Roger Wedderburn-Day
Debt Financing and Sukuk
LSE Islamic Finance Seminar Series
30 October 2013
© Allen & Overy 2013
1
Introduction
– What is debt financing?
– How do bond issues work?
– Why is there a bond market?
– How is this relevant to sukuk?
– How do sukuk work?
– What are sukuk?
– Interesting features of sukuk
– What is the future for sukuk?
© Allen & Overy 2013
What is debt financing?
– Bank loan
– Corporate financing options
– Equity
– Bank debt
– Securities
© Allen & Overy 2013
How do bond issues work?
– What is a bond?
– Significant differences from loans:
– Multiple creditors
– Diversity in creditors
– Tradable
© Allen & Overy 2013
Why is there a bond market?
– Why issue securities?
– Different source of funding (issuer)
– More flexible (bank lender)
– Hedging (non-bank lenders)
© Allen & Overy 2013
How is this relevant to sukuk?
– Same reasons:
– Alternative source of funding (issuer)
– More flexible (bank lender)
– Hedging (non-bank lenders)
© Allen & Overy 2013
How do sukuk work?
– Islamic bonds, but…..
© Allen & Overy 2013
How do sukuk work?
Islamic Republic of Pakistan – Conventional Bond Issuance (2004)
PAKISTAN
© Allen & Overy 2013
US$500 million
Bond
US$50 million
US$500 million
INVESTORS
How do sukuk work?
Islamic Republic of Pakistan – Sukuk Al Ijara (2005)
Ijara (Lease)
PAKISTAN
Land
Rental
(50m)
Exercise
Price
(500m)
Pakistan purchases land
for Exercise Price.
Issuer pays Investors
final distribution.
© Allen & Overy 2013
NATIONAL
HIGHWAY
AUTHORITY
STEP 2
US$500 million
STEP 4
Sukuk
Issuer pays Investors
periodic distributions.
ISSUER
US$50 million
Issuer leases Land to
Pakistan for rental fee.
Purchase
Price
(500m)
US$500 million
STEP 3
Land
Issuer purchases Land
from Highway Authority
for Purchase Price,
declares trust and issues
sukuk.
INVESTORS
STEP 1
Investors purchase
sukuk from Issuer.
What are Sukuk?
– Trust certificates
– Do not pay interest
– Returns mimic conventional fixed-income debt securities
– Carry a Fatwa signed by Shari’a scholars
– Governed by English law not Shari’a
© Allen & Overy 2013
What are sukuk?
Sharia Scholars
– Limited number
– Relied on by Sharia institutions
– Scholars provide a fatwa
– Wide range of views
Enforceability
– Being bound by Sharia is essentially elective
– With exceptions, Sharia is not national law.
– Shamil case
© Allen & Overy 2013
Sukuk – Interesting features
Principal documents
Sukuk
Conventional bond
Subscription Agreement
Agency Agreement
Sale Agreement
Lease Agreement
Service Agency Agreement
Purchase Undertaking
Subscription Agreement
Agency Agreement
© Allen & Overy 2013
Sukuk – Interesting features
– Role of the Trustee
– What happens on default?
© Allen & Overy 2013
What is the future for sukuk?
© Allen & Overy 2013
What is the future for sukuk?
© Allen & Overy 2013
What is the future for sukuk?
– Islamic issuer or issuer based in Middle East / Asia
– To build a new investor base
– To benefit from future liquidity as market develops
– To complement commitment to Middle East / Asia
– Political reasons
© Allen & Overy 2013
What is the future for sukuk?
– Sovereign sukuk
– Middle East credit issues
– Sukuk defaults and restructurings
– Sharia compliance
– Need greater predictability and consistency
– Secondary market liquidity
– GE sukuk
– First sukuk by western multinational
– Will others follow?
© Allen & Overy 2013
17
Any questions?
© Allen & Overy 2013
18