© Allen & Overy 2013 1 Roger Wedderburn-Day Debt Financing and Sukuk LSE Islamic Finance Seminar Series 30 October 2013.

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Presentation transcript:

© Allen & Overy Roger Wedderburn-Day Debt Financing and Sukuk LSE Islamic Finance Seminar Series 30 October 2013

© Allen & Overy 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 What is debt financing? –Bank loan –Corporate financing options –Equity –Bank debt –Securities

© Allen & Overy How do bond issues work? –What is a bond? –Significant differences from loans: –Multiple creditors –Diversity in creditors –Tradable

© Allen & Overy Why is there a bond market? –Why issue securities? –Different source of funding (issuer) –More flexible (bank lender) –Hedging (non-bank lenders)

© Allen & Overy How is this relevant to sukuk? –Same reasons: –Alternative source of funding (issuer) –More flexible (bank lender) –Hedging (non-bank lenders)

© Allen & Overy How do sukuk work? –Islamic bonds, but…..

© Allen & Overy How do sukuk work? PAKISTAN INVESTORS US$50 million US$500 million Islamic Republic of Pakistan – Conventional Bond Issuance (2004) Bond

© Allen & Overy How do sukuk work? ISSUER INVESTORS Sukuk US$500 million US$50 million STEP 1 Investors purchase sukuk from Issuer. STEP 2 Issuer purchases Land from Highway Authority for Purchase Price, declares trust and issues sukuk. STEP 3 Issuer leases Land to Pakistan for rental fee. Issuer pays Investors periodic distributions. STEP 4 Pakistan purchases land for Exercise Price. Issuer pays Investors final distribution. Rental (50m) Ijara (Lease) PAKISTAN Exercise Price (500m) Land NATIONAL HIGHWAY AUTHORITY Purchase Price (500m) Land Islamic Republic of Pakistan – Sukuk Al Ijara (2005) US$500 million

© Allen & Overy 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 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 Sukuk – Interesting features Principal documents SukukConventional bondSubscription AgreementAgency Agreement Sale Agreement Lease Agreement Service Agency Agreement Purchase Undertaking

© Allen & Overy Sukuk – Interesting features –Role of the Trustee –What happens on default?

© Allen & Overy What is the future for sukuk?

© Allen & Overy What is the future for sukuk?

© Allen & Overy 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 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? 17

© Allen & Overy Any questions? 18