1. Corporate Bonds and Sukuk Issues Developing the Market in Maldives
Rabel Akhund
7 May 2008
Male

2. Corporate Bonds Bond is a debt instrument.
Issuer of bonds obliged to pay holders of the bonds interest and principal on specified repayment dates.
Bond markets are a core sector of any capital market.
Conventionally, there are two ways of raising finance.
Equities
Debt

3. Corporate Bonds
Bonds are tradable debt securities. In that way different from bank financing.
Issuers can use bonds for both general purposes and specific projects and assets.

4. Corporate Bonds for Investors
For investors bonds are an important savings product.
Offer investors higher return than a cash deposit but lower risk than equities.
Predicatable cashflows make it a suitable investment for pension funds and insurance companies.
Returns on bonds vary, they can be zero coupon, fixed rated or benchmarked to a floating interest rate.

5. Corporate Bonds for Issuers
Maturities can also differ. Will depend on nature and objectives of the Issuer.
Government bonds usually have 30 year maturities.
Corporate bonds can have maturities of 5-10 years. Short term bonds are not being considered here.
Presence of covenants affect the risk profile of bonds.
Negative covenants restrict future actions of issuer, e.g., future debt issues by Issuer and future dividend payments by Issuer.

6. Types of Bonds Government Bonds Investment grade Corporate Bonds
High yield (more risky) Corporate Bonds
Asset backed Bonds (Project Specific)

7. Historical Background - Sukuks
Need for liquidity and good liquidity management
Different periods between maturities of assets and deposits – resulting in either surplus of non performing cash or a shortage of cash to fund investments
Lack of:
active interbank and secondary market (mostly primary market trading)
acceptable Shariah compliant instruments
acceptable regulatory conditions
limited available agency credit ratings
unsophisticated market
limited information flow
The need for a more sophisticated capital, financial and insurance market.

8. Sukuks – Legal Meaning
All this changed with the development of the Sukuks.
Definitions:
a) “Participation Securities, coupons, investment certificates”
b) “Certificates of equal value, representing an undivided beneficial ownership in the underlying assets”

9. Types of Sukuks MUDARABA SUKUK IJARA SUKUK
A mudaraba is a partnership for profit between capital employed on one hand and work on the other. Mudarib/Rabbul-Mal
IJARA SUKUK
An ijara is essentially an Islamic leasing transaction which can be used as a financing tool.
DEVELOPMENT SUKUK (ISTISNA)
Istisna is defined as a contract of sale of specified goods to be manufactured with an obligation on the manufacturer to deliver them upon completion. Like turnkey projects.
MUSHRAKA SUKUK
Musharaka is a form of partnership whereby each party contributes assets or capital with a view to establishing a project or to share in an existing one.

10. Ijara (Leasing) Sukuk
Can be used for long term infrastructure projects by the mobilisation of short term deposits i.e. securitisation of Government tangible assets
Possible use in project financings, e.g. development of a Tourist Resort.

11. Typical Project Financing Structure
CONTRACTING AUTHORITY
SPONSOR
Services (and other) Direct Agreements
Security
FINANCING BANKS
PROJECT COMPANY
Debt Finance
Agreement
Contractor Direct Agreement
Sub Contractor
Sub Contractor
Sub Contractor
Sub Contractor
Hard PM
Soft PM

12. Ijara (Leasing) Sukuk – Case Study for a Project Financing of a Tourist Resort.
Works as follows:-
sale of tangible assets to a special purpose restricted Mudaraba (SPV)
assets are then leased to the interested parties through a Ijara lease
the MUDARABA participation SUKUK will be issued and sold to public/investors with a guarantee of payments (usually from Government or international bank)
required security will be given to SUKUK holders
MUDARABA managed (on behalf of SUKUK holders) by MUDARIB
MUDARIB signs and executes all relevant contracts
ensures Shariah compliance
transparency and efficient operation

13. Leasing Sukuk - Tourist Resort
SUKUK Holders
Periodic rentals and capital amount payments
Sukuk proceeds
Periodic rentals and capital amount payments
Lessee
(Project Operator)
MUDARIB
Seller
Assets/Hotel (Beds)
Sold
MUDARABA (SPV)
Project Assets
Sukuk proceeds
IJARA Lease
For a fixed period of time and service agency

14. Legal Requirements for Bonds and Sukuks
Laws must allow the concept of trust. Important for Sukuks and Bonds.
Contract law must recognise debt obligations and repayment obligations.
Property laws must recognise the concept of security interests.
Insolvency laws must give priority to security holders in the event of the insolvency of Issuers.

15. Market Requirements for Corporate Bonds and Sukuks.
A sufficient number of investors.
A sufficient number of issuers.
Investment professionals and other professional advisers available to advise on structures, e.g. lawyers and accountants.
The need for a secondary trading market to provide liquidity.
Listing rules similar to your stock exchange listing rules.
Effective legal documentation.
Credit rating.
Transparent dealings.
Adequate investor protection

16. Enforcement The need for a suitable enforcement regime.
Protection of creditors’ rights.
Enforcement of judgments in a timely and efficient manner.
Possibility of foreign arbitration.
Consider sovereign guarantee for sukuk issues.

17. Debt outstanding versus stock market capitalisation (in billions of Euros) 2004

18. E-mail: r.akhund@taylorwessing.com
RABEL AKHUND
Taylor Wessing
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