Transcript Securitisation using sukuk

Financing the Securitisation of
Real Estate using Sukuk.
Trevor Norman
Director
The application of
lessons learnt from the
Caravan 1 transaction
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Securitising assets using sukuk.
Summary of talk: Islamic versus conventional
securitisation.
The CARAVAN I transaction.
• The problems (and some solutions)
Real Estate backed Sukuk
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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, Shari’a Standard No. (17) on
Investment Sukuk].
Must be issued on the basis of a Shari’a
compliant contract (e.g.: Ijarah, Salam,
Murabaha, Mudaraba, etc.).
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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.
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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.
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Shari’a compliant securitisations:
Two levels of Shari’s compliance:
 The underlying assets must be Shari’a compliant.
Suitable assets include:
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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 Shari’a principles
– e.g.: Ijarah, Salam, Murabaha, Mudaraba, etc
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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)
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•
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Legal and Accounting issues
Shari’a compliance
Ratings Agency
Other points
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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.
 Shari’a review by Yasaar Ltd. for the structurer and by
Sh. Nizam Yaquby of Bahrain for the underwriters.
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CARAVAN I Ltd. – structure diagram:
Two-tier structure devised by
BSEC together with Volaw
Trustee (Volaw)
Jersey Charitable
Trust
Resident
Shareholders
Share capital
Share capital
Fathi Taleb & Sons
Hanco Rent a Car
Cash f rom sale GCC company
Shari'a compliant
of assets
(Al Karam)
f unding agreements
Assets purchased
f rom Originator
Underly ing
Assets
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Return on
assets
Carav an I Ltd
Jersey
Cash f rom issue
of Sukuk
SR 98m
Inv estors
Shamil Bank
Income return matching
f lows f rom assets
SR4.1m
Participating Shares
(Hanco)
CARAVAN I Ltd. – lessons learned
Legal issues:
Title to the vehicles
No provision for Sukuk under Saudi Law
Different Codes of Law
Shari’a compliance:
Corporate structure
Sukuk
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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
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Real Estate Securitisation Structure (?)
Trustee (Volaw)
Jersey Charitable
Trust
Protector (Shari'a Board)
Share capital
Cash f rom issue
of Sukuk
Originating Islamic
bank or institution
Cash f rom sale SPV - Company
of assets
incorp. in Jersey
Assets purchased
f rom Originator
Return on
assets
(Intermediate
holding entity )
Asset
(Real
Estate)
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Inv estors
Income return matching
f lows f rom assets
Conclusion:
Caravan is a “first of breed” transaction.
Sukuk are ideally suited for Shari’a
compliant securitisation structures.
Many types of asset may be securitised
in a Shari’a compliant manner, and
Real Estate is an ideal asset class for
Shairi’a compliant securitisations.
A variety of structures will evolve.
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General disclaimer
 The information in this presentation is intended for use by
participants at the Islamic Real Estate Finance, 2004,
conference only.
 Any structures and case studies presented serve as
outlines and examples only. Specific advice should be
sought for all proposed transactions.
 All comments and views expressed are those of the
presenter and do not necessarily represent the views of
Volaw Trust Company, or the conference organisers.
 Volaw Trust Company is regulated by the Jersey Financial
Services Commission in the conduct of trust company
business.
© Volaw Trust Company 2004
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Securitising Real Estate using Sukuk
Questions ?
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Volaw Trust Company, Jersey
Trevor L Norman
Director
Volaw Trust & Corporate Services Limited
Templar House, Don Road, St Helier,
Jersey, JE4 8WH
Tel: +44 (0) 1534 500 400
Fax:+44 (0) 1534 500 450
[email protected]
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