structure of government sukuk case of indonesia bandar seri begawan, 30 th nov – 4 th dec 2015

STRUCTURE OF GOVERNMENT SUKUKCASE OF INDONESIABandar Seri Begawan, 30th Nov – 4th Dec 2015

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Structure of Government SukuksCase of Indonesia

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1. Indonesian Government SukukStructure for State Budget (Unspecified)

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Investors

Sales of Asset

Proceeds

Lease of Asset

Sukukissuance

Proceeds

Declaration of Trust / Wakalah

Sales of Asset

SBSN issuance

Maturity date

Secondary Market

Lease Payment / coupon

Sukuk Redemption payment

Sukuk

Redemption

Paying Agent

Investor

MoF - GOI(Obligor/Originator)

MoF - GOI(Obligor/Originator)

SPV (PP SBSN)

(Issuer/ Trustee)

SPV(Issuer/ Trustee)

Structure Sukuk Negara (SBSN)Ijarah Sale & Leaseback Through SPV

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Interesting problem to be anticipated is the concept of sale & leaseback in accordance with sequential process sale (Al Bay’) – leaseback (Al Ijarah) – saleback (Al Bay’) is not really just transfer of beneficial ownership but also transfer of title of ownership or just transfer of domain of ownership.

If the issuer of sukuk is not careful with concept of this sale and leaseback, Bay’ Al Inah which forbidden by majority of ulama can be formed, this can be happening when in sequential process sale in the beginning and saleback in the end only consits of two parties and conditioned in the aqd that one party at first sell to other party with other party in the end has to sell back to the original seller.

The bases of Government Sukuk are National Sharia Board – Indonesian Council of Ulama No. 69 – 72 years 2008.

The positive base law of Government Sukuk is Law No. 19 year 2008 which also related with the fatwas.

Sukuk Negara – Government SukukIjarah Sale & Leaseback

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Aqd Sale Document (Al Bay’) between issuer (Special Purpose Vehicle Company – SPVC can be used) and investors (Trustee Company as representative of investors can be used);

Aqd Leaseback Document (Al Ijarah) between investors (Trustee Company as representative of investors can be used) and the user of Ijarah Objects in this case End Users or SPVC or any parties represented by SPVC;

The Essence of Sequential signing of documents has different spirit with Bay’ Al Inah which has prerequisite from the beginning of Aqd Sale (Al Bay’) that the ijarah objects have to be resold to issuer or SPVC at Sukuk’s maturity date

Sharia compliant legal formal documents for Sukuk Ijarah Sale & Leaseback consists of:

Wa’d Documents (one side agreement) of Saleback from investors (not to be stated in first Aqd Sale) to resell the Ijarah Objects to issuer or SPVC;

Issuer or SPVC can reanticipate this first Wa’d with another Wa’d in making sure to buy (optional).

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Legal Formal Government Sukuk –Ijarah Sale and Leaseback

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2. Sovereign Sukuk (SS) Wakalah bil Istithmar

Concept of SS Wakalah

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SS issuer company shall declare that they act as Trustee / Representative of the SS owner to manage fund that proceeds from issuance of SS in a variety activities that generate profits.

As representative, SS issuer company deliver to prospective investors the planned use of funds in variety of activities to be conducted, among others:

•The plan of activity type

•The plan of activity contexture

•Estimate of the benefits of each activity

•Estimate of the composit benefits

Wakalah that will be used is wakalah without any ujrah or wakalah with ujrah.

The issuance has the purpose that SS can be traded at secondary market, SS issuer company has to maintain the composition of minimum 55% activities in the form o tangible assets.

SS rewards is profits that earned from the results of the investment activities which undertaken by the SS Issuer company. Rewards can be granted to the owner during the term periodically and/or at maturity according to the contract.

Basic Structural Concept of SS Wakalah

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SS Issuer CompanyA. SS IssuerB. Trustee/ Wakil bil Istithmar

SS Issuer CompanyA. SS IssuerB. Trustee/ Wakil bil Istithmar

Investor(Muwakkil)Investor

(Muwakkil)

1b.Issuance of SS

2.Proceeds 9. Acquittance SS

6. Periodically rewards

5. Investment Profits3. Investment Activities

1a. Declaration of Trust

GoI (Originator)

4. Proceeds

GoI(Obligor)

8. Payment on purchase of SS assets

7. Purchase of SS assets

SS Assets

SS Assets

Basic Structure Explanation of SS Wakalah (1)

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Issuance:

1a. SS issuer company shall declare that they act as Trustee/ Wakil bil Istithmar of the SS owner to manage fund that proceeds from issuance of SS in a variety activities that generate profits:

• SS issuer company deliver to prospective investors the planned use of funds in variety of activities to be conducted;

• Wakalah contract that used is wakalah without any ujrah (bi dunil ujrah);

• SS issuer company inform that investment activities are conducted, among others: The plan of activity type The plan of activity contexture, Estimate of the benefits of each activity, Estimate of the composit benefits;

• The issuance has the purpose that SS can be traded at secondary market, SS issuer company has to maintain the composition of minimum 55% activities in the form o tangible assets.

1b. Issuance of SS wakalah by SS issuer company.

2. Fund that proceeds from issuance of SS.

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Investment Activities and SS Rewards:

3. SS Issuer company conduct variety of profitable activities, such as Ijarah, Tijarah, and others that comply to sharia.

4. Investment activities fund.

5. Profits that earned from the results of the investment activities will be granted to the SS owner as reward. SS rewards can be granted during the SS terms periodically and/or at maturity according to the contract.

6. Paying SS rewards periodically to SS owners.

Maturity:

7. At maturity, the Government should buyback the SS assets with price that according to the contract.

8. Payment price on the purchase of the SS assets.

9. Acquittance of SS.

Basic Structure Explanation of SS Wakalah (2)

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3. Methods of GoI Sukuk Issuance

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Regular issuance in domestic market: Auction:

Medium and long-term tenor

Bookbuilding: Wholesale Sukuk Retail Sukuk Project Financing Sukuk (in process of constructing regulations)

Private placement: IDR ror foreign currency denominated

Regular issuance in International Market:Global Sukuk

GoI Sukuk Issuance Program

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Determining the Underlying Asset

Preparing the Sukuk Structure

Appointing the Arranger and Legal Consultant

Forming of Prospectus and Equity Market Documents

Evaluating the sharia compliance of sukuk

Offering:- Book

running- Roadshow

Forming of Legal Documents.

Global Sukuk can be issued as a Reg S/144 A or Global SEC offering.

Allocation

Distribution

Finalization of Legal and Equity Market Documents

Clearing

Settlement

Closing

Listing

Steps of GoI Sukuk Issuance:Bookbuilding

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Announcement of Auction Plan

Investor

Dealer A

Dealer B

Auction Participants

1.aBidding

6.bAwarded Bid

1.bBidding

6.aAwarded Bid

BI-SSSSTrading Platform

DSS-MoFDecision Support

System

Publication of Auction Result

DMO-MoF

Tabulation/ Allocation

Data Bidding

BI-RTGSv.sBI-SSSS

DVP Settlementa.Paymentb.Securities Transfer

Auction Rules and Monitoring

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Steps of GoI Sukuk Issuance:Auction

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Frequency : Monthly Price Method : Multiple-Price No. of Series : Multi Tranches Tenor Sukuk Structure : Ijarah – Sale and Lease Back Underlying Asset : State-owned Asset Window Time : 10.00 – 12.00 WIB Auction Agent : Bank Indonesia Central Registry : Bank Indonesia Auction Participants : Commercial Banks & Investment

Banks

GoI Sukuk IssuanceAuction Method

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The Sovereign Syariah Securities still traded until May 2015

Source : OJK, IDX, dan DJPU Depkeu RI

Development of the Sovereign SyariahSecurities in Indonesia

No Name of Sukuk Issuer Year Nominal (Rp.) Tenor Maturity Date

1 SBSN Seri IFR0001 GoI 2008 2.714.700.000.000 7 years 15 August 2015

2 SBSN Seri IFR0002 GoI 2008 1.985.000.000.000 10 years 15 August 2018

3SBSN Seri IFR0003

GoI2009 2.632.000.000.000 6 years

15 September 2015

4 SBSN Seri IFR0005 GoI 2009 1.171.000.000.000 8 years 15 January 2017

5 SBSN Seri IFR0006 GoI 2009 2.175.000.000.000 21 years 15 March 2030

6 SBSN Seri IFR0007 GoI 2009 1.547.000.000.000 16 years 15 January 2025

7 SBSN Seri IFR0008 GoI 2009 252.000.000.000 11 years 15 March 2020

8SBSN Seri IFR0010

GoI2011 4.110.000.000.000 25 years

15 February 2036

9SBSN Seri PBS001

GoI2012 6.725.000.000.000 6 years

15 February 2018

10 SBSN Seri PBS002 GoI 2012 1.218.000.000.000 10 years 15 January 2022

11 SBSN Seri PBS003 GoI 2012 3.786.000.000.000 15 years 15 January 2027

12SBSN Seri PBS004

GoI2012 10.149.000.000.000 25 years

15 February 2037

13 SBSN Seri PBS005 GoI 2013 9.934.000.000.000 30 years 15 April 2043

14SBSN Seri PBS006

GoI2013 8.934.000.000.000 7 years

15 September 2020

15SBSN Seri PBS007

GoI2014 7.150.000.000.000 26 years

15 September 2040

16 SBSN Seri PBS008 GoI 2015 12.695.000.000.000 1 years 15 June 2016

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The Sovereign Syariah Securities still traded until May 2015

Source : OJK, IDX, dan DJPU Depkeu RI

Development of the Sovereign SyariahSecurities in Indonesia

No Name of Sukuk Issuer Year Nominal (Rp.) Tenor Maturity Date

17Sukuk Ritel Seri SR-0004

GoI 2012 13.613.805.000.000 3 years21 September

2015

18Sukuk Ritel Seri SR-0005

GoI 2013 14.968.875.000.000 3 years27 February

2016

19Sukuk Ritel Seri SR-0006 GoI

2014 19.323.345.000.000 3 years 05 March 2017

20Sukuk Ritel Seri SR-0007 GoI

2015 21.965.035.000.000 3 years 11 March 2018

21 SPN-S 14072015 GoI 2015 1.000.000.000.000 6 months 08 July 2015

22 SPN-S 11082015 GoI 2015 1.000.000.000.000 6 months 10 August 2015

23SPN-S 11092015

GoI2015 1.000.000.000.000

6 months08 September

2015

24 SPN-S 08102015 GoI 2015 1.000.000.000.000 6 months 13 October 2015

25SPN-S 06112015

GoI2015 780.000.000.000

6 months06 November

2015

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4. IIFM Interbank Unrestricted Master Investment Wakalah Agreement

What is the IIFM Inter-Bank Unrestricted Master Investment Wakalah Agreement?The IIFM Inter-Bank Unrestricted Master Investment Wakalah

Agreement is a framework agreement which sets out the terms upon which the Muwakkil (Investor) will transfer certain funds to the Wakil (Agent) as its agent to invest such funds in a Shari’ah compliant manner

Entering into the Master Agreement does not of itself give rise to any transactions. After the Parties have entered into the Master Agreement, they may subsequently enter into Wakalah Investment Transactions which will be subject to and governed by the Master Agreement

Note that the Governing Law of the Master Agreement may be decided by the Parties, although the Agreement had been prepared on the implicit understanding that English Law will be the Governing Law predominantly used

1IIFM Industry Seminar on Islamic Capital and Money Market

Tuesday, 6th May 2014, Bank Indonesia, Jakarta

What is the purpose of entering into an Unrestricted Inter-Bank Wakalah Agreement?

For many years, IFI’s have relied mainly on commodity Murabahah for their wholesale liquidity management purposes notwithstanding issues and concerns related to commodity Murabahah transactions, such as the cost of commodity brokerage, or the amount of Shari‘ah compliant commodities available at any particular moment in time to cover transaction volumes etc

In order to diversify the range of liquidity management solutions available to the IFI’s, the last few years have witnessed the active use by IFI’s of Wakalah arrangements/transactions particularly Unrestricted Wakalah as an alternative liquidity management tool. The objective of this activity has been to reduce the over reliance by the IFI’s on commodity Murabahah



What are the Key Features of the Master Agreement?

The key features of IIFM Inter-Bank Unrestricted Master Investment Wakalah Agreement are:

Clause 1 (Definitions and Construction)

This clause defines terms used in this Wakalah Master Agreement, details the rules of construction which apply to the Master Agreement and explicitly states that only the Parties may enjoy the benefits of this Master Agreement (Clause 1.4). In addition, the purpose of Clause 1.3 (Single Contract) is to clarify that, as the Master Agreement is a framework agreement, when Wakalah Investment Transactions are subsequently entered into, the Master Agreement will apply to such Wakalah Investment Transactions. So, although a Wakalah Investment Transaction will be a separate document, the Wakalah Investment Transaction will be regarded as entered into upon the terms set out in the Master Agreement and covered by the framework created by the Master Agreement.



Clause 2 (Wakalah Terms and Conditions)

This clause deals with the appointment by the Muwakkil of the Wakil as its agent in relation to each Wakalah Investment Transaction

Clause 3 (Wakalah Investment Transactions)

This clause states that the Master Agreement does not of itself create an obligation on the part of the Wakil or the Muwakkil to enter into any Wakalah Investment Transactions.

Clause 4 (Payments)

This clause deals with the mechanics of how payments are made under this Master Agreement, the currency of payments

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What are the Key Features of the Master Agreement? (continuation)

IIFM Industry Seminar on Islamic Capital and Money Market


Clause 5 (Representations)

This clause contains a set of standard representations which each Party is required to make including that they have the power and authority to enter into Wakalah Investment Transactions and that they do not have any proceedings pending against them.

Clause 6 (Undertakings)

This clause requires each Party to undertake amongst other things that it will comply with all laws and regulations to which it may be subject and that it will notify the other Party of any Default.

Clause 7 (Events of Default)

The occurrence of certain events will result in termination of any Wakalah Investment Transactions then in existence. Such events include the Wakil failing to pay any amounts under the Master Agreement, misrepresentation by a Party and insolvency. The clause also details what happens upon the occurrence of an Event of Default (See Clause 7.7) and the payments due thereunder (See Clause 7.8).

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Clause 8 (Early Termination)

This clause deals amongst other things with the right of the Muwakkil to terminate a Wakalah Investment Transaction, the Wakil’s acceptance of an Early Termination Request and the ability of the Wakil to notify the Muwakkil of a Revised Anticipated Profit Rate (See Clause 8.3).

Clause 9 (Late Payment Amount)

This clause obliges a Party to pay a Late Payment Amount where it fails to pay a sum on a Due Date. Clause 9.2 (Calculation of Late Payment Amount) deals with how the Late Payment Amount is calculated and Clause 9.3 (Payment of Late Payment Amount) covers how such amount shall be applied.




Clause 10 (Miscellaneous)

This clause contains miscellaneous agreements of the Parties, including a provision that neither Party may assign its rights under the Master Agreement and when notices are deemed to be served.

Clause 11 (Governing Law and Jurisdiction)

This clause contains the governing law and dispute resolution forum provisions. The governing law is to be selected by the Parties. The forum for dispute resolution will be the courts of the jurisdiction of the governing law unless the Parties choose arbitration.




The Schedules1. Schedule 1 (Form of Wakil Offer Notice) (Offer)

2. Schedule 2 (Form of Muwakkil Acceptance Notice)

When the Parties wish to enter into a Wakalah Investment Transaction they should do so by completing Schedules 1 and 2 in accordance with the mechanics detailed in Clause 3 (Wakalah Investment Transactions).




Are There Any Other Features ofthe Master Agreement?

Yes, this agreement is supplemented with a set of items as follows:

1. Operational Guidance Memorandum which covers the operational procedures to be implemented by the Wakil as well as the Wakil and Muwakkil responsibilities



Operational Guidance Memorandum Process Flow

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Start

Wakil makes an offer for an Unrestrcited Wakalah transaction. The offer, amongst other things, shall include the following:· Anticipated Profit Rate (APR)· Maturity· Wakalah Pool· Co-mingled vs Segeregated pools

Muwakil accepts the offer

Muwakil transfers the investment amount to the

Wakil

Early termination A

B

No

Yes

A

Offer

Acceptance Fund Transfer

At maturity determine the return earned on the contract

Wakil pays the Muwakil Investment Amount +APR – Wakil Fee and retain the excess (incentive fee) (clause 3.4 (a) 3.5)

Wakil pays the Muwakil Investment Amount +APR – Wakil Fee (clause 3.4 (a))

Wakil pays the Muwakil Investment Amount +Actual Profit – Wakil Fee (clause 3.4 (b))

Return> APR

Return = APR

Return < APR

Wakil pays the Muwakil Investment Amount – Negative return – Wakil Fee (clause 3.4 (c))

Negative return

End



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Affected party informs the other party on becoming aware of event

B

Default by Wakil(clause 7.8)

Wakil sends a notice to Muwakkil notifying the inability to honour the anticipated return

Muwakil sends a notice requesting for a early termination

Voluntary exit of Muwakkil(clause 8.1)

Revised profit rate notice(clause 8.3)

Illegality(clause 8.5)

Wakil is to pay the Muwakil investment amount + lower of APR and Actual Profit Rate calculated up to the day of notification of Muwakkil – Wakil Fee

In case the Wakil accepts the request the Wakil shall notify the Muwakkil of the acceptance. Early Termination date shall be the date of acceptance

Muwakil notifies the Wakil of an early termination due to default on behalf of Wakil

Wakil pays the Muwakil investment amount + lower of APR and Actual Profit Rate calculated up to the day of notification of Muwakkil - Wakil Fee

Wakil is to pay the Muwakil investment amount +lower of APR and Actual Profit Rate calculated up to the day of notification of Muwakkil – Wakil Fee – Actual Administrative and Out of Pocket Expenses

In case the Muwakil decides to continue with the contractWakil is to pay the Muwakil investment amount + total profit calculated up to the day of notification of Muwakkil + revised profit rate calculated from the notification date to maturity date – Wakil Fee

In case the Muwakil decides to terminate the contractWakil is to pay the Muwakil investment amount + Lower of APR and Actual Profit Rate calculated up to the day of notification of Muwakkil - Wakil Fee

End

Operational Guidance Memorandum Process Flow (continuation)



structure of government sukuk case of indonesia bandar seri begawan, 30 th nov – 4 th dec 2015

Documents

ss issuer company

issuer of sukuk

concept of sale leaseback

issuance of ss

ss owner

ss rewards

aqd sale document al

beginning of aqd sale