Islamic Investment
Business islamica Magazine
By Mohammed Khnifer
Shocking
21 defaulted sukuk cases
in the last 20 months!
The default storm gets intensify, hitting the sukuk issuance which assets were not only based on real estate but also
transportation, oil and even tuna!
24 www.islamica-me.com
I
remember June 21 from last
year vividly. It was the day when
I initiated a series of research
works on the so-called defaulted
sukuk. Al-Eqtisadiah, Saudi financial newspaper, was one of the first
worldwide publications who provided the readers with an in-depth analysis on the issue. I remember some
of my friends in law firms and credit
rating agencies rushing to translate these series of research works
from Arabic to English, as there was
hardly anyone tackling the topic.
Why should they? If you were a su-
kuk arranger entity, wouldn’t you try
to underestimate such reports? If
you were in the sukuk industry, you
would rather turn a blind eye on the
first default cases, trying to dismiss
these insightful reports to stress that
they will not shake the foundation of
the industry. But Nakheel near default changed everything, forever!
Last year, we thought, as we were
keeping close eyes to these cases,
that only 10 cases of such defaults
existed, apart from those who were
defaulted technically. We were wrong!
In a research I conducted myself for
my publication after completing my
MSc in Investment Banking & Islamic
Finance , we found out, that the total
defaulted sukuk cases in the last 20
months has reached at least 21 ! As
for the total value of such issuance,
it is almost $ 2.1 Billion. When I say
“at least”, I mean it is likely there are
more we do not know about it!
This accelerated percentage makes
one wonders why the industry stakeholders hided such critical information from the investors at that time.
Further, sukuk Holders might even
wonder why they always see these
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25
Islamic Investment
optimistic reports on the future prospect of sukuk on a regular basis.
2009 can be described as the “default year” for the sukuk market. The
year ended with at least 15 cases.
As for 2010, there are six new default events. The industry should be
eager to examine such cases in order to learn for past mistakes, protect sukuk holders’ rights and create
a modified next generation of such
Islamic financial certificates.
Last year, Malaysia took the
lead by 9 cases, Pakistan
(2) and one default event in
SAUDI ARABIA, Kuwait and
the US. They are as follows:
•
Saad Group’s Golden Belt
($650 M)
• East Cameron Gas ($165.6 M)
• The Investment Dar Company
($100 M)
• New Allied Electronics Industries ( $ 16.4 M) + Maple Leaf
(Rs8 billion)
• Oxbridge Height ($2.82 M)
• Hartaplus
• Ingress ($ 7.2 M)
• Oilcorp Bhd ($ 20.6 M)
• PSSB Ship management (RM40 m)
• Tracoma Holdings (RM 100 m)
• M-Trex Corporation (RM 60 m)
• Englotechs HOLDING (RM 50 M)
• Straight A’s portfolio (RM 200 M)
• Malaysian International Tuna
Port (RM 240 m )
According to RAM rating agencies,
there were 24 registered default
events in Malaysia from 2003-2010.
When we add up this figure with the
recognized worldwide defaulted issuance, we end up with 31. The
high rate can be justified, as rating is
mandatory in Malaysia while investors are more educated about such
complex instrument comparing to
the GCC.
This year was a continuation
of the previous one. The 6
cases were divided equally
between Malaysia,Pakistan
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Business islamica Magazine
and the GCC.
•
•
•
•
•
•
Merchant Marine (RM 120M)
Nam Fatt (RM 250 M)
Eden Housing Sukuk (Rs. 1.63
Billion)
Eden Housing Sukuk (Rs. 730
Million)
Tabreed ($ 463 M)
IIGF Funding Limited sukuk ( $
200 m)
According to media reports, few originators have been working with law
firms to restructure their sukuk issuance as they are about to miss the
periodic payments. Such restructure
will lead to the extension of sukuk
maturity. It means, sukuk Holders
are likely to suffer certain loss if we
factored the opportunity cost concept and time-value of money.
From my practical experience, default events would have been minimized or even contained should
the issuance was asset-backed. It
is more a question of whom, as an
investment bank, rights’ you would
like to protect more: the sukuk Holders or the originator. As for the question why we have not done that for
the sake of the investors’ interests,
that’s another story!
Mohammed Khnifer is regarded as part of
a ‘second generation’ of Islamic banking
practitioners who have a solid academic
background in Islamic finance.
He is one of the most prolific and
well-known journalist and researcher
specializing in Islamic Finance today.
He is a holder of an MSc in Investment
Banking & Islamic Finance and is a
Chartered Islamic Finance Professional
(CIFP) from INCEIF.
For the past seven years he has been
in charge of the editorial content for the
Islamic Banking section of Al Eqtisadiah
Saudi Newspaper, writing over 1,000
articles on various aspects related to
Islamic Finance. Mr. Khnifer is frequent
guest to numerous and prestigious
Islamic Finance conferences and his
research papers are being published in
major publications worldwide.
He can be contacted at mkhnifer1@
gmail.com
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