Sukuk programmes clifford chance


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Sukuk programmes clifford chance

  1. 1. IIFM Islamic Finance Workshop p6 May 2012, Muscat
  2. 2. Contents Introduction Sukuk Programmes Sukuk Programmes – TDIC Case Study Sukuk Programmes – Financial Institution Case Study Looking Ahead.... Questions & Answers 1
  3. 3. Introduction Sukuk Certificates (an overview)  Interest-bearing instruments are not permissible under Islamic investment principles  Sukuk created as an alternative to corporate bonds ( p (the “Islamic bond”)  Intended to put investor into the same position as a holder of a corporate bond p  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 2
  4. 4. 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 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 asset  The assets are not intended to provide security for the transaction, the sukuk being asset-based for Sharia reasons only and most originators having no desire to actually lose the physical asset in question 3
  5. 5. 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 p y g particular issue 4
  6. 6. Sukuk Programmes (Cont’d) Sukuk Programmes have been a relatively recent development, but they have been premised along the same lines as a conventional b d programme ti l bond Sukuk Programmes therefore mirror, as far as possible, conventional bond programmes, except with an underlying Shari’a t t Sh i’ 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 typically t i ll required i d Recent examples in the GCC (RAK, TDIC, Etisalat, Sharja Islamic Bank) 5
  7. 7. 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 6
  8. 8. 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)  Lessor appoints an agent (usually the lessee) to carry out servicing duties pursuant to a servicing agreement 7
  9. 9. Sukuk Programmes – TDIC Case Study((Cont’d) ) 8
  10. 10. Sukuk Programmes – TDIC Case Study((Cont’d) ) 9
  11. 11. Sukuk Programmes – TDIC Case Study((Cont’d) ) On the issue date of the Certificates, TDIC grants a musataha right over certain land on Saadiyat Island in consideration for an amount equal t th proceeds received b TDIC S k k Li it d i t l to the d i d by Sukuk Limited in connection with the issue of the Certificates TDIC Sukuk Limited leases the relevant land the subject of the musataha right t TDIC f th lif of th C tifi t t h i ht to for the life f the Certificates. TDIC agrees to pay lease rental payments to TDIC Sukuk Limited which are equal to the Periodic Distribution Amounts due under the Certificates TDIC Sukuk Limited appoints TDIC as its servicing agent for the Certificates 10
  12. 12. Sukuk Programmes – TDIC Case Study((Cont’d) ) Redemption of the Certificates  Purchase Undertaking g – on maturity of the Certificates or prior thereto following the occurrence of a Dissolution Event  Redemption Undertaking p g – following the occurrence of a Change of Control – Following a Certificateholder Put  Sale Undertaking – in the event of certain tax gross-ups being required 11
  13. 13. Sukuk Programmes – TDIC Case Study((Cont’d) ) Substitution of the Lease Assets  Substitution Undertaking g Cancellation and buy-back of Certificates  A novel feature of sukuk structuring  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. 12
  14. 14. Sukuk Programmes – TDIC Case Study((Cont’d) ) Programme Documents  Capital Markets Documents p – Dealer Agreement – Master Declaration of Trust – Agency Agreement  Islamic Documents – Master Musataha Agreement – Master Ij M t Ijara Agreement A t – Servicing Agency Agreement – Purchase Undertaking – Sale Undertaking S l U d t ki – Redemption Undertaking – Substitution Undertaking 13
  15. 15. Sukuk Programmes – TDIC Case Study((Cont’d) ) Issuance Documents  Capital Markets Documents p – Final Terms – Subscription Agreement – Supplemental Declaration of Trust  Islamic Documents – Supplemental Musataha Agreement – Supplemental Ijara Agreement 14
  16. 16. 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 any other purpose until th S k k i th til the Sukuk issue h matured has t d 15
  17. 17. Sukuk Restructuring Number of potential issues on restructuring of a sukuk The buy back and cancellation of a sukuk has generally not been buy-back permissible under the documentation Originator may be prohibited under Sharia law from amending the 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 t e e o e exchange o therefore e c a ge for a new su u would require estab s e t o a e sukuk ou d equ e establishment of new sukuk programme or a new stand alone issuance  Value of asset may have changed drastically 16
  18. 18. IIFM Islamic Finance Workshop p6 May 2012, Muscat