Transcript of Pre conference---sukuk-workshop-part-ii
- 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 Originators 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 originators 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 Sharia 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 Nakheels 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 & Iraqs 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 companys
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
companys 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