The International Investor: Islamic Finance and the Equate Project Project summary In August 1994, Union Carbide Corporation and Petrochemical Industries Company (PIC) began building a $2 billion petrochemical plant in Kuwait known as Equate Petrochemicals Company (Equate). They financed construction with a $450 million bridge loan, but hoped to raise $1.2 billion of permanent debt financing backed by guarantees from the United States Export-Import Bank (US Exim). Despite more than a year of negotiations, they had still not worked out a deal. Having become sufficiently frustrated with process, the sponsors began exploring alternative financing structures without export credit agency (ECA) involvement. Although they were closing in on a proposal, they needed more certain commitments from various lenders before they could openly change structures. One aspect of the deal that would remain the same under either structure was the inclusion of a tranche of Islamic finance; i.e., funds that were invested in accordance with Islamic Sharia principles (Islamic law). The sponsors had awarded a mandate to underwrite the Islamic tranche to Kuwait Finance House (KFH), Kuwaits only Islamic bank, which, in turn, had come to The International Investor (TII), an Islamic investment bank, for assistance in placing the Islamic tranche. TIIs chairman, Adnan Al Bahar, had asked Sulaiman Al Qimlas, Salah Nafisi, and Yahya Malik, members of TIIs Structured Finance Group, to prepare a final recommendation regarding TIIs involvement in the deal. In particular, Bahar wanted to know whether the proposed ijara structure made sense and whether TIIs Sharia committee was likely to accept it. In addition, he wanted to discuss how much TII should commit to place knowing that TII would not commit if it did not have investors lined up for the full amount. Questions c. What is the minimum debt service coverage ratio (DSCR) for the term loans only (for total debt including the subordinated debt)? When does it occur and why?

d. What is the average DSCR and what does it tell you? e. Should the sponsors use a tranche of Islamic finance? If so, how big should it be and what form should it take (istisna, murabaha, or ijara)?

f. How would the inclusion of an Islamic tranche affect the deal, and How would you address these complications?