Presentation on theme: "Www.volaw.com Financing the Securitisation of Real Estate using Sukuk. Trevor Norman Director The application of lessons learnt from the Caravan 1 transaction."— Presentation transcript:
Financing the Securitisation of Real Estate using Sukuk. Trevor Norman Director The application of lessons learnt from the Caravan 1 transaction
Securitising assets using sukuk. Summary of talk: - Islamic versus conventional securitisation. The CARAVAN I transaction. The problems (and some solutions) Real Estate backed Sukuk
Definition of sukuk certificates of equal value representing undivided shares in tangible assets, usufruct and services or … the assets of particular projects or special investment activity... [Source: Accounting and Auditing Organization for Islamic Financial Institutions, Sharia Standard No. (17) on Investment Sukuk]. Must be issued on the basis of a Sharia compliant contract (e.g.: Ijarah, Salam, Murabaha, Mudaraba, etc.).
Securitisation Definition: The technique of repackaging assets into a traded instrument, such as a bond; or The transfer of risk (and reward) from the holder of certain assets to the holders of bonds backed by those assets.
Similarities between Sukuk and ABS*: (*ABS – Asset Backed Security) Both sukuk and conventional ABS structures transfer beneficial and/or legal ownership of assets, or of the cash flows derived from those assets, to the holders of the securities. Neither represent shares in the capital of the originator, nor (if a true sale) debt on the balance sheet of the originator. Both are intended to generate a stable and predictable return for investors from the cash flows generated by the assets.
Sharia compliant securitisations: Two levels of Sharis compliance: The underlying assets must be Sharia compliant. Suitable assets include: Motor vehicle fleets, aircraft, ships, etc. Real Estate leases Equipment leases Infrastructure projects The underlying contract governing the ownership and use of the assets must comply with Sharia principles – e.g.: Ijarah, Salam, Murabaha, Mudaraba, etc
The CARAVAN I Ltd. transaction: The objective: To refinance the motor vehicle fleet owned by Hanco Rent a Car, in Saudi Arabia. The problems (and solutions) Legal and Accounting issues Sharia compliance Ratings Agency Other points
CARAVAN I Ltd. - summary: SR98 M sukuk plus SR4.1 M Redeemable Participating Shares, backed by motor vehicle leases, sold by Hanco Rent A Car, Saudi Arabia. Sukuk have 3 year forecast maturity (max 6 years), forecast return of 6% p.a. (variable) Credit enhancement: dual Saudi / Jersey structure; 4.25% equity tranche; 15.39% overcollateralisation; 8.77% cash reserves. Originated, structured and arranged by BSEC - Bemo Securitisation SAL, Beirut. Wholly underwritten by Shamil Bank, Bahrain. Sharia review by Yasaar Ltd. for the structurer and by Sh. Nizam Yaquby of Bahrain for the underwriters.
CARAVAN I Ltd. – structure diagram: Two-tier structure devised by BSEC together with Volaw
CARAVAN I Ltd. – lessons learned Legal issues: Title to the vehicles No provision for Sukuk under Saudi Law Different Codes of Law Sharia compliance: Corporate structure Sukuk
CARAVAN I Ltd. – lessons learned (2) Ratings agency: Historic data Ownership of SPC Country risk (legal) Other problems: Time zones, working weeks Banking business days Taxation
Real Estate Securitisation Structure (?)
Conclusion: Caravan is a first of breed transaction. Sukuk are ideally suited for Sharia compliant securitisation structures. Many types of asset may be securitised in a Sharia compliant manner, and Real Estate is an ideal asset class for Shairia compliant securitisations. A variety of structures will evolve.