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
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
