1. finance

Genesis of Global Sukuk
Arsalaan Ahmed
Prepared by Barwa Bank Q.S.C. for the Kazan Sukuk Conference 2015
9th April 2015
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What we will cover
 A brief time line
 High level overview of the structures
 Change in structure impact to Issuers & Investors
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What we will cover
 A brief time line
 High level overview of the structures
 Change in structure impact to Issuers & Investors
3
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Time Line
2002
2006
2007/8
2011/2
2014/5
3 non-OIC country
sovereigns issue (all
100% Al-Ijarah)
Malaysia Global Sukuk.
First ever Global Sukuk.
Cagamas & Petronas
use Wakala with 34%
tangible assets
Al-Ijarah Structure.
SABIC Sukuk.
UK Sovereign uses coobligor mechanism on
Ijarah
Istithmaar Structure
introduced.
Search for a noTangible asset structure
and issuer . . . .
DP World & Purple
Island Sukuk.
Mudharaba Structure
used….later killed off by
Wakala
Malaysia Wakala Global
Sukuk.
Wakala Structure used
(51% tangible assets).
Axiata Group.
Manafae Structure used
(vouchers)
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What we will cover
 A brief time line
 High level overview of the structures
 Change in structure impact to Issuers & Investors
5
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Ijara Sukuk : Sale & Leaseback (or Head-Lease & Sub-Lease)
Structure Overview
Inception
Ongoing & Maturity
Obligor
(Seller of Assets)
Asset Sale
2
Obligor
(Lessee)
Purchase
Price
3
Asset Lease
Obligor
(Purchaser of Assets)
Obligor
(Lessee)
6
4
Rental
Payments
5
Periodic
Distribution
Asset Repurchase
SPV
(Issuer / Trustee / Lessor)
1
Sukuk Issue
SPV
(Issuer / Trustee / Lessor)
Sukuk
Redemption
Sukuk Proceeds
Sukuk Holders
Transaction
Fund flow
Exercise Price
7
Redemption
Amount
Sukuk Holders
1
4
~ 3 Steps at inception
~ 5 Steps during ongoing
6 ~ 7 Steps at maturity
6
Istithmaar Structure
Structure Overview
Inception
Dissolution
Ongoing
Business
Business
Administration of
Business
Obligor
(Seller of Business Right)
Obligor
(Administrator)
4
Business
Net Income
Obligor
(Administrator)
Obligor
Obligor
(Administrator)
(Purchaser of Business
Right)
Excess Income
5.2 or Top-up
Net Income
Purchase of
Business
Right
2
3
Purchase Price
Appointment of
Administrator
5.1
Reserve
Account
9
Sale of
Business
Right
7
Reserve
Account
Purchase Price
5.3 Top-up
SPV
(Issuer / Trustee)
SPV
(Issuer / Trustee)
1
6
Sukuk Issue
Sukuk Proceeds
Investors
Transaction
Fund flow
Periodic Distribution
Amounts
8
Sukuk Redemption
10
Purchase Price +
Extra Redemption Amount
Investors
Transaction
Fund flow
7
Extra
Redemption
Amount
SPV
(Issuer / Trustee)
Investors
1 ~ 3 Steps at inception
4 ~ 6 Steps during ongoing
Incentive Fee
7 ~ 10 Steps at dissolution
Mudharaba & Wakala
 Mudharaba:
– Did not live long, was taken out by Wakala structure
 Wakala:
– 1) Name for a Sukuk that mixes tangible assets (like Ijarah) with commodity Murabaha Assets.
Note 51% tangible assets was typically market practice till 2015
– 2) Actual agency investment into Shariah compliant assets. Easier than Mudharaba hence the
effective demise of Mudharaba based sukuk
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Manafae Structure
Structure Overview
Inception
Ongoing & Maturity
Vouchers
Vouchers
Obligor
(Seller)
Obligor
(Wakeel)
Obligor
(Purchaser)
Obligor
(Wakeel)
Appointment
of Wakeel
2
Revenue from
Voucher Distribution
3
4
6
Purchase of
Asset Pool
Sale of
Asset Pool
Exercise
Price
SPV
(Issuer / Trustee )
Sukuk Issue
1
SPV
(Issuer / Trustee )
Periodic
Sukuk Proceeds
5 Distribution
Amounts
Investors
Transaction
Fund flow
Sukuk
Redemption
7
Redemption
Amount
Investors
1 ~ 3 Steps at inception
Transaction
Fund flow
9
4 ~ 5 Steps during ongoing
6 ~ 7
Steps at maturity
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What we will cover
 A brief time line
 High level overview of the structures
 Change in structure impact to Issuers & Investors
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Impact of Structure on Issuers
Structure
Asset Type
 Existing tangible
assets such as plant,
machinery, buildings
etc
Ijara
Istithmar
 Usufruct rights
pertaining to tangible
assets can be
considered as well
 Income-generating
assets/business (e.g.
commercial rights)
 Ijara assets
Wakala
 Shariah-compliant
equity instruments
 Sukuk certificates
 Commodity Murabaha
Manafae
 Shariah-compliant
consumables (e.g.
seats on flight routes,
electricity and water
usage, airtime),
Description
Benefits
Considerations
 Involves a sale and
leaseback (or
headlease and
sublease) of tangible
assets (or their
usufruct rights)
 Most commonly-applied and
accepted Sukuk structure
 Identification of assets
 Tradable on secondary market
 Assets remain in the beneficial
ownership of investors till maturity
 Involves appointing
the obligor as
manager to manage
the assets/business
for a fee
 Easily executable if Shariah
compliant income-generating
assets/business are available
 Involves appointing
the obligor as
investment agent to
manage the assets
for a fee
 Easily executable if Shariah
compliant assets are available
 Identification of assets and
substitution
 Template documents available
 Assets need to have value at or
greater than amount raised
 Involves appointing
the obligor as
distribution agent
 Tradable yet does not require
any tangible assets
 Wide Shariah acceptability
(AAOIFI-compliant)
 Relatively easy documentation
process
 100% of assets have to be tangible
 Assets should be unencumbered at
time of sale
 Identification of income-generating
assets/business
 Template documents available
 Minimum 34% (or 51%) physical
assets required
 Acceptable to most Islamic
investors
 Allows the greatest potential
amount of issuance, hence suited
for a programme
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 Due diligence around the assets to
ensure regulation/regulators allows for
such sale
 Slightly more complex from a
documentation perspective
 Investor education required
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What about the Investors
Structure
GCC Windows
Asia Sukuk
Investors
Preferred & Widely
Accepted
Wide Acceptance
Wide Acceptance
Well understood
Widely Acceptance
Wide Acceptance
Wide Acceptance
Not well understood
Depends
Wide Acceptance
Wide Acceptance
Familiarity increasing
Depends
Wide Acceptance
Wide Acceptance
Not well understood
GCC Islamic
Conventional
Ijara
Istithmar
Wakala
Manafae
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Questions?
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Disclaimer
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The information in this document is derived from sources believed to be reliable but which have not been independently verified. Barwa Bank makes no
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institutional and professional customers and is not intended for the use of private customers.
Copyright 2013 Barwa Bank Q.S.C. All rights reserved. The presentation was developed, compiled, prepared and arranged by Barwa Bank Q.S.C. through the
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interest in and to the presentation is vested in Barwa Bank Q.S.C. and the presentation cannot be used without Barwa Bank Q.S.C.’s prior written consent.
Information herein is believed to be reliable but Barwa Bank Q.S.C. does not warrant its completeness or accuracy.
The information contained in this presentation has been distributed to you on a stand alone basis and is not to be combined with, consolidated, incorporated or
otherwise used with any other written materials provided by Barwa Bank Q.S.C..
The information contained in this document is for discussion purposes only. Any information relating to performance contained in these materials is illustrative
and no assurance is given that any indicative returns, performance or results, whether historical or hypothetical, will be achieved. Indications based on market
data are subject to change, and Barwa Bank Q.S.C. undertakes no duty to update this information.
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