Transcript Corporate Bonds with Sukuk Features

Corporate Bonds for Real Estate
with Sukuk Features
Presented By:
Naim Farooqui
Managing Director
ORIX Investment Bank Pakistan Limited
International Islamic Finance and
Investment Symposium 2006
December 7, 2006
Real Estate Acquisition
Transaction Structure
Bank Syndication
Debt -Rs. 150 m
1
Corporate House
Equity – Rs. 121 m
Equity + Debt
Rs. 271 m
Rentals
Company 1
Purchase
Company 2
Rented
Office Building
Company 3
Company 4
Making a Case for Securitization for
A Real Estate Finance Company (REFC)
2

Securitization is a process for institutions to turn their
locked up assets i.e. mortgages in the instant case,
which are illiquid and lumpy, into tradable securities
such as bonds.

Securitization is an open market selling of financial
instrument backed by asset’s cash flow or asset value
(mortgages).

A contractual arrangement whereby the REFC sells its
mortgage receivables to a special purpose vehicle
(SPV).

SPV issues debt instruments (bonds) to finance the
purchase
Securitization Structure
Typical Structure
Mortgage Backed
Securitization
Normal REFC Business
Operations
Receivables
Real Estate
Finance Company
Mortgages
Extension of Loans
For Real Estate
Cash Proceeds Raised
Via Issuance of Debt
Securities
Housing Mortgage
Receivables
SPV
Key Issues To be Addressed
1.
2.
3.
4.
5.
6.
Non-Recourse Element
Accounting Clearance
Legal Issues
Market For Instrument
Regulatory Aspects
Security Mechanisms
Debt
Securities
Cash
Safeguarding Investors
Interest
Investors
Trustee
Private Placements
Public Placements
3
Structure of SPV

Originator: entity that generates receivables

Issuer of the securities: SPV (any form, usually
trust, corporation, partnership, etc.)

Advisor/Arranger: structures transaction; prepares
documentation alongside legal, liaison with
auditors

Underwriter: who places securities in the market
4
Structure of SPV…contd.

Custodian: entity that holds receivables as agent
and bailee for the trustee or trustees

Servicer: who collects receivables and transfers
funds to accounts of trustees

Trustee: who deals with the administration—
holds receivables; receives payment on
receivables, makes payment to security holders

Rating agencies: JCR-VIS, PACRA.—helps in
structuring; determine opinions needed, etc.
5
6
General Benefits of Securitization

Why Securitize?

Lower-cost financing


Equity saving




Liquidity crunches?
Leverage restrictions
Reduction of assets – create liquidity to
the company
Matched funding / funding
strategy
Earnings

Originator capitalizes the future cash flow
Summing Benefits for all
Stakeholders

To owner/originator






To bondholders/investors




Alternative financing instruments
Improve liquidity in the balance sheet
Reinvestment and freeing up the low-yield assets
Transfer the interest rate risks to SPV
Reducing corporate gearing
New Investment opportunities for diversification
Direct participation in real estate market by small investors
Building as collateral
To Real Estate Market


An active secondary capital market for institutional
investment
Alternative Financing Options
7
Conclusions
8
Similarities of SUKUK with the proposed structure
The proposed structure though based on conventional
model can easily be converted into a Shariah Compliant
Sukuk Bond. It has the following characteristics which
are important elements of Sukuks:

Corporate Bonds are easily Tradable – Similarly, SUKUK
being liquid real assets, are easily transferred and traded in the
financial market.

Corporate Bonds can be Rated – Credit rating increase the
credibility of financial instruments. SUKUK are easily analyzed by
international and regional rating agencies which facilitates their
marketability.
Differences in Main features:


Sukuk have share holding in the underlying asset while Bonds
are purely a debt instrument.
Sukuk are limited to Sharia permissible ventures/products.
9
Recent Deals
July 2003
July 2003
International Housing
Finance Limited
International Housing
Finance Limited
Rs. 150 Million
Rs. 150 Million
Mortgage Backed
Bridge Financing
Mortgage Backed
Bridge Financing
August 2003
August 2003
Crescent Ujala Limited
Crescent Ujala Limited
Rs. 150 Million
Rs. 150 Million
Debt Syndication
Debt Syndication
Dec 2003
Dec 2003
July 2003
July 2003
Ittehad Chemicals
Limited
Ittehad Chemicals
Limited
Rs. 250 Million
Rs. 250 Million
Listed Term Finance
Certificates
Listed Term Finance
Certificates
Sept 2003
Sept 2003
Fidelity Investment
Bank Limited
Fidelity Investment
Bank Limited
Rs. 125 Million
May 2004
May 2004
Indus Dyeing &
Manufacturing Company
Indus Dyeing &
Manufacturing Company
Rs. 100 Million
Rs. 100 Million
Commercial Paper
Commercial Paper
Rs. 38 Million
Rs. 38 Million
Lease Syndication
Lease Syndication
Oct 2003
Oct 2003
Grays Leasing Limited
Grays Leasing Limited
July 2003
July 2003
Baluchistan Glass
Limited
Baluchistan Glass
Limited
Rs. 200 Million
Rs. 200 Million
Debt Syndication
Debt Syndication
Nov 2003
Nov 2003
Sigma Leasing Limited
Sigma Leasing Limited
July 2003
July 2003
Brookes Pharmaceutical
Limited
Brookes Pharmaceutical
Limited
ORIX
ORIXSecuritization
SecuritizationTransactions
Transactions
Completed
Completed
Rs. 100 Million
Rs. 100 Million
Debt Syndication
Debt Syndication
June 2004
Sept 2003
Sept 2003
Orient Petroleum Inc
Orient Petroleum Inc
June 2004
Rs. 1 Billion
Telecard Limited
Telecard Limited
First Oil & Gas Securitization
Rs. 1 Billion
Company
First Oil & Gas Securitization
Securitization
Company
Rs. 400 Million
Rs. 400 Million
Privately Placed Term
Finance Certificates
Privately Placed Term
Finance Certificates
Jan 2004
Rs. 130 Million
Rs. 130 Million
Privately Placed Term
Finance Certificates
Privately Placed Term
Finance Certificates
Dec 2003
Rs. 100 Million
Rs. 100 Million
Debt Syndication
Debt Syndication
March 2004
Rs. 200 Million
Rs. 200 Million
Debt Syndication
Debt Syndication
Securitization
April 2005
April 2005
Orient Petroleum Inc
May 2004
Orient Petroleum Inc
Jan 2004
Crescent Standard
Crescent Steel & Allied
Investment Bank Limited
Products Limited
Crescent Standard
Crescent Steel & Allied
Investment Bank Limited
Products Limited
Lease Discounting
Rs. 125 Million
Syndication
Lease Discounting
Syndication
July 2003
NationalJuly
Police
2003
Foundation Security
National
Police
Services
Limited
Foundation Security
Services Limited
Rs. 300 Million
300 Million
Privately Rs.
Placed
Term
Finance Certificates
Privately Placed Term
Finance Certificates
June 2004
June 2004
Eden Developers Pvt
Limited
Eden Developers Pvt
Limited
Rs. 500 Million
Rs. 500 Million
Debt Syndication
Debt Syndication
Dec 2003
Orient Petroleum Inc
Orient Petroleum Inc
Rs. 300 Million
Rs. 300 Million
Privately Placed Term
Finance Certificates
Privately Placed Term
Finance Certificates
June 2004
June 2004
International Brands
Pvt Limited
International Brands
Pvt Limited
Rs. 110 Million
Rs. 110 Million
Debt Syndication
Debt Syndication
March 2004
Sindh Abadgar Sugar
Mills Limited
Sindh Abadgar Sugar
Mills Limited
Rs. 100 Million
Rs. 100 Million
Debt Syndication
Debt Syndication
June 2004
June 2004
Big Bang Communications
Pvt Limited
Big Bang Communications
Pvt Limited
Rs. 32 Million
Rs. 32 Million
Debt Syndication
Debt Syndication
May 2004
Al Zamin Leasing
Modaraba Limited
Al Zamin Leasing
Modaraba Limited
Rs. 50 Million
Rs. 1.2 Billion
Naimat Basal oil & Gas
Rs. 1.2 Billion
Securitization Company
Naimat Basal oil & Gas
Securitization
Securitization Company
Securitization
Rs. 50 Million
Lease Discounting
Syndication
Lease Discounting
Syndication
June 2004
June 2004
Al Noor Sugar Mills
Limited
Al Noor Sugar Mills
Limited
Rs. 100 Million
Rs. 100 Million
Debt Syndication
Debt Syndication
Sept 2002
Sept 2002
PILCORP
PILCORP
Rs. 100 Million
First Securitization
Trust
Rs. 100 Million
Company
First Securitization Trust
Lease Receivables
Company
Securitization
Lease Receivables
Securitization

Thank You!