a bond, but which is compliant with Islamic principles. Such principles do not permit the collection of interest, and therefore, traditional Western bonds are not acceptable to investors who wish to apply Islamic principles. A sukuk is used as an Islamic compliant mechanism for distributing cash flows to investors. The sukuk certificate issued to investors represents a partial ownership in the underlying asset which enables the sukuk holders to charge...