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 1 Bank Syndication Debt -Rs. 150 m 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 Normal REFC Business Operations Securitization Structure Receivables 3 Mortgages Typical Structure Mortgage Backed Securitization Real Estate Finance Company Extension of Loans For Real Estate Cash Proceeds Raised Via Issuance of Debt Securities Housing Mortgage Receivables SPV Debt Securities Safeguarding Investors Interest Cash Key Issues To be Addressed Non-Recourse Element Accounting Clearance Legal Issues Market For Instrument Regulatory Aspects Security Mechanisms Investors Trustee Private Placements Public Placements

Structure of SPV 4 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

Structure of SPV…contd. 5 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.

Why Securitize? 6 General Benefits of Securitization Lower-cost financing Liquidity crunches? Equity saving 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 7 To owner/originator 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 To bondholders/investors 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

8 Conclusions 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 ORIX Securitization Transactions Completed July 2003 July 2003 July 2003 July 2003 July 2003 July 2003 July 2003 National Police Foundation Security Services Limited July 2003 July 2003 July 2003 International Housing Finance Limited Ittehad Chemicals Limited Baluchistan Glass Limited Brookes Pharmaceutical Limited ORIX Securitization Transactions Completed National Police Foundation Security Services Limited ORIX Securitization Transactions Completed International Housing Finance Limited Ittehad Chemicals Limited Baluchistan Glass Limited Brookes Pharmaceutical Limited Rs. 150 Million Rs. 250 Million Rs. 38 Million Rs. 200 Million Rs. 100 Million Mortgage Backed Bridge Financing Rs. 150 Million Listed Term Finance Certificates Rs. 250 Million Rs. 38 Million Rs. 200 Million Rs. 100 Million Sept 2003 Lease Syndication Mortgage Backed Bridge Financing Listed Term Finance Certificates Debt Syndication Debt Syndication Sept 2003 Lease Syndication Debt Syndication Debt Syndication Orient Petroleum Inc August 2003 Sept 2003 Oct 2003 Nov 2003 Orient Petroleum Inc June 2004 August 2003 Sept 2003 Fidelity Investment Bank Limited Oct 2003 Nov 2003 June 2004 Crescent Ujala Limited Grays Leasing Limited Sigma Leasing Limited Rs. 1 Billion Fidelity Investment Bank Limited Telecard Limited First Oil & Gas Securitization Company Crescent Ujala Limited Grays Leasing Limited Sigma Leasing Limited Rs. 1 Billion Telecard Limited Securitization First Oil & Gas Securitization Company Rs. 150 Million Rs. 400 Million Rs. 130 Million Rs. 100 Million Rs. 200 Million Securitization Rs. 150 Million Rs. 400 Million Rs. 100 Million Privately Placed Term Finance Certificates Privately Placed Term Finance Certificates Rs. 130 Million Rs. 200 Million April 2005 Debt Syndication Debt Syndication Privately Placed Term Finance Certificates Privately Placed Term Finance Certificates Debt Syndication April 2005 Debt Syndication Debt Syndication Debt Syndication Orient Petroleum Inc Dec 2003 Jan 2004 Dec 2003 March 2004 May 2004 Orient Petroleum Inc Dec 2003 Jan 2004 Dec 2003 March 2004 May 2004 Crescent Standard Investment Bank Limited Crescent Steel & Allied Products Limited Orient Petroleum Inc Sindh Abadgar Sugar Mills Limited Al Zamin Leasing Modaraba Limited Rs. 1.2 Billion Crescent Standard Investment Bank Limited Crescent Steel & Allied Products Limited Orient Petroleum Inc Sindh Abadgar Sugar Mills Limited Al Zamin Leasing Modaraba Limited Naimat Basal oil & Gas Securitization Company Rs. 1.2 Billion Securitization Naimat Basal oil & Gas Securitization Company Rs. 125 Million Rs. 300 Million Rs. 300 Million Rs. 100 Million Rs. 50 Million Securitization Lease Discounting Syndication Rs. 125 Million Privately Placed Term Finance Certificates Rs. 300 Million Privately Placed Term Finance Certificates Rs. 300 Million Rs. 100 Million Lease Discounting Syndication Rs. 50 Million Lease Discounting Syndication Privately Placed Term Finance Certificates Privately Placed Term Finance Certificates Debt Syndication Sept 2002 Lease Discounting Syndication Debt Syndication Sept 2002 May 2004 June 2004 June 2004 June 2004 June 2004 PILCORP May 2004 June 2004 June 2004 June 2004 June 2004 PILCORP Indus Dyeing & Manufacturing Company Eden Developers Pvt Limited International Brands Pvt Limited Big Bang Communications Pvt Limited Al Noor Sugar Mills Limited Rs. 100 Million Indus Dyeing & Manufacturing Company Eden Developers Pvt Limited International Brands Pvt Limited Big Bang Communications Pvt Limited Al Noor Sugar Mills Limited First Securitization Trust Company Rs. 100 Million Lease Receivables Securitization First Securitization Trust Company Rs. 500 Million Rs. 110 Million Rs. 32 Million Rs. 100 Million Rs. 100 Million Lease Receivables Securitization Rs. 32 Million Rs. 100 Million Rs. 500 Million Rs. 110 Million Rs. 100 Million Commercial Paper Debt Syndication Debt Syndication Debt Syndication Debt Syndication Commercial Paper Debt Syndication Debt Syndication Debt Syndication Debt Syndication

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