Financing the Securitisation of Real Estate using Sukuk. Trevor Norman Director The application of lessons learnt from the Caravan 1 transaction

Securitising assets using sukuk. Summary of talk: - Islamic versus conventional securitisation. The CARAVAN I transaction. The problems (and some solutions) Real Estate backed Sukuk

Definition of sukuk certificates of equal value representing undivided shares in tangible assets, usufruct and services or … the assets of particular projects or special investment activity... [Source: Accounting and Auditing Organization for Islamic Financial Institutions, Sharia Standard No. (17) on Investment Sukuk]. Must be issued on the basis of a Sharia compliant contract (e.g.: Ijarah, Salam, Murabaha, Mudaraba, etc.).

Securitisation Definition: The technique of repackaging assets into a traded instrument, such as a bond; or The transfer of risk (and reward) from the holder of certain assets to the holders of bonds backed by those assets.

Similarities between Sukuk and ABS*: (*ABS – Asset Backed Security) Both sukuk and conventional ABS structures transfer beneficial and/or legal ownership of assets, or of the cash flows derived from those assets, to the holders of the securities. Neither represent shares in the capital of the originator, nor (if a true sale) debt on the balance sheet of the originator. Both are intended to generate a stable and predictable return for investors from the cash flows generated by the assets.

Sharia compliant securitisations: Two levels of Sharis compliance: The underlying assets must be Sharia compliant. Suitable assets include: Motor vehicle fleets, aircraft, ships, etc. Real Estate leases Equipment leases Infrastructure projects The underlying contract governing the ownership and use of the assets must comply with Sharia principles – e.g.: Ijarah, Salam, Murabaha, Mudaraba, etc

The CARAVAN I Ltd. transaction: The objective: To refinance the motor vehicle fleet owned by Hanco Rent a Car, in Saudi Arabia. The problems (and solutions) Legal and Accounting issues Sharia compliance Ratings Agency Other points

CARAVAN I Ltd. - summary: SR98 M sukuk plus SR4.1 M Redeemable Participating Shares, backed by motor vehicle leases, sold by Hanco Rent A Car, Saudi Arabia. Sukuk have 3 year forecast maturity (max 6 years), forecast return of 6% p.a. (variable) Credit enhancement: dual Saudi / Jersey structure; 4.25% equity tranche; 15.39% overcollateralisation; 8.77% cash reserves. Originated, structured and arranged by BSEC - Bemo Securitisation SAL, Beirut. Wholly underwritten by Shamil Bank, Bahrain. Sharia review by Yasaar Ltd. for the structurer and by Sh. Nizam Yaquby of Bahrain for the underwriters.

CARAVAN I Ltd. – structure diagram: Two-tier structure devised by BSEC together with Volaw

CARAVAN I Ltd. – lessons learned Legal issues: Title to the vehicles No provision for Sukuk under Saudi Law Different Codes of Law Sharia compliance: Corporate structure Sukuk

CARAVAN I Ltd. – lessons learned (2) Ratings agency: Historic data Ownership of SPC Country risk (legal) Other problems: Time zones, working weeks Banking business days Taxation

Real Estate Securitisation Structure (?)

Conclusion: Caravan is a first of breed transaction. Sukuk are ideally suited for Sharia compliant securitisation structures. Many types of asset may be securitised in a Sharia compliant manner, and Real Estate is an ideal asset class for Shairia compliant securitisations. A variety of structures will evolve.

General disclaimer The information in this presentation is intended for use by participants at the Islamic Real Estate Finance, 2004, conference only. Any structures and case studies presented serve as outlines and examples only. Specific advice should be sought for all proposed transactions. All comments and views expressed are those of the presenter and do not necessarily represent the views of Volaw Trust Company, or the conference organisers. Volaw Trust Company is regulated by the Jersey Financial Services Commission in the conduct of trust company business. © Volaw Trust Company 2004

Securitising Real Estate using Sukuk Questions ?

Volaw Trust Company, Jersey Trevor L Norman Director Volaw Trust & Corporate Services Limited Templar House, Don Road, St Helier, Jersey, JE4 8WH Tel: +44 (0) Fax:+44 (0)