Pre conference---sukuk-workshop-part-ii
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  • 1. Sukuk Workshop Part II Tradability of Sukuk, Use of Sukuk in Restructuring Existing Debt, Convertibility of Sukuk into Shares and Implications of Default By Jassim Mahadik, Project Manager Al Maali Islamic Finance Consultancy 2nd February 2014 1
  • 2. Contents • Tradability of Sukuk  Lease based Sukuk  Sale based Sukuk  Investment based Sukuk • Use of Sukuk in Restructuring Debt          Types of debts restructured through Sukuk Benefits of restructuring debt Sukuk restructuring Reasons for restructuring of Sukuk Restructuring of sales based Sukuk Restructuring of investment based Sukuk Restructuring of Ijara Sukuk Case Study 4 Case Study 5 • Convertibility of Sukuk  Case Study 6 • Implications of Default
  • 3. Tradability of Sukuk Secondary Market Trading of Sukuk • Trading of Sukuk essential for liquidity management purposes • Trading of Sukuk means trading the underlying asset which Sukuk represents at the time of trading Lease Based Sukuk Sukuk al Ijara Tradable Reason: The Sukuk represents underlying asset of the Sukuk which are tangible real estate assets and so can be traded for any value of currency
  • 4. Tradability of Sukuk Sale Based Sukuk Sukuk al Salam Sukuk al Murabaha Sukuk al Istisna Non-tradable Non-tradable Non-tradable Reason: The Sukuk represents debt created through deferred payment sale, and debt cannot traded except at par value Reason: The Sukuk represents the underlying asset to be delivered to the Sukuk holder on a future date & hence falls under trading of non-existent & non-possessed object Reason: Falls under the trading of non-existent & non-possessed object. Possible if the portfolio consists of more than 50% of existent tangible assets
  • 5. Tradability of Sukuk Investment Based Sukuk Sukuk al Mudaraba Tradable if more than 50 of the project is in form of illiquid assets. As per some scholars, having more than 33% of assets in illiquid form is enough Reason: The majority is considered to be the whole part. Sukuk al Musharaka Tradable if more than 50 of the project is in form of illiquid assets. As per some scholars, having more than 33% of assets in illiquid form is enough Reason: The majority is considered to be the whole part. Sukuk al Wakala Tradable if more than 50 of the project is in form of illiquid assets. As per some scholars, having more than 33% of assets in illiquid form is enough Reason: The majority is considered to be the whole part.
  • 6. Use of Sukuk in Restructuring Debt Types of Debts Restructured Through Sukuk The debt to be restructured can be of two types Normal borrowings • Sukuk issuance • Capital raised through Sukuk can be used for any “Sharia compliant” purposes Debt created through Sukuk • Relatively Complicated process • The existing sukuk needs to be restructured
  • 7. Use of Sukuk in Restructuring Debt Benefits of Restructuring Debt Benefits for the Debtor/Originator Benefits for the Creditor/Sukuk holders • Help ease cash flow • Maximise credit recovery • Allowing continuity in business • Reduce non-performing finance (NPF) • Avoid legal action • Avoid legal hassles, e.g. recourse to charged assets
  • 8. Use of Sukuk in Restructuring Debt Sukuk Restructuring • Reasons for restructuring of Sukuk  Merger, acquisition or general corporate restructuring of the originator o No major concerns for Sukuk holders  Originator’s default o A concern for Sukuk holders, issuer and other related parties. Challenges from the perspective of Sharia, commercial and legal.
  • 9. Use of Sukuk in Restructuring Debt Sukuk Restructuring Purpose of Re-structuring in case of originator’s default • To save the transaction • To provide sufficient time for the originator to financially reorganize itself and fulfill its obligations • Offering better terms to Sukuk holders • Saving Sukuk holders from taking painful path of enforcing the claim (recourse) to Sukuk assets
  • 10. Use of Sukuk in Restructuring Debt Sukuk Restructuring From the perspective of restructuring, Sukuk structures can be divided into 3 categories Sale Based Structures Investment Based Structures Ijara Structure • Murabaha • Salam • Istisna, etc • Musharaka • Mudaraba • Wakala
  • 11. Use of Sukuk in Restructuring Debt Sukuk Restructuring Restructuring of sale based Sukuk Murabaha & Istisna Possible solutions i. An extension of time without any increase in payment obligations ii. Exchanging the existing Murabaha or Istisna Sukuk with new Sukuk  These new sukuk can be based on investment based structures (Mudaraba, Musharaka, Wakala) or Ijara structure  The new Sukuk should not be debt instrument like Murabaha or Istisna
  • 12. Use of Sukuk in Restructuring Debt Restructuring of sale based Sukuk Murabaha & Istisna Sukuk Murabaha and Istisna can be restructured by offering Sukuk holders new Sukuk in exchange of the old Sukuk. Following are the possible Sharia structures and their Sharia conditions and complexities in replacing the old restructured Sukuk Mudaraba, Musharaka & Wakala Hybrid (Portfolio of Assets) Ijara Should be independent of existing Murabaha & Istisna payables Should be independent of existing Murabaha & Istisna payables No such condition as the portfolio consists of tangible assets Capital should be present in cash or in kind. Debt or receivable cannot qualify as capital Ensure that the portfolio always consists of the required percentage of tangible assets for tradability Tangible assets can be exchanged for any value of currency Important Elements: Debts, receivables & Extension of time
  • 13. Use of Sukuk in Restructuring Debt Sukuk Restructuring Restructuring of sale based Sukuk Salam • Possible easy solutions: 1. Extending the date of delivery of underlying assets  Can the permission to extend the delivery date apply to the substitute assets 2. Replacement of the existing assets with other assets of the same market value 3. Mutually cancel the Salam contract and require the payment of Salam price (capital) without any increase or decrease
  • 14. Use of Sukuk in Restructuring Debt Sukuk Restructuring Restructuring of Investment based Sukuk • Restructuring investment based Sukuk is relatively easy than in sale based Sukuk structures Possible Solutions i. Amending and redrafting the existing agreements/documents as per the new agreed terms between the parties ii. Exchanging the existing Sukuk with new Sukuk
  • 15. Use of Sukuk in Restructuring Debt Sukuk Restructuring Restructuring of Investment based Sukuk Amending and redrafting the existing agreements/documents Consent of all Sukuk holders Downside: Extension of the inherent risk. Investors would wish to change risk exposure. Exchanging the existing Sukuk with new Sukuk Same underlying investments/assets or different investments/assets or combination of both Tender offer, acceptance and settlement require strict compliance with Shari’a principles
  • 16. Use of Sukuk in Restructuring Debt Sukuk Restructuring Restructuring of Ijara Sukuk • Restructuring of Ijara Sukuk is relatively simple and easy than sales based and investment based types of Sukuk. Possible Solutions i. Amending and redrafting the existing agreements/documents as per the new agreed terms between the parties  Tenor, pricing, security, etc. ii. Exchanging the existing Sukuk with new Sukuk with the same or new underlying assets
  • 17. Restructuring Normal borrowings Through Sukuk Nakheel Debt Restructuring 2011 UAE Nakheel: Real estate developer, earlier a part of Dubai World, fully acquired by the Government of Dubai in August 2011 Summary • This was the first instance in GCC where Sukuk was used to restructure debt • Debt owed to trade creditors of Nakheel • This was the final leg of Nakheel’s debt restructuring with respect to the debt owed to trade creditors • Debt restructuring done through offering asset-backed Sukuk to trade creditors • Sukuk structure: Ijara • Sukuk were tradable in the secondary market • The company offered trade creditors repayment of 40 per cent cash and the remaining 60 per cent in the form of Sukuk Benefits for Nakheel • Some breathing space on its cash flows • Tangible issuance • No bank guarantees. Sukuk was asset-backed • Helped Nakheel to close a chapter from the past and allowed to move ahead with its unfinished projects Nakheel wraps up debt restructure: Gulf News, August 25th 2011 Nakheel launches Dh4.8b sukuk to trade creditors: Gulf News, August 24th 2011
  • 18. Restructuring Debt created through Sukuk Dana Gas Sukuk Restructuring - 2012 (1/2) Dana Gas: Listed in Abu Dhabi and headquartered in Sharjah Sukuk Summary • Sukuk type: Mudaraba • Originator: Dana Gas • Issuer/SPV: Dana Gas Sukuk Limited (Rabal-Maal) • Issue Price: $1 billion • Issue (closing) Date: 31st October 2007 • Maturity: 31st October • Sukuk convertible into shares • Underlying assets: Egyptian assets • Purchase undertaking (by Dana Gas) on maturity at price equal to principal amount UAE Sukuk Default • Cash flow of Dana Gas was hit by delayed payments from governments hit by regional political unrest. • Payment were due from Egypt & Iraq’s Kurdistan region. • Creditors could enforce their rights against Egyptian assets. • Enforcement of the assets by Sukuk holders would have prompted the government to revoke the company’s licenses. Dana Gas misses Islamic Islamic bond repayment: Financial Times, November 1st 2012 Dana Gas defaults on $ 1 billion loan: Daily News Egypt, November 4th 2012
  • 19. Restructuring Debt created through Sukuk Dana Gas Sukuk Restructuring - 2012 (2/2) UAE Source: Dana Gas
  • 20. Convertibility of Sukuk • A convertible corporate bond is an interest-bearing loan to a company that can be exchanged, at the option of the bond-holder, for a specific number of shares of that company’s shares. • The convertibility aspect of the bond works as an added attraction for investors. • Convertible bonds normally offer a low rate of return in exchange for the option to trade the bond into stock. • Bond holder can exchange the bond for shares if the company is performing well. • A convertible Sukuk is an Islamic convertible bond which adheres to Sharia principles like ban on interest.
  • 21. Convertible Sukuk PCFC Sukuk - 2006 PCFC (Dubai Ports, Customs and Free Zone Corporation) Sukuk  First convertible Sukuk ever  Lead Managers: Dubai Islamic Bank and Barclays Capital  Listing: DIFX  Sukuk structure: Musharaka  Tenor: 2 years Orders and Allocation 60% of the offers came from the Middle East, 30 per cent from Europe and the rest from Asia. On the other hand, 70% of the sukuk were allocated to bank, 7 per cent to high net worth investors and the remaining to asset and fund managers Convertibility: UAE o The investors will receive a periodic return generated by the Musharaka during its term, and if PCFC group launches any IPO for any of its group companies, the sukukholders will be allocated certain number of shares from the IPO as part of their equity redemption. o Similarly, if the group goes public for any other of its companies, a certain number of shares from it will also be allocated to the sukukholders, provided that such convertibility does not exceed 30 per cent of the sukuk amount held by each investor.
  • 22. Implications of Default Investors Perspective Issuers Perspective Industry Perspective Severely affects the investors Affects the creditworthiness of the issuer. Reputational damage Financial loss Damages the reputation and loss of investors’ confidence Loss of investors’ confidence Legal action Dispute resolution and Sharia issues – heterogeneity of scholastic opinion Restructuring Sharia in conventional regulatory framework – English Case Excruciating legal action Compromise • • • Example: Nakheel Sukuk (2011) Investors confidence seeping in Every industry has got its share of issues
  • 23. Thank You! Contact AL Maali Islamic Finance Consultancy Dubai Head Office Al Maktoom Road, Golden Business Centre, 603 Deira Dubai, U.A.E Phone: +97142942242 Mobile: +971 52 88 78 450 Email: j.mahadik@almaaligroup.com Website: www.almaaligroup.com