Saudi Arabian law firm Abdulaziz Alajlan & Partners and the local office of US-based Baker & McKenzie have advised the kingdom's Finance Ministry (MOF) in the transaction to convert the SR167.92bn ($44.78bn) owed by the state utility Saudi Electricity Company (SEC) to the government into a sharia-compliant financial instrument.

The team said the transaction involves "creating a mudaraba-based subordinated perpetual financial equity-like instrument", in what is described as the world's largest-ever Islamic finance transaction.

The deal was announced in an SEC filing with the Saudi Stock Exchange (Tadawul) on 16 November.

The measure is part of restructuring the kingdom’s electricity sector and efforts to reclassify SEC’s financial government liabilities.

SEC said that it agreed to “re-reclassify SEC’s net government liabilities in the amount of SR167.92bn into a subordinated perpetual financial equity-like instrument with a redemption option and a profit rate of 4.5 per cent per annum”.

The profit rate is payable once SEC distributes dividends to ordinary shares.

SEC said the financial instrument “is sharia-compliant and classified under shareholders’ equity and considered non-dilutive to existing shareholders’ stakes”.

It represents about 33.4 per cent of SEC’s total asset as at the end of the third quarter of 2020.

It “includes government loans and net government payables and accruals after offsetting for outstanding amounts owed to SEC by the government, in accordance to SEC’s financial statements at the end of the fiscal year 2019”.

MEED notes that the amount includes SR3.35bn-worth of total dividends owed to Saudi Aramco since SEC’s inception until 2017, the book value of which was previously transferred to the MOF.

The state utility said it will be seeking general assembly approval to recognise the dividends owed to Saudi Aramco as being part of the financial instrument.

Dispute

MEED understands there is a disputed SR10.3bn between the two entities with regard to technical differences in quantities, prices and handling costs of fuel and electric power.

A working group has been formed including representatives from the Ministry of Energy, MOF and the Electricity & Cogeneration Regulatory Authority, in coordination with other relevant entities, to study the disputed amount.

SEC and the MOF will also jointly appoint an independent legal and technical adviser to settle the dispute by the first quarter of 2021.