Presentation on theme: "Sukuk Innovations by: Wan A Rahim Kamil ICM Consultant, Securities Commission Malaysia."— Presentation transcript:
Sukuk Innovations by: Wan A Rahim Kamil ICM Consultant, Securities Commission Malaysia
Capital Market: Products & Instruments CERT May Sukuk as a consequent of Islamic securitisation Also known as Islamic bonds - but better described as “Trust Certificates” or “Participation Securities” “ Grant investor a share of an asset along with the cashflows and risk commensurate with such ownership” Prescribed as “securities” under the Islamic Securities Guidelines to give wider definition Can be consistent with conventional asset-backed securities (ABS) or conventional unsecured lending – depending on the structures
Capital Market: Products & Instruments CERT May Issuance of Sukuk must be supported by an underlying asset From Shariah perspective, Islamic financing should only be raised for trading in specified and identified Shariah compliant assets In general, trading of indebtedness is prohibited, unless it is traded at par Middle East and some other jurisdictions only allow debt trading at par Malaysia – trading of indebtedness is permissible at any value provided the underlying contract is Shariah e.g. Bai’ Bithaman Ajil / Bai’ Dayn Return for investment in sukuk in most cases are linked to cash flows and performance of underlying assets
Capital Market: Products & Instruments CERT May Possible Contracts for Project Funding Needs Consider a rental of the asset instead of a sale: Project rents it from outsourced party; Actually investors purchased the asset and rents it to the project, thus: Objective of use of asset achieved; Investors subject to similar cash-flow risk if it had gone into a murabahah contract; At end of period, project company could opt to purchase the asset, considering that it would have already paid in full.
Capital Market: Products & Instruments CERT May Best achieved through an Asset Backed Securitisation (“ABS”) exercise: What qualifies as assets? Investment entries through Participatory Contracts; Need to comply with guidelines or regulations on ABS.
Capital Market: Products & Instruments CERT May Definition of Assets Under the shari’ah the assets must meet the necessary conditions: Must exist physically (land, building, machinery) Must be pure; Must have use (however restricted to halal use and not for example for operations of casino or alcohol sales outlet); Must be owned by the seller; Must be free from encumbrances; Must be known by specifications, descriptions, location, etc.
Capital Market: Products & Instruments CERT May What are Participatory Contracts? Such as … Participatory Contracts (risk participation) Mudharabah or Trust Loan-Investments: Contract between fund owner and entrepreneur whereby returns are pre-agreed based on profit achievements but losses borne just by capital provider. Entrepreneur only provides management expertise. Musharakah or Joint Participations: Pooling of capital resources among several parties based on pre-agreed proportions of profit distributions and losses borne according to equity contributions.
Capital Market: Products & Instruments CERT May Applications These are extensions to equity-related instruments. Musharakah is close to joint participations; Mudharabah is a semi-equity semi-debt instrument. Can be applied to needs normally raised under subordinated debt structures.
Capital Market: Products & Instruments CERT May Participatory Contracts Participatory Contracts of: 1.Musharakah or general partnership under profit-loss sharing formula. Partners: Share profits in accordance with pre-agreed proportions and not necessarily based on capital investment; Bear losses in proportion to capital contribution. Partners might forgo rights to management to other partners. Managing partner liable for losses due to mismanagement or wrong business judgments.
Capital Market: Products & Instruments CERT May Mudharabah Trustee investment contract that is semi-equity and semi-debt in nature. Marriage between capital and entrepreneurship; Profit sharing contract whereby: one party, the capital provider or rabb al mal provides the necessary capital for the venture, The other party, the mudharib, provides the expertise for the venture. Profit sharing not based on capital but based on pre-agreed proportion of achieved profits. Genuine business losses borne in entirety by rabb al mal.
Capital Market: Products & Instruments CERT May Asset Backed Securitisations: Create new opportunities to popularise mudharaba or qirad, and/or musharkah contracts, Ability to ring-fenced risks with more secured contracts such as ijarah, murabaha, salam or other compounded contracts of exchanges, whereby Risks mitigated through secured cash-flow streams and with lesser operational and credit risks, More shari’ah compliant due to Special Purpose Vehicle involved in direct investments or business activities – avoidance of Bai’ al Dayn issues.
Capital Market: Products & Instruments CERT May Special Purpose Vehicle (“SPV”) (Mudharib) Mudharaba or Musharakah Certificates Pool of Investors (Rabb al Mal or Musharkah Partners) Subscription for Certificates ($) Direct Investments through ijarah, murabahah or other real estate businesses or trading activities Cash-flow stream ($) Profit Distribution Expenses for meeting operational requirements
Capital Market: Products & Instruments CERT May Asset Backed Securitisation 1.Sale of asset to the SPV – True Sale 2.SPV issues asset-backed securities to investors 3.Proceeds from the sale of ABS go to the Originator 4.(Interest) & principal repayments to Investors SPV Investors Originator 3a. 4.
Capital Market: Products & Instruments CERT May Islamic Asset-Backed Sukuk adds a new dimension to ICM products True sale – legally belong to SPV Non-recourse sukuk / ABS - credit risk performance is determined solely by underlying asset SPV – bankruptcy remote (independent) Correspondence of income streams with actual income and value of the assets Ratings are primarily dependent on a risk analysis of the assets or performance of assets Unilateral purchase undertaking (if any) – at market value
Capital Market: Products & Instruments CERT May Ambang Sentosa Originator Investor 2.Investor purchase asset (gift) 4. Sale of asset on deferred payment (BBA) 5. ASSB issue BAIDS to investor 3. Cash Identified Asset: Rights, title and interest over the balance sales proceeds of two development projects 1.Hibah (Gift) Aqad Asset Proceeds from BBA transaction used to purchase Identified asset Ambang Sentosa BBA (ABS) –domestic version of Islamic securitisation Underlying assets to execute BBA are assets awarded by 3 rd party – need tangible assets to avoid debt-for-debt transactions which is prohibited both in Msia and international Cash flow is still based on receivables
Capital Market: Products & Instruments CERT May Cagamas Sukuk Musyarakah (RMBS) - does it comply with international Shariah standards ? Cagamas (Transaction Administrator & Administrator) Cagamas MBS GOM (Originator & Servicer) Sale of GSHFs Purchase consideration Investors Sukuk issued to investors Proceeds from sukuk Trustee Represent Sukukholders Sale of Islamic house financing receivables Debt trading – sold at discount not at par Although investors formed as musyarakah venture
Capital Market: Products & Instruments CERT May Golden Crop Sukuk Ijarah (ABS) – compliance with international Shariah standards Share Trustee Golden Crop Returns (Issuer) Sukukholders Boustead Group (Originators) Trustee LTAT Sukuk Ijarah Originator sell the plantation asset to the Issuer Issuer leases back the plantation asset to the Originator Subordinated Musyarakah facility with LTAT
Capital Market: Products & Instruments CERT May Islamic Asset Backed Securities issued in Malaysia IssuerFacility Issue Size RM (million) SC Approved Ambang Sentosa Sdn Bhd BBA May-03 Musyarakah One Capital Berhad Sukuk Musyarakah 2, Mar-05 Cagamas MBS BerhadSukuk Musyarakah 2, Jul-05 Golden Crop Returns Bhd Sukuk Ijarah * Oct-05 ABS Logistics Bhd Sukuk Ijarah * Jul-06 Nepline SPV Sdn Bhd Sukuk Ijarah * Jul-06 Total Islamic ABS6, * International Shariah compatible structure
Capital Market: Products & Instruments CERT May Majority of sukuk has been on simple “ijarah” structure – unsecured financing / asset-based Originator seeking financing “sells” the assets to SPV for a value equal to financing required and lease it back SPV – subsidiary of originator; Lease payments provide fixed income stream which may be benchmarked to an index / LIBOR +; Conducted on non true-sale basis so repayment and risk/performance is not asset backed but originator based; Purchase undertaking of asset at maturity with pre- determined value;
Capital Market: Products & Instruments CERT May Ratings are primarily dependent on the riskness of the borrower / sponsor / originator / lessee; Assets only used to facilitate Shari’ah compliance.
Capital Market: Products & Instruments CERT May Sukuk Al-Ijarah - Asset Based Transaction SPV Sukuk Originator Sukuk Sale of asset Sukuk proceeds Lease & repurchase payments for assets Sukuk proceeds Asset repurchase Periodic payments: Lease flows and principal (via amortisation/repurchase) Non-true sale – condition to repurchase at maturity Payment of rental / profit can be derived from ijarah or other sources
Capital Market: Products & Instruments CERT May Sukuk Al Ijarah – Asset Backed There are also structures of sukuk al ijarah under an Asset Backed Scenario. True sale, though The ownership of the SPV is transferred to the originator or the lessor at end of lease. Original underlying sale has been true sale.
Capital Market: Products & Instruments CERT May SPV Certificates of Investments Investors 1. Offer for Sale of securities 2. Asset Provider 3. Sale & Purchase of Asset (payment of asset acquisition Cost US$) Asset 4. Transfer of Ownership of Asset to SPV 1 st Transaction: SPV and Asset Provider 1 st Relationship: SPV and Investors Step 1 $ Creation of Sukuk al Ijarah
Capital Market: Products & Instruments CERT May SPVProject Owner 1. Execution of al ijarah contract ASSET 2. Rental of Asset on fixed term and fixed rental basis Ijarah Rental Obligation Certificates (evidence of obligations) 3. Issuance of ijarah rental Obligations Promissory Notes to SPV implying cash flow stream on asset. Step 2
Capital Market: Products & Instruments CERT May SPVProject Owner 1.Regular Ijarah Rental Payments Asset 5. Asset transferred to Project Owner Investment Certificates Holders 2. Scheduled Distributions of Coupon Payments to Holders Of Investment Certificates issued by SPV 3. Final Repayment Representing Total Settlement equal to Initial Purchase Price Of Asset by SPV 4. Payment of Final Amount being final settlement of Obligations under Ijarah Contract
Capital Market: Products & Instruments CERT May Assets purchased by the SPV are funded by the issuance of floating rate Trust Certificates, representing beneficial ownership in the assets and having beneficial rights on the lease; Upon maturity of the lease, SPV sells asset to the Project Owner at the original price. Proceeds from this sale will be utilised to meet the final payment to investors.
Capital Market: Products & Instruments CERT May Sukuk al Ijarah can be: short term facility instruments i.e. as per structure of sukuks issued by the Bank Negara and/or Government of Malaysia to replace T-Bills; or Medium to long term facilities but with rental settings made every scheduled periods of say 3 or 6 months each year.
CERT May Capital Market: Products & Instruments PROJECT Co. Ijarah SPV Rental of Equipment 6. Ijarah contract Musharakah Investors 2. Musharakah Investment Agreement 3. $ for Working Capital Needs $ Income Stream 7. $ Ijarah Rental Payments 7. $ Profit Payments & Repurchase or Redemption of MPS Ordinary Equity Sukuk Mudharabah Financial Investors 5. $ Participation Into Mudharabah $ Mudharabah Profit Payments Project Funding through COMBINATION OF PARTICIPATORY AND IJARAH CONTRACTS 9. $ Dividends MUSHARAKAH PREFERENCE SHARES (‘MPS’)
Capital Market: Products & Instruments CERT May Khazanah Exchangeable Sukuk (Asset Swap) Khazanah & Other Sellers Issuer Rafflesia Khazanah SPV II Sukuk Proceed ($) Sale of Equity Pool Sale Price (Principal) ($) Sale Price (Principal) ($) Sale of Equity Pool Cash Settlement Purchase Right Deed Default / Maturity Purchase Undertaking Deed Investors $
Capital Market: Products & Instruments CERT May Some notable Sukuk issued in the global markets IssuerFacility Issue Size USD(mil) Manager Nakheel DevelopmentConvertible Sukuk Ijarah3, Barclays Capital, DIB ADIB Sukuk CoSukuk Ijarah800.00HSBC Rafflesia Capital Exchangeable Sukuk Musyarakah CIMB, HSBC Amanah, UBS Aabar Sukuk Exchangeable Sukuk Mudarabah Deutsche
Capital Market: Products & Instruments CERT May Tabreed 06 Financing Corp Sukuk Istisna’ CIMB, HSBC, Dreer Kleinwort Wassertein East Cameron Gas CoAsset backed Sukuk Merrill Lynch International IssuerFacility Issue Size USD(mil) Manager
Capital Market: Products & Instruments CERT May Asset-Based Sukuk vs Asset Backed Sukuk Asset based SukukAsset backed Sukuk FeatureUsing Shariah compliant assets/business ventures to facilitate issuance of Sukuk Asset backing Shariah compliant assets/business ventures which form PRIMARY source of income /return to investor. Issued in various Shariah principles Key Accounting Concept/ treatment ON balance sheet (for originator/obligor) OFF balance sheet (for originator) True sale criterion: legal & off balance sheet accounting
Capital Market: Products & Instruments CERT May Funding CostMarket driven mainly depending on originator/issuer credit rating/standing Mainly based on the strength of the asset cash flow RatingCorporate rating of issuer/obligor Strength of cash flow Asset based SukukAsset backed Sukuk
Capital Market: Products & Instruments CERT May END Thank You