$ US 150 million First Global Sukuk:
Kumpulan Guthrie Bhd
Case Writer: Brian Kettell
www.islamicbankingcourses.com
This case describes the Serial Islamic Lease Sukuk by First Global Sukuk.It is intended to be
used as the basis for class discussion. Answers are not provided. It is expected that the course
leader will guide participants accordingly.
.
Case Abstract
An Islamic bond (sukuk) has economic characteristics similar to those of a conventional bond,
but is structured so as to be compliant with Shari’a law enabling it to be sold to Islamic investors
who are prohibited by Shari’a law from investing in conventional debt securities.
The US$150 million Islamic Lease Sukuk was part of a US$395 million Serial Islamic Sukuk
issuance that Bank Islam (Labuan) Limited was mandated to arrange by Kumpulan Guthrie
Berhad (Guthrie). In December 2000, Guthrie was granted a RM1.5 billion (US$400 million) Alljarah Muntahiah Bittamleek by a consortium of banks. The original facility was raised to refinance Guthrie’s acquisition of a palm oil plantation in the Republic of Indonesia.
‘Those who take riba (usury or interest) will not stand but as stands the
one whom the demon has driven crazy by his touch.’
Qur’an Sura 2:275-280
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Ijarah Corporate Sukuk: Kumpulan Guthrie Bhd
Kumpulan Guthrie Berhad has its origins in a firm established in 1821 and was converted to a
public company under the Companies Act, 1965 on 2nd September, 1987. Guthrie’s shares
have been listed and traded on the KLSE since 25th August, 1989. The Serial Islamic Lease
Sukuk issuance by First Global Sukuk in partnership with various Malaysian subsidiaries of
Kumpulan Guthrie provides an interesting case study of an alternative structure for ijarah
sukuk. The arrangement implemented different ‘series’ of sukuk (similar to conventional
securitization tranches) as well as call and put options. Furthermore, the fact that the seller is a
corporate rather than government meant that there were numerous varying risk considerations.
First Global Sukuk is an SPV incorporated in Labuan, Malaysia specifically for the purpose of
this particular sukuk. On December 24, 2001 Guthrie issued trust certificates in two series
(Series A and Series B) with a total value of US $ 150 million. Series A comprised of US $ 50
million of certificates due in 2004, and the remaining US $ 100 million were incorporated in
Series B due in 2006. The distinctions between Series A and Series B sukuk are in the land
parcels, the different sellers (various subsidiaries of Guthrie), the semi-annual returns,
ownership interests and the terms to maturity.
First Global Sukuk
Country
Malaysia
Issuer
Type
Kumplan Guthrie
Bhd
Ijarah Sukuk
Value
US$ 150 Million
Maturity
2006
Differences between Guthrie sukuk Series A and Series B
Series A
Series B
Denominations
$500,000
$500,000
Due Dates
December 2004
December 2006
Sellers
Kumpulan Jerai Sdn Bhd
Kumpulan Linggi Sdn Bhd
and Kumpulan Kamuning Sdn
Bhd
Semi Annual Returns
LIBOR + 1.5% per annum for
the principal amount of Series
A sukuk held by investor
LIBOR + 2.0% per annum for
the principal amount of Series
B sukuk held by investor
Ownership Interest
1.0% undivided ownership
interest in Series A Trust
Assets
0.5% undivided ownership
interest in Series B Trust
Assets
The arrangement has provisions for Guthrie and its subsidiaries to be able to issue further
sukuk on other land parcels. Distributions on such further issuances will be derived from
Guthrie’s payments under the relevant lease agreements with the SPV. Additional trusts will
have to be created for this additional certificate but it has been estimated that the total value of
future issuances would not exceed US $ 245 million.
The lease arrangements also have stipulations involving the utilisation of call and put options.
The put option allows the SPV, on behalf of the holders of the trust certificates, to require
Guthrie to purchase the beneficial interest in the related land parcels. The purchase price is
equal to the principal amount on such series of sukuk plus the aggregate periodic distribution
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amount payable on the sukuk on the date of such redemption. This option can be exercised on
the periodic distribution date immediately following the occurrence of a dissolution event and on
any scheduled dissolution date. Conversely, the lease agreements also afford Guthrie a call
option whereby Guthrie can require the SPC to sell the beneficial interests in the land parcels
back to it on the related scheduled dissolution date at the associated dissolution distribution
amount. See Figure 1.
Given that Guthrie is a commercial enterprise operating in a region with a history of economic
vulnerability, its financial statements and returns projections are subject to considerable
scrutiny. There are several covenants that the company has agreed to under the terms of the
arrangement and these include:
•
To maintain a Gearing Ratio (the proportion of the company’s total capital that is borrowed)
of not more than 1.5.
•
To maintain a Debt Service Coverage Ratio of not less than 1.5. The Debt Service
Coverage Ratio is defined as the ratio of Net Operating Income to Total Debt Service. This
would indicate whether the property is generating enough income to pay its debt
commitments.
•
Not to declare or pay any dividend on its shares as long as the debt service coverage ratio
is less than 1.5 and the amount deposited in any reserve account is less than the amount
required to be deposited.
The trust certificates were rated internationally as BBB+ by MARC International Ltd and are
listed on the Labuan International Financial Exchange (Malaysia). The advisors to the issuance
included Bank Islam Ltd (Shari’a structuring and Lead Arranger), ABN Amro (Financial and
Global Coordinator), Aseambankers Malaysia Berhad (Co-Arranger) and Shamil Bank of
Bahrain (Middle East Coordinator).
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Figure 1. First Global Sukuk
Sukuk
9
6
Semi-annual
distributions
derived from
Lease
Payments
Sukuk are issued, each of which
represents an undivided ownership
interest in the Trust Assets
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Trustee
7
Proceeds of
Sukuk issue
paid directly to
Acquisition Facility
Financiers to fund
Acquisition Facility
Call Option
SPV
Convey to Trustee for the benefit of
Sukukholders (i) beneficial interest in
Land Parcels and (ii) all rights under
Lease Agreements
3
8
Semi-annual
Lease
Payments
4
Lease beneficial interest in
Land Parcels to Guthrie
Guthrie
1
Transfer beneficial
interest in t he Land
Parcels to the SPV
Seller
Transfer beneficial interest in Land
Parcels back to the Seller
Acquire beneficial
interest in Land
Parcels via
Acquisition Facility
Call Option
2
Acquisition
Facility
Financiers
Summary of the Offering
Parties
SPV
First Global Sukuk Inc., a bankruptcy remote, special purpose
company incorporated in Labuan under the Offshore Companies
Act, 1990. The SPV has been incorporated solely for the purpose
of participating in the transactions contemplated in the
Transaction Documents.
SPV Ownership/
Administration of the SPV
The issued share capital of the SPV is US$2.00 divided into two
ordinary shares of par value US$1.00 each. Pursuant to the SPV
Administration Agreement, the SPV’s ordinary shares are owned
by BIMB International Islamic Trust (Labuan) Sdn Bhd as SPV
Administrator.
Sellers
Kumpulan Jerai Sdn Bhd (the “Series A Seller”), Kumpulan
Linggi Sdn Bhd and Kumpulan Kamuning Sdn Bhd (together, the
“Series B Sellers”), each a subsidiary of Kumpulan Guthrie
Berhad. The Series A Seller will declare itself a bare trustee, for
the benefit of the SPV, over all its rights, title and interests in the
Series A land Parcels pursuant to the Series A Purchase
Agreement and each of the Series B Sellers will declare itself a
bare trustee, for the benefit of the SPV, over all its rights, title and
interests in the Series B Land Parcels pursuant to the Series B
Purchase Agreements and will convey to the SPV the beneficial
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interest in such Land Parcels pursuant to the relevant Purchase
Agreement.
Guthrie
Kumpulan Guthrie Berhad has its origins in a firm established in
1821 and was converted to a public company under the
Companies Act, 1965 on 2nd September, 1987. Guthrie’s shares
have been listed and traded on the KLSE since 25th August,
1989. Guthrie will lease from the SPV (i) the Series A Land
Parcels on the terms set out in the Series A Lease Agreement for
a period of three years commencing on the Closing Date and
terminating, with the acquisition of the Series A Land Parcels
from the SPV, on the Series A Scheduled Dissolution Date, and
(ii) the Series B Land Parcels on the terms set out in the Series B
Land Parcels on the terms set out in the Series B Lease
Agreement for a period of five years commencing on the Closing
Date and terminating, with the acquisition of the Series B Land
Parcels from the SPV, on the Series B Scheduled Dissolution
Date, and will operate and maintain the Land Parcels in the
ordinary course of its business.
Initial Purchasers
Bank Islam (L) Ltd, Maybank International (L) Ltd, Shamil Bank of
Bahrain EC, Bumiputra Commerce Bank (L) Ltd, AMMB
International (L) Ltd, ABN AMRO Bank NV, Labuan Branch, Bank
Muamalat Malaysia Berhad, Labuan Offshore Branch, and RHB
Bank (L) Limited as initial purchasers under the Certificate
Purchase Agreement, pursuant to which they have each agreed
to purchase the aggregate principal amount of the Sukuk.
Trustee
Bank Islam (L) Ltd, a company incorporated in Labuan under the
Offshore Companies Act, 1990 and licensed under the Offshore
Banking Act, 1990, in its capacity as trustee on behalf of the
Sukukholders in respect of the Trusts in accordance with the
Trust Agreements.
Summary of Certificates
Sukuk
US$50,000,000 Trust Certificates due 2004, Series A and
US$100,000,000 Trust Certificates due 2006, Series B.
Issue Price
100 per cent of the aggregate principal amount of the Sukuk.
Rate of Return on Trust
Assets
Each holder of a Series A Suk’kun will receive on each Periodic
Distribution Date, out of the Series A Trust Assets, a return equal
to 1.5 per cent per annum above LIBOR for the principal amount
of Series A Sukuk held by such holder for each Profit
Accumulation Period.
Issue Price
100 per cent of the aggregate principal amount of the Sukuk.
Rate of Return on Trust
Assets
Each holder of a Series A Suk’kun will receive on each Periodic
Distribution Date, out of the Series A Trust Assets, a return equal
to 1.5 per cent per annum above LIBOR for the principal amount
of Series A Sukuk held by such holder for each Profit
Accumulation Period.
Each holder of a Series B Suk’kun will receive on each Periodic
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Distribution Date, out of the Series B Trust Assets, a return equal
to 2.0 per cent per annum above LIBOR for the principal amount
of Series B Sukuk held by such holder for each Profit
Accumulation Period.
Scheduled Dissolution of
the Trust
Under each Lease Agreement, the SPV will have the option (the
“Put Option”), which it will assign to the Trustee for the benefit of
the holders of the related Series of Sukuk pursuant to the related
Trust Agreement, to require Guthrie to purchase the beneficial
interest in the related Land Parcels at a price equal to the
principal amount of such Series of Sukuk plus the aggregate
Periodic Distribution Amount payable on the Sukuk on the date of
such redemption.
(a)
on the Periodic Distribution Date immediately following the
occurrence of a Dissolution Event; and
(b)
on the Scheduled Dissolution Date in respect of such
Series of Certificates; and
Under each Lease Agreement, Guthrie will have the option (the
“Call Option”) to require the SPV or, after the assignment to the
Trustee of the PSV’s interests in such Lease Agreement pursuant
to the relevant Trust Agreement, the Trustee to sell the beneficial
interest in the relevant Land Parcels to it on the related
Scheduled Dissolution Date at the related Dissolution Distribution
Amount.
Forms and Denomination
The Sukuk (or Certificates) will be issued in bearer form, serially
numbered and in denominations of US$500,000 each. Title to
the Certificates will pass by delivery.
Each Series of Certificates will be represented by a Global
Certificate which will be deposited on the Closing Date with the
Depository.
Status
Each Series A Suk’kun represents an undivided 1.0% ownership
interest in the Series A Trust Assets and will rank pari passu,
without any preference, with the other Series A Sukuk. Each
Series B Suk’kun represents an undivided 0.5% ownership
interest in the Series B Trust Assets and will rank pari passu,
without any preference, with the other Series B Sukuk.
Limited Recourse
Each Suk’kun represents solely an undivided ownership interest
in the relevant Trust Assets. Holders of Series A Sukuk will have
no recourse to the Series B Trust Assets. Likewise, holders of
Series B Sukuk will have no recourse to the Series A Trust
Assets. Creditors of the SPV and the Trustee (in any capacity
other than as trustee in respect of the Sukuk), including, in
particular, holders of certificates relating to other trusts, will have
no recourse to the Trust Assets. Proceeds of the Trust Assets
are the sole source of payments on the Sukuk. The Sukuk do not
represent an interest in or obligation of any of the SPV, the
Trustee, Guthrie or any of their affiliates. Accordingly,
Sukukholders will have no recourse to any assets of the SPV, the
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Trustee (including, in particular other assets comprised in other
trusts), Guthrie (to the extent it fulfils all of its obligations under
the related Lease Agreements) or any of their affiliates in respect
of any shortfall in the expected amounts from the Trust Assets.
Negative Pledge
So long as any of the Sukuk remains outstanding, the SPV has
undertaken that it will not create or have outstanding any Security
Interest upon, or with respect to, any of its present or future
business, undertaking, assets or revenues (including any
uncalled capital).
Guthrie’s Covenants
Under the terms of each Lease Agreement, Guthrie will agree,
among other things:
(a)
to maintain a Gearing Ratio of not more than 1.5;
(b)
to maintain a Debt Service Coverage Ratio of not less
than 1.5; and
(c)
not to declare or pay any dividend on its shares for so
long as:
(i)
the Debt Service Coverage Ratio is less than 1.5;
Provided that Guthrie shall, notwithstanding the above, be
allowed to declare and pay an annual gross dividend of 5.0 per
cent.
Use of Proceeds
The net proceeds of the issue of the Sukuk will be applied by the
Trustee to acquire from the SPV the relevant Trust Assets. Such
proceeds will be used by the SPV to purchase the beneficial
interests in the Land Parcels from the Sellers pursuant to the
Purchase Agreements. The Sellers will lend such proceeds to
Guthrie to be used to refinance a portion of the financing facilities
totalling RM1.5 billion entered into by Guthrie and its subsidiaries
to fund its Indonesian acquisition and operations.
Listing
Application has been made to LFX to list the Sukuk on LFX.
Rating
The Sukuk have been given an international rating of BBB+is by
MARC International Ltd. The letters “is” denote Islamic Sukuk,
asset-based instruments.
Governing Law
Each of the Trust Agreements, the Certificate Purchase
Agreement, the Transaction Administration Agreement and the
Sukuk will be governed by, and construed in accordance with,
New York law. The Lease Agreements and the Purchase
Agreements will be governed by Malaysian law.
Investment Considerations
Considerations relating to Guthrie and its Business
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Credit Risk
Proceeds of the Trust Assets are the sole source of payments on the Sukuk and such proceeds
are derived ultimately from Lease Payments made by Guthrie under the Lease Agreements.
Accordingly, payment due on the Sukuk will be directly related to Guthrie’s creditworthiness and
financial condition. A prospective purchaser of Sukuk should have such knowledge and
experience in financial and business matters and expertise in assessing such credit risk that it
is capable of evaluating the merits, risks and suitability of investing in the Sukuk including the
credit risk associated with Guthrie and the Trust Assets. In particular, each prospective
purchaser of Sukuk should note the investment considerations set out below in respect of
Guthrie and the Group.
Financial and Economic Factors Affecting Malaysia and Indonesia
Malaysia remains one of Guthrie’s more important markets, with 15% of Malaysia’s production
consumed domestically and remaining 85% exported in the form of refined palm oil products.
No assurances can be made as to future growth rates of Malaysia or the palm oil export
markets as this may be affected by (among others): (i) adverse developments in the economies
of countries to which Malaysia exports; (ii) changes in inflation and interest rates; (iii) taxation;
(iv) the Malaysian Government’s budget deficit/surplus and (v) political and social
developments affecting Malaysia. The Federation of Malaysia currently maintains long-term
investment grade foreign currency ratings of Baa2 and BBB with a Stable outlook by both S&P
and Moody’s respectively.
In November 2000, Guthrie decided to venture into Indonesia through the Share Acquisition.
The long-term business and growth prospects in Indonesia will be dependent on the political
stability and economic policies of the country. At the present time there is uncertainty as to the
political and economic stability of Indonesia. S&P and Moody’s current long-term foreign
currency rating for Indonesia are CCC+ and Caa1 with a Stable outlook.
Foreign Exchange Exposure and Exchange Controls
Changes in exchange rates influence Guthrie’s results of operations. Guthrie’s crude palm oil
sales are based on the traded crude palm oil price, which is quoted in US dollars. As of the
date hereof, the US dollar is pegged against the Ringgit at a rate of RM3.80 to US$1.00. This
acts as a natural hedge for Guthrie’s US dollar indebtedness. Due to this peg, any rise in the
crude palm oil price in US dollars will be earnings positive to Guthrie as this will be similarly be
reflected in a matching rise in Guthrie’s operating income. There can be no assurance that the
Ringgit peg will continue nor, if it is removed, that the impact thereof will not have a negative
effect on Guthrie and its financial conditions and prospects.
Malaysia has in place limited currency controls for the purposes of economic stability. These
apply primarily in respect of short-term equity investments. In respect of external borrowing,
Malaysian residents are required to obtain the permission of the Malaysian Controller of
Foreign Exchange (the “FX Controller”) before they can obtain credit facilities, including
financial guarantees from non-residents, in foreign currency equivalent to more than RM10.0
million in aggregate. Permission has generally been given for all foreign loans raised on
reasonable terms to finance productive activity in Malaysia and for foreign exchange income
generating investments overseas.
Guthrie has obtained the permission of the FX Controller for the remittance of the RM1.5 billion
raised earlier for the payment of the Acquired Shares. The FX Controller has asked that
Guthrie re-finance this sum via a US dollar financing. It is anticipated therefore, that the FX
Controller will provide the requisite approvals for Guthrie to remit the lease payments under the
Lease Agreements to the Trusts in order for the Trusts in turn to meet its payment obligations
incurred under the Sukuk.
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Currently, there are no restrictions on the repatriation of profits, capital derived from
investments in Indonesia and on the transfer of funds abroad. There are also no restrictions on
foreign exchange operations, specifically including the purchase and sale of foreign exchange
and transfers and all other types of international settlements. However, there can be no
assurance that there will be no restrictions on the repatriation of profits, capital derived from
investments in Indonesia and on the transfer of funds abroad in the future.
Competition
The demand for crude palm oil is dependent upon the world-wide traded prices for competing
oils, such as soya, rapeseed, sunflower seed and other such substitutes for palm oil. As such,
good soya harvests will normally lower the price and impact demand levels for palm oil.
Similarly, palm kernel oil demand is closely tied to that for coconut oil, as they are close
substitutes. The demand for these lauric oils is driven by non-food uses where they have an
environmental advantage over mineral oil. Aside from world-wide demand, supply and price of
oils and fats, there are a number of other factors affecting the movement of palm oil prices
(some of which are interrelated and unpredictable), which could cause price volatility in the
world vegetable oils market. These include: (i) important and export tariff barriers; (ii)
agricultural policies imposed by importing and exporting countries; and (iii) weather and other
agricultural influences.
Environmental Issues
Guthrie and its operations are required to comply with various environmental laws relating to
water, air, noise pollution and the disposal of waste materials. Although Guthrie believes that it
is in compliance in all material respects to these environmental laws, some risks of
environmental costs and liabilities is inherent in its operations and there can be no assurance
that material costs and liabilities will not be incurred in the future in this regard. Compliance
with environmental laws and regulations may add extra costs to the development and
replanting of oil palm.
Accounting Standards
Guthrie prepares its financial statements using generally accepted accounting principles in
Malaysia issued by the Malaysian Accounting Standards Board which differ in certain respects
from international accounting standards. As a result, Guthrie’s financial statements and results
of operations may differ from those of companies in other countries.
Considerations relating to the Sukuk
Limited Recourse
Each Suk’kun represents solely an undivided ownership interest in the relevant Trust Assets.
Holders of Series A Sukuk will have no recourse to the Series B Trust Assets. Likewise,
holders of Series B Sukuk will have no recourse to the Series A Trust Assets. Creditors of the
SPV and the Trustee (in any capacity other than as trustee in respect of the Sukuk), including,
in particular, holders of certificates relating to other trusts, will have no recourse to the Trust
Assets. Proceeds of the Trust Assets are the sole source of payments on the Sukuk. The
Sukuk do not represent an interest in or obligation of any of the SPV, the Trustee, Guthrie or
any of their affiliates. Accordingly, Sukukholders will have no recourse to any assets of the
SPV, the Trustee (including, in particular other assets comprised in other trusts), Guthrie (to the
extent it satisfies all of its obligations under the related Lease Agreements) or any of their
affiliates in respect of any shortfall in the expected amounts from the Trust Assets.
Interest in the Land Parcels
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The issue of the Sukuk and the related transactions involve the transfer of the beneficial
interest in the Land Parcels by the Sellers to the SPV. Such transfer of only the beneficial
interest in (and not the legal title to) the Land Parcels is (i) to facilitate the issue of the Sukuk
and (ii) does not and is not intended to convey ownership in the Land Parcels to the SPV within
the meaning of the National Land Code 1965 of Malaysia. Consequently, the Trustee also
would only acquire a beneficial interest in the Land Parcels. By virtue of Part Thirty-Three (A)
of the National Land Code 1965, a foreigner or a foreign company may acquire land only after
having obtained the approval of the relevant State Authority.
Limited Liquidity
No secondary market for the Sukuk currently exists and, in the event that a secondary market
in the Sukuk does develop, whether as a result of the Initial Purchasers offering to buy such
Sukuk or otherwise, there can be no assurance that it will continue. Accordingly, the purchase
of a Suk’kun is suitable only for investors who can bear the risks associated with a lack of
liquidity in the Sukuk and the financial and other risks associated with an investment in the
Sukuk.
Provision of Information
None of the Trustee, the Initial Purchasers or any of their affiliates makes any representation as
to the credit quality of Guthrie or the Trust Assets. Any of such persons, whether by virtue of
the types of relationships described herein or otherwise, may have acquired, or during the term
of any Sukuk may acquire, non-public information with respect to Guthrie or the Trust Assets.
None of such persons is under any obligation to make such information directly available to any
Sukukholder.
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Restrictions on Malaysian Residents Acquiring Sukuk
Residents of Malaysia are not permitted to purchase the Certificates without first having had
and obtained all the necessary approvals from all relevant regulatory authorities, including but
not limited to all the necessary approvals from Bank Negara Malaysia. The onus of obtaining
such approvals is on the residents concerned and none of the Trustee, the Initial Purchasers,
the SPV or Guthrie accepts any responsibility for the purchase of any Sukuk by the residents as
aforesaid without the necessary approvals being in place. Malaysian residents are advised to
seek independent professional advice as may be necessary before making any such purchase.
Rating
It is a condition of the issuance of the Sukuk that the Sukuk be assigned, on issue, an
international rating of BBB+is by MARC International Ltd for timely payment on the Sukuk. The
rating will address the likelihood of the receipt by Sukukholders of the distributions to which
they are entitled under the Conditions which is a function of Guthrie’s ability to make payments
under the Lease Agreements. A rating is not a recommendation to buy, sell or hold securities
and may be subject to revision, suspension or withdrawal at any time. There is no assurance
that a rating will remain for any given period of time or that a rating will not be lowered or
withdrawn entirely by the relevant rating agency if in its judgment circumstances in the future so
warrant. The rating of the Sukuk will be based, inter alia, on the structure of the issue.
The Leases (Ijarah)
First Global Sukuk Inc, a special purpose company incorporated in Labuan, Malaysia under the
Offshore Companies Act, 1990 (the “SPV”), will enter into (i) a purchase agreement with
Kumpulan Jerai Sdn Bhd, as subsidiary of Guthrie (the “Series A Seller”) in respect of the
Series A Land Parcels (the “Series A Purchase Agreement”) and (ii) three purchase
agreements (each a “Series B Purchase Agreement”) with each of Kumpulan Jerai Sdn Bhd,
Kumpulan Linggi Sdn Bhd and Kumpulan Kamuning Sdn Bhd, each a subsidiary of Guthrie
(together, the “Series B Sellers”) in respect of the Series B Land Parcels.
Pursuant to the Series A Purchase Agreement, the Series A Seller will declare itself a bare
trustee of its interests in the Series A Land Parcels for the benefit of the SPV and convey the
beneficial interest in the Series A Land Parcels to the SPV. Thereafter the SPV will lease its
beneficial interest in the Series A Land Parcels to Guthrie pursuant to an agreement (the
“Series A Lease Agreement”).
Pursuant to the Series B Purchase Agreement, the Series B Sellers will declare themselves
bare trustee of their respective interests in the Series B Land Parcels for the benefit of the SPV
and convey the beneficial interest in the Series B Land Parcels to the SPV. Thereafter the SPV
will lease its beneficial interest in the Series B Land Parcels to Guthrie pursuant to an
agreement (the “Series B Lease Agreement”).
Pursuant to each Lease Agreement, the SPV and Guthrie will enter into several six-month
leases, with the first such lease beginning on the Closing Date and the last such lease
terminating on the Scheduled Dissolution Date of the related Series of Certificates. The “term”
of lease shall refer to the period from the commencement of the first such six-month lease to
the termination of the last such six-month lease. The lease term under the Series A Lease
Agreement is for a period of three years, commencing on the Closing Date and terminating on
the Series A Scheduled Dissolution Date. The lease term under the Series B Lease Agreement
is for a period of five years, commencing on the Closing Date and terminating on the Series B
Scheduled Dissolution Date.
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The SPV will, pursuant to the Trust Agreements, convey to the Trustee its beneficial interest in
the Land Parcels and assign to the Trustee all its rights, title, interest and benefit, present and
future, in, to and under the Purchase Agreements and the Lease Agreements.
Under the Shariah principle of Al-Ijarah Al-Muntahiyah Bit-Tamlik, at the end of the relevant
lease terms, Guthrie will purchase the beneficial interest in the relevant Land Parcels from the
Trustee.
Under each Lease Agreement, Guthrie, as lessee in respect of the relevant Land Parcels, will
be responsible for all costs and expenses associated with, among others, the use, lease and
registration of the Land Parcels. The SPV, as lessor in respect of the Land Parcels, will retain
responsibility for the maintenance of the Land Parcels. Pursuant to the Service Agency
Agreements, the SPV will appoint Guthrie as its service agent for the purposes of providing
adequate maintenance (including conducing periodic inspections of the Land Parcels on the
SPV’s behalf and keeping the Land Parcels in optimal condition) in respect of the Land Parcels
and for the purpose of procuring and maintaining adequate insurance against loss and damage
to the Land Parcels. The SPV will be named in all insurance policies as the beneficiary or loss
payee. The SPV’s rights, title, interest and benefit, present and future, in, to and under such
insurance policies will be assigned to the Trustee (as part of the Trust Assets) pursuant to the
Trust Agreements.
In exchange for its rights in respect of the Land Parcels pursuant to the Lease Agreements,
Guthrie will be obliged to make Lease Payments. Such payments will be equivalent to the
aggregate amounts payable on the Certificates on the forthcoming Periodic Distribution Date.
The Series A Lease Payments and the Series B Lease Payments will be made by Guthrie on
each Periodic Distribution Date.
Under each Lease Agreement:
(a)
(b)
the SPV will have the option (the “Put Option”), which it will assign to the Trustee for
the benefit of the holders of the Series of Sukuk related to such Lease Agreement
pursuant to the related Trust Agreement, to require Guthrie to purchase the beneficial
interest in the related Land Parcels at a price equal to the principal amount of such
Series of Sukuk plus the aggregate Periodic Distribution Amount payable on the Sukuk
on the date of such redemption:
(i)
on the Unscheduled Dissolution Date in respect of such Series of Sukuk; and
(ii)
on the Scheduled Dissolution Date in respect of such Series of Sukuk; and
Guthrie has the option (the “Call Option”) to require the SPV or, after the assignment to
the Trustee of the SPV’s interests in such Lease Agreement pursuant to the relevant
Trust Agreement, the Trustee to sell the beneficial interest in the relevant Land Parcels
to it on the related Scheduled Dissolution Date at the related Dissolution Distribution
Amount.
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First Global Sukuk: Case Study questions
Following the recent string of successful Sukuk issues, and the fact that they are a relatively
new concept in corporate finance, your employer, an Investment Bank, has selected your group
to make presentations to the Board regarding the key issues involved.
Your group must consider the following questions and you must present your findings to the
whole class. Please be ready to explain any technical concepts to the class. You will be
expected to defend your answers.
Remember that “time is money” and that your responses must be succinct and not overly
descriptive. In other words – get to the point!!
1.
Describe the exact nature of the First Global Sukuk
2.
What Islamic modes of finance underpin the First Global Sukuk?
3.
Describe how these modes of finance work and the exact relationship they have with
the First Global Sukuk
4.
In analysing the investment considerations involved describe the nature of the following
risks
(i)
credit risk
(ii)
financial and economic risks
(iii)
foreign exchange risk
(iv)
business risk
(v)
environmental risk
(vi)
accounting considerations
5.
Describe any particular considerations relating to the sukuk that you feel should be
drawn attention to.
6.
Describe in detail the Ijarah leasing arrangements.
7.
What Sharia Board requirements were put in place?
8.
Are issues of corporate governance relevant to this issue?
9.
What was innovative about this issue?
10.
How was the issue rated and by whom?
11.
What lessons can be learnt for the issue of future sukuk? How do the critical factors for
First Global Sukuk compare with those for the other Sukuk discussed?
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Identify the following parties in the First Global Sukuk:
SPV
Sellers
Guthrie
Initial Purchasers
Trustee
Identify and explain the following elements of the Sukuk Certificates:
Form and Denomination
Issue price
Rate of return on Trust Assets
Scheduled Dissolution of the Trust
Form and Denomination
Status
Trusts
Limited Recourse
Negative Pledge
Guthrie’s Covenants
Use of Proceeds
Listing
Rating
Offers of Sukuk
Governing Law
Demonstrate with a flow chart the nature of the underlying transactions