sukuk programmes clifford chance
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IIFM Islamic Finance Workshopp
6 May 2012, Muscat
Contents Introduction
Sukuk ProgrammesSukuk Programmes
Sukuk Programmes – TDIC Case Study
Sukuk Programmes – Financial Institution Case Study Sukuk Programmes Financial Institution Case Study
Looking Ahead....
Questions & Answers Questions & Answers
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Introduction
Sukuk Certificates (an overview)
Interest-bearing instruments are not permissible under Islamic investment principles
Sukuk created as an alternative to corporate bonds (the “Islamic p (bond”)
Intended to put investor into the same position as a holder of a corporate bondp
This is typically achieved by the purchase of income generating assets by an SPV who holds the assets and the income provided by them on trust for the investors - the sukuk represents a beneficial entitlement in such assets and income
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Introduction (Cont’d)
The sukuk is typically structured so that investors do not have recourse to the physical assets and upon default the assets must be sold back to the originator pursuant to the purchase undertakingsold back to the originator pursuant to the purchase undertaking
Similarly to corporate bonds, the investor therefore takes credit risk on the originator who is obliged to pay the Sukuk certificateholder irrespective of the performance of the underlying assetirrespective of the performance of the underlying asset
The assets are not intended to provide security for the transaction, the sukuk being asset-based for Shari'a reasons only and most originators having no desire to actually lose the physical asset inoriginators having no desire to actually lose the physical asset in question
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Sukuk Programmes A feature of the market in 2009 (and 2010) Essentially an uncommitted facility between a borrower (the
“issuer”) and a panel of investment banks (the “dealers”) The borrower may issue and the investment banks may purchase
and place Sukuk Certificates from time to time on general terms The Sukuk Programme enables a number of sukuk issues to be
effected through (essentially) one set of documentation The purpose of the Sukuk Programme is to enable sukuk issues p p g
to be effected quickly, economically and efficiently The detailed terms (particularly pricing) relating to any issue of
sukuk certificates will only be agreed at the time of a particular y g pissue
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Sukuk Programmes (Cont’d)
Sukuk Programmes have been a relatively recent development, but they have been premised along the same lines as a
ti l b dconventional bond programme Sukuk Programmes therefore mirror, as far as possible,
conventional bond programmes, except with an underlying Sh i’ t tShari’a structure
Issuers are establishing, simultaneously, conventional and sukuk programmes
Unlike a Sukuk Programme, a conventional bond programme has very few supplemental documents as there is no underlying asset transfer i.e. only Subscription Agreement and Final Terms are t i ll i dtypically required
Recent examples in the GCC (RAK, TDIC, Etisalat, Sharja Islamic Bank)
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Sukuk Programmes – TDIC Case Study
Tourism Development & Investment Company PJSC U.S.$1,450,000 Trust Certificate Issuance Programme First sukuk programme in Abu Dhabi Sukuk al ijara Sukuk-al-ijara
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Sukuk Programmes – TDIC Case Study (Cont’d)
Key principles of Ijara
Shari’a compliant lease Lease rental payments “mirror” the profit payments under the
Sukuk Certificates Obligation to undertake capital maintenance of leased asset
remains with lessor (SPV) Obligation to insure the leased asset remains with the lessor
(SPV)(SPV) Lessor appoints an agent (usually the lessee) to carry out
servicing duties pursuant to a servicing agreement
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Sukuk Programmes – TDIC Case Study (Cont’d)( )
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Sukuk Programmes – TDIC Case Study (Cont’d)( )
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Sukuk Programmes – TDIC Case Study (Cont’d)( )
On the issue date of the Certificates, TDIC grants a musataharight over certain land on Saadiyat Island in consideration for an
t l t th d i d b TDIC S k k Li it d iamount equal to the proceeds received by TDIC Sukuk Limited inconnection with the issue of the Certificates
TDIC Sukuk Limited leases the relevant land the subject of thet h i ht t TDIC f th lif f th C tifi t TDICmusataha right to TDIC for the life of the Certificates. TDIC
agrees to pay lease rental payments to TDIC Sukuk Limitedwhich are equal to the Periodic Distribution Amounts due underthe Certificatesthe Certificates
TDIC Sukuk Limited appoints TDIC as its servicing agent for theCertificates
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Sukuk Programmes – TDIC Case Study (Cont’d)( )
Redemption of the Certificates Purchase Undertakingg
– on maturity of the Certificates or prior thereto following theoccurrence of a Dissolution Event
Redemption Undertakingp g– following the occurrence of a Change of Control– Following a Certificateholder Put
Sale Undertaking Sale Undertaking– in the event of certain tax gross-ups being required
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Sukuk Programmes – TDIC Case Study (Cont’d)( )
Substitution of the Lease Assets Substitution Undertakingg
Cancellation and buy-back of Certificates A novel feature of sukuk structuring What are the commercial objectives? What are the commercial objectives? TDIC and/or any of its subsidiaries may at any time purchase
Certificates in the open market or otherwise. Should TDIC wish to cancel any Certificates, such cancellation is conducted in y ,accordance with the Master Declaration of Trust and the Redemption Undertaking.
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Sukuk Programmes – TDIC Case Study (Cont’d)( )
Programme Documents Capital Markets Documentsp
– Dealer Agreement– Master Declaration of Trust– Agency AgreementAgency Agreement
Islamic Documents– Master Musataha Agreement
M t Ij A t– Master Ijara Agreement– Servicing Agency Agreement– Purchase Undertaking
S l U d t ki– Sale Undertaking– Redemption Undertaking– Substitution Undertaking
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Sukuk Programmes – TDIC Case Study (Cont’d)( )
Issuance Documents Capital Markets Documentsp
– Final Terms– Subscription Agreement– Supplemental Declaration of TrustSupplemental Declaration of Trust
Islamic Documents– Supplemental Musataha Agreement– Supplemental Ijara Agreement– Supplemental Ijara Agreement
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Sukuk Programmes – TDIC Case Study (Cont’d)( )
Size of Sukuk issuance is restricted by the value of the assets transferred to the Lessee
Once the assets have been transferred for the purposes of a Sukuk issue, they cannot be used for
th til th S k k i h t dany other purpose until the Sukuk issue has matured
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Sukuk Restructuring Number of potential issues on restructuring of a sukuk
The buy-back and cancellation of a sukuk has generally not beenThe buy back and cancellation of a sukuk has generally not been permissible under the documentation
Originator may be prohibited under Shari'a law from amending the terms and conditions to increase coupon/provide additionalthe terms and conditions to increase coupon/provide additional incentive
There may be prohibitions against raising further debt
Asset Coverage Problems Sukuk traditionally issued as a stand alone debt instrument and
therefore exchange for a new sukuk would require establishment of a t e e o e e c a ge o a e su u ou d equ e estab s e t o anew sukuk programme or a new stand alone issuance
Value of asset may have changed drastically
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IIFM Islamic Finance Workshopp6 May 2012, Muscat