IIFM Sukuk Report (3rd Edition) a Comprehensive Study of the Global Sukuk Market

S U K U K R E P O R TA comprehensive study of the Global Sukuk Market S U K U K R E P O R T A comprehensive study of the Global Sukuk Market S U K U K R E P O R T A comprehensive study of the Global Sukuk Market From the light of the Holy Qur’an Allah Almighty Said: “We ask not of you a provision: We provide for you. And the good end is for righteousness” (Surat Ta-Ha, (20) 132) ﻢﻳﺮﻜﻟا نآﺮﻘﻟا ةﺎﻜﺸﻣ ﻦﻣ :ﻰﻟﺎﻌﺗ لﺎـﻗ S U K U K R E P O R T A comprehensive study of the Global Sukuk Market I Central Bank of Bahrain Labuan Financial Services Authority, Malaysia Islamic Development Bank, KSA Central Bank of Sudan Bank of Indonesia Autoriti Monetari Brunei Darussalam State Bank of Pakistan Dubai International Financial Centre Crédit Agricole Corporate & Investment Bank Al Salam Bank, Bahrain Kuwait Finance House, Kuwait National Bank of Kuwait, Bahrain Al Baraka Banking Group, Bahrain Khaleeji Commercial Bank, Bahrain Bank Islam Malaysia Berhad, Malaysia Kuwait Finance House, Bahrain Standard Chartered Saadiq, UAE Abu Dhabi Islamic Bank, UAE Jordan Islamic Bank, Jordan Ahli United Bank, Bahrain ABC Islamic Bank, Bahrain Global Banking Corporation, Bahrain Al Hilal Bank, UAE Mashreq Al-Islami, UAE Ithmaar Bank, Bahrain Bahrain Islamic Bank Gulf International Bank, Bahrain The National Commercial Bank, KSA IIFM is the International Islamic Financial Services Industry’s standard setting organization focused on the Islamic Capital & Money Market (ICMM) segment of the industry. Its primary focus lies in the standardization of Islamic fnancial products, documentation and related processes at the global level. Moreover, IIFM also contribute in the development of ICMM by organizing specialized Seminars, Workshops & Consultative meetings as well as research on Sukuk issuances around the globe. IIFM was founded with the collective eforts of the Central Bank of Bahrain, Islamic Development Bank, Autoriti Monetari (i.e. Monetary Authority) Brunei Darussalam, Bank Indonesia, Central Bank of Sudan and the Bank Negara Malaysia (delegated to Labuan Financial Services Authority) as a neutral and non-proft organization. Besides the founding members, IIFM is supported by other jurisdictional members such as State Bank of Pakistan, Dubai International Financial Centre as well as a number of regional and international fnancial institutions and other market participants. About IIFM Bank Muscat SAOG, Oman HSBC, UAE Bank Kerjasama Rakyat Malaysia Malaysian Rating Corporation Berhad, Malaysia Emirates Securities & Commodities Authority, UAE Ernst & Young, Bahrain DDCAP Limited, UK United Gulf Bank, Bahrain First Habib Modaraba, Pakistan Cliford Chance LLP, UAE Allen & Overy LLP, UAE Zaid Ibrahim & Company, Malaysia The Islamic Bank of Asia Limited, Singapore The Royal Bank of Scotland, UK Istanbul Stock Exchange, Turkey Seera Investment Bank, Bahrain Bank Al Jazeera, KSA Boubyan Bank, Kuwait Bank of London and the Middle East Kuveyt Türk Participation Bank Inc. RAM Rating Services Berhad Iraqi Islamic Bank Islamic International Arab Bank plc Bank Islam Brunei, Darussalam IIFM MEMBERS III S U K U K R E P O R T A comprehensive study of the Global Sukuk Market S U K U K R E P O R T A comprehensive study of the Global Sukuk Market IIFM has prepared this publication for general information purposes only and this does not constitute an invitation or solicitation to purchase, subscribe for or sell any Sukuk or to engage in, lead into, conclude or refrain from engaging in any transaction. IIFM or the author/s accept no liability whatsoever for any direct, indirect, consequential, or other damages and loss arising from any use of this publication. The information contained herein has been obtained from sources considered to be reliable. IIFM or the author/s makes no guarantee, representation or warranty as to its accuracy or completeness. DISCLAIMER IV II S U K U K R E P O R T A comprehensive study of the Global Sukuk Market Research & Review Team Mr. Ijlal Ahmed Alvi Chief Executive Ofcer Dr. Ahmed Rufai Head of Shari’ah Department Mr. Ismail Dadabhoy IIFM Advisor Mr. Usman Mohammad Naseer Business Development Ofcer Database Maintenance Mr. Babar Naseer Mr. Tareq Fouad Design & Printing Mr. Sayyed Zarrar V III S U K U K R E P O R T A comprehensive study of the Global Sukuk Market S U K U K R E P O R T A comprehensive study of the Global Sukuk Market The growth of the Islamic fnancial market worldwide has been very impressive and remarkable. The innovations have changed the dynamics of the industry especially, in the area of Sukuk which is a means of raising government fnance through sovereign issues, and also a way for companies to obtain funding through ofering corporate Sukuk. This third edition of the IIFM Sukuk research report aims to shade light on the growth and development of international and domestic Sukuk issuances in recent years and to highlight as well on the diferent Sukuk structures used in various jurisdictions active in issuing Sukuk. This research report highlighted and analyzed some selected case studies from the international Sukuk markets based on widely used structures for the purpose of achieving a deeper understanding of the mechanism of these unique and most popular and commonly used fnancial instruments in the Islamic Capital and Money Market. The report presents invaluable information on the benefts of Sukuk for all the stake holders in the industry. Abstract VI IV S U K U K R E P O R T A comprehensive study of the Global Sukuk Market On the very outset of this research report, IIFM would like to take this opportunity to express its deep sense of gratitude and thanks to individuals and institutions for their cordial support to complete this research report. The report would not have been seen light without the support of such individuals, the industry institutions and the stakeholders in general. Our sincere gratitude and highly thankful goes also to all institutions and stakeholders who provide us with invaluable information that helped us to complete this task through various stages. We take this opportunity to express our profound gratitude and deep regards to the Central Bank of Bahrain (CBB) for its constant and continued support. We would also like to acknowledge and highly thank IIFM Board of Directors and Members for their unreserved support for IIFM in its general endeavors. IIFM is very much thankful to Mr. Ismail Dadabhoy for his review and voluble contribution to this report. We are also thankful to Ms. Shazia Farooq for her time and efort in jointly preparing the case studies of this research report. Lastly, IIFM is also thankful to Ministry of Finance – Indonesia, Cliford Chance, Linklaters, HSBC Bank, Al Hilal Bank, Noor Islamic Bank & FWU Group for providing case studies & articles on specifc Sukuk structures institutions contribution. Acknowledgements VII V S U K U K R E P O R T A comprehensive study of the Global Sukuk Market S U K U K R E P O R T A comprehensive study of the Global Sukuk Market From IIFM Chairman – & Executive Director - Banking Supervision – Central Bank of Bahrain (CBB) In the Name of Allah, the Most Gracious, the Most Merciful All the praises and thanks be to Allah Almighty. May peace and blessings of Allah Almighty be upon His Messenger Prophet Muhammad (S.A.W.) his family and all his companions. The continuing evolution of the Sukuk Market is critical to the sustainability of the future growth of Islamic fnance. Reliable research which provides data in respect of Sukuk issuance is a key factor in understanding the way in which the market is developing, and this in turn can be used to inform decisions as to when to issue a Sukuk; the anticipated terms of the issuance; and to facilitate the monitoring of any secondary market. In 2010, the International Islamic Financial Market (IIFM) successfully published the frst edition of a Sukuk Research Report, followed by the second edition in 2011. The two reports provided a comprehensive analysis of the market at the respective times. It has been encouraging to note the level of praise and admiration both reports received from existing and potential market participants. The latest Research Report builds upon the previous success, and it goes a long way to strengthen and deepen the understanding of global Sukuk structures and issuance. The Report provides a reliable database, with accompanying professional analysis, and this can be used as a benchmark by regions which have a high concentration of the worlds Sukuk issuance. This research report aims to provide information for industry decision makers in their assessments of trends in the issuance of Sukuk globally. The report also amply illustrates the importance of this feld of transactions to all stakeholders, and clearly demonstrates the way in which Sukuk issuance and utilisation has evolved. I believe that the IIFM research team can be confdent that there will be many grateful readers who will gain a broader perspective of the Sukuk structure and how stakeholders can optimize the benefts of the Sukuk market as a result of their eforts. Mr. Khalid Hamad April 2013 VIII VI Foreword S U K U K R E P O R T A comprehensive study of the Global Sukuk Market From The Chief Executive Ofcer, International Islamic Financial Market (IIFM) In the Name of Allah, the Most Gracious, the Most Merciful All the praises and thanks be to Allah Almighty, the Lord of all that exists. And may peace and blessings of Allah Almighty be upon His Messenger Prophet Muhammad, his family and all his companions. There is no doubt that Sukuk play an essential role in the development of Islamic Capital and Money Market and also play an important role in contributing to the economic growth and prosperity of Islamic countries. IIFM eforts in this respect as refect in its 1 st and 2 nd Editions of the Sukuk Reports are evident. The two reports were very well received by the practitioners. Considering the value addition provided by IIFM in terms of Sukuk issuance database and issues covered in the reports. I have a great satisfaction in introducing this third edition of the IIFM Sukuk Report to the stake holders in the industry in particular, governments, Islamic fnancial institutions and corporates. This report provides valuable information obtained through data analysis, regarding the Sukuk issuances for the years January 2001 – January 2013. This report will pay particular attention on the prospects and overview trends of the global Sukuk Market and it will highlight on major issuances around the globe. This report is an excellent example of cooperative endeavor among a number of institutions and individuals from diferent jurisdictions. They have put in their eforts and contributed to the successful completion of this report. I will like to acknowledge their contribution individually but the constraint of space restricts me from that. The motivation and commonality among the stakeholders of the research objective despite their belonging to divergent jurisdictions helped IIFM to complete this important task without obstructions. The varied information of the collaborating institutions which have been brought into this report, the issuance specifc data and the profound analysis make the report immensely useful and valuable. I am very much thankful to Securities Commission Malaysia, Bank Indonesia, Ministry of Finance Indonesia, State Bank of Pakistan and Central Bank of Sudan for their continued support and enriching t he IIFM database with valuable Sukuk data information and verifcation. I must place on record my profound gratitude to the Central Bank of Bahrain (CBB), IIFM board of directors and Members for their continued support. I must also wholeheartedly thank the IIFM research team who through their hard work, devotion and sincerity has completed this challenging task of Sukuk report successfully. It is my hope that the reader will fnd this report useful and of value. Mr. Ijlal Ahmed Alvi April 2013 IX VII Foreword S U K U K R E P O R T A comprehensive study of the Global Sukuk Market S U K U K R E P O R T A comprehensive study of the Global Sukuk Market CONTENTS CONTENT PAGE Disclaimer ii Research Team iii Abstract iv Acknowledgments v Foreword (from the IIFM Chairman & CEO) vi Contents viii List of Tables ix List of Charts ix INTRODUCTION 1 CHAPTER ONE : SUKUK AL- ISTITHMAR (INVESTMENT SUKUK): 3 MEANING AND TYPES 1 Introduction 3 2 Sukuk Al-Istithmar 3 2.1 Defnition 3 2.2 Types of Sukuk Al-Istithmar 4 2.3 Characteristics of Sukuk Al-Istithmar 7 3 Fundamental diferences between Sukuk Al-Istithmar and Bonds 7 4 Conclusion 7 CHAPTER TWO : OVERVIEW OF THE GLOBAL SUKUK MARKET 9 2.1 Resurgence of Sukuk Market 9 2.2 Global Sukuk Issuances 9 2.3 Distribution of Global Sukuk Issuance by Issuer Status 14 2.4 International Sukuk Market 19 2.5 Domestic Sukuk Markets 22 2.6 Structural Break-up of Global Sukuk Market 24 2.7 Short Term Sukuk Market 29 CHAPTER THREE : CASE STUDIES OF SELECTED INTERNATIONAL SUKUK ISSUES 30 3.1 Abu Dhabi Islamic Bank (ADIB) Shirkat-Ul-Milk Based Sukuk 2011 30 3.2 Khazanah Nasional Wakalah Based Sukuk 2011 34 3.3 Majid Al Futtaim (MAF) Wakalah Based Sukuk 2012 38 3.4 Saudi Electricity Company (SEC) Al Ijarah Based Sukuk 2012 43 3.5 Projek Lebuhraya Usahasama Berhad (Plus Berhad) Musharakah Based Sukuk 2012 46 CHAPTER FOUR : CASE STUDIES & ARTICLES ON SPECIFIC SUKUK STRUCTURES 49 INSTITUTIONS CONTRIBUTION 4.1 Government of Indonesia Sukuk Issuances (Sukuk Negara) 49 4.2 Republic of Turkey 56 4.3 Abu Dhabi Islamic Bank PJSC Mudaraba-Based Tier 1 Capital Sukuk 2012 59 4.4 Article on Sukuk Heading Forward 63 4.5 Article on Sukuk Secondary market overview (Q4 2012 – Q1 2013) 66 4.6 FWU Group Sukuk CASE STUDY 66 CONCLUSION 68 GLOSSARY 71 REFERENCES 73 X VIII S U K U K R E P O R T A comprehensive study of the Global Sukuk Market LIST OF TABLES TABLE PAGE Table 1: Selected Hall Mark Global Sukuk Issues & Trends -2011- Jan 2013 - 11 Year wise latest frst USD 700 Millions or greater (International & Domestic) Table 2: Selected the Non-Local Currency hallmark global Sukuk issuances 13 during last 2 years Table 3: landmark Fixed Proft Rate Sukuk Issuances during Jan 2011 – Jan 2013 period 14 Table 4: Global Sukuk Issuances by Issuer Status 2001- Jan 2013 15 Table 5: Global Sovereign Sukuk Issues -Selected Value Leaders 2011-2013 - 15 (International & Domestic) Table 6: Global Corporate Sukuk Issues -Selected Value Leaders 2011-2013 - 16 (International & Domestic) Table 7: Global Quasi-Sovereign Sukuk Issues -Selected Value Leaders 2011-2012 - 18 (International & Domestic) Table 8: Regional Break-Up of the Total International Sukuk Issuance 2001-Jan 2013 20 Table 9: International Sukuk Issues -Selected Value Leaders in USD 2011- Jan 2013 - 21 (Corporate, Sovereign & Quasi-Sovereign) Table 10: Regional break-up of the Total Domestic Sukuk Issuance 2001-Jan 2013 22 Table 11: Domestic Sukuk Issues -Selected Value Leaders in Local Currency 2011- 2013 - 23 (Corporate, Sovereign & Quasi-Sovereign) Table 12: Cross Border International Sukuk Maturing 2013 26 Table 13: Cross Border International Sukuk Maturing 2014 26 Table 14: Domestic Sukuk Maturing 2013 27 Table 15: Domestic Sukuk Maturing 2014 28 Table 16: Total Global Short-Term Sukuk Issuance – All Currencies 29 LIST OF CHARTS/FIGURES CHART PAGE Chart 1: Total Global Sukuk Issuance (All Currencies) 10 Chart 2: Total Global Sukuk Issuance (All Currencies) – Breakdown by Issuer Status 18 Chart 3: Total Global Sukuk Issuance by Value (All currencies) – Structural Breakdown 25 Chart4: Total Global Sukuk Issuance by currency Breakdown 2001- Jan 2013 25 Chart 5: Total Global Sukuk Issuance by Regional Breakdown 2001- Jan 2013 26 Chart 6: Total Global Short-Term Sukuk Issuance by Currency 29 XI IX The International Islamic Financial Market (IIFM) over the past years has been in the forefront of global initiatives and eforts to help in establishing a sustainable, viable and feasible global Islamic Capital and Money Market industry through its comprehensive documentation and product standardization initiatives that cater not only Islamic Financial Industry but also to ensure that the Islamic Capital and Money Market products and services remain attractive to all investors, creditors and Sukuk issuers across the Globe. In an attempt to further strengthen efciency, awareness and enhance competitiveness of the Islamic Capital and Money Market industry, in 2010 IIFM has published its frst Sukuk research report (IIFM Sukuk Report 1 st Edition) as part of its eforts to help the industry move forward in a comprehensive manner. In 2011 the 2 nd edition of IIFM Sukuk research report (IIFM Sukuk Report 2 nd Edition) was published in order to meet the growing and increasing needs of those interested in the Sukuk Market by providing them useful information on the latest developments of Sukuk market. The two reports covered a number of important issues related to Sukuk issuances across the globe over the period of 2001 to 2010. With the continued rise in global Sukuk Issuances whether it’s domestic or international, sovereign or corporate, it has become very much necessary and essential to shed more light on the evolution of this important fnancial sector in the Islamic fnance industry. This third edition of Sukuk report as the previous reports provides information and relevant details of Sukuk issuances during the period of 2011 -2012 The main objective here is to highlight the development of the Sukuk market during this period, in particular, in the GCC countries, Asia represented by Malaysia, Indonesia and other countries such as Turkey, Pakistan etc., by analysing the transition and practices that have taken place. In doing so, some of the relevant issues related directly to Sukuk issuances globally during this period of time is discussed and analyzed. As far as the International Sukuk secondary market is concern, there has been some improvement given the record issuances during last two years, however, the data is not yet available to IIFM in order to assess the level of secondary market Sukuk trading hence, our intention is to continue work on Sukuk secondary market and publish the report at a later date. Research methodology Both quantitative and qualitative methods have been used in writing this report. A quantitative method mainly involves data collection on various Sukuk issuances from January 2011 to January 2013 and also further data verifcation for 2001 to 2010 period. The main focus in this method is to collate data from writing materials relating to the topic of the research. This includes prospectuses, publications, articles, magazines, online research, and information service providers. Data collected was then fltered with respect to diferent criteria such as chronology, geographic distribution, issuer status, country of origin, etc and depicted in the form of tables and/or charts for better understanding. Moreover, certain IIFM Member jurisdictions as well as institutions have also assisted IIFM in data verifcation. However, in a qualitative method the main focus is to collect and analyze materials or data in respect to Sukuk issuance acceptability. This includes the types of structures used, legal, innovation and Shari‘ah issues. This research report is organized into four stand‐alone chapters which are organized as follows: Introduction 1 Chapter One explains the meaning, concept and types of Sukuk Al-Istithmar (An ‘Arabic term of investment Sukuk) and common mistakes in this regard. Chapter Two discusses overview of the Sukuk issuances over the period of January 2011 to January 2013. Chapter Three comprises of selected Sukuk case studies of international & domestic Sukuk issuances prepared by IIFM. Chapter Four consists of case studies & articles on specifc Sukuk structures, written and prepared by members & other institutions. Among the the objective of this research report is to help the stake holders in the industry in particular, governments, Islamic fnancial institutions and corporate, evaluate and asses their decisions on Sukuk issuance as well as in their decision making and policy formulation. Also to orient those interested in the Sukuk Market to the nature of Sukuk feld and how it can be useful for those who need to gain some basic as well as more in-depth knowledge and background on the level of research in this feld. In order to maximize the beneft of the report, some case studies and articles on specifc Sukuk structures and issues have been included. 2 3 SUKUK AL- ISTITHMAR (AN ‘ARABIC TERM OF INVESTMENT SUKUK) MEANING AND TYPES By: Ahmed Rufai - IIFM Abstract Every so often question is raised on whether there is any diference between Sukuk Al-Istithmar and Sukuk Al- Mudarabah or Sukuk Al-Wakalah bi Al-Istithmar or Sukuk Al-Salam etc. Some suggested in their writings on Sukuk that Sukuk Al-istithmar should be distinguished from Sukuk al- Mudarabah and Sukuk al-Wakalah bi Al-Istithmar without realizing that all these contracts in this context are in general termed or called Sukuk Al-Istithmar. Therefore, the objective of this chapter is to explain the meaning and types of Sukuk Al-Istithmar based on the AAIOFIShari ‘ah Standard, without going into details of itsShari ‘ah provisions and practical applications. 1. Introduction Sukuk in general refect participation in the underlying asset so that what is traded is not a merely debt as each certifcate must represent an undivided interest in the asset. This is because in the light of the prohibition of Riba (i.e. interest) under theShari ‘ah trading in pure debt instrument is forbidden. Therefore, Sukuk are structured to achieve a desired economic objective in a manner conform to the principle and sprit ofShari ‘ah. Investment in tangible assets, used for productive purposes and reaping the rewards arising from those assets is the core principle of Islamic fnance and it is this principle on which Sukuk securitization structures are founded. Moreover, for a Sukuk structure to comply withShari ‘ah principles the underlying asset must also comply with theShari ‘ah principles as well. In other words the underlying asset must be lawful from theShari ‘ah perspective. As mentioned in the abstract that the primary purpose of this chapter is to give general information on Sukuk Al-Istithmar without digging deep into its Sahri’ah provisions and practical applications but to know that these Sukuk must be structured on the basis of the known Islamic investment transaction contracts such as Mudarabah, or Wakalah or Ijarah or Salam etc. all of which are called/termed/categorized as Sukuk Al-Istithmar according to AAIOFI Shari‘ah Standard. 2. Sukuk Al- Istithmar 2.1 Defnition The early Muslims have used the word Assakk, ّ ك ّ صلا which means certifcate or order of payment. And the plural of this ‘Arabic term is Sukuk 1 ٌ كوُك ُ ص. They used Sukuk in those early days as a form of papers representing fnancial obligations originating from trade or any other commercial activities. However, in the modern day Islamic fnancial system, Sukuk are known as instruments of the Islamic capital Market and it is one of the best fnancial instruments and mechanisms that are commensurate with the needs of issuers/originators and investors. Chapter One 1. Sheikh Ahmad Al- Fayyumi Al- Muqri, Al-Misabah Al-Munir, Kitab Al-Saad, Al-Saad ma ‘a Al-Kaf. 4 Sukuk Al-Istithmar is defned as follows: “Investment Sukuk are certifcates of equal value representing undivided shares in ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity” 2 . The concept of Sukuk Al-Istithmar can be extracted from this defnition as certifcates of equal value issued and sold to investors who, by virtue thereof, have proportional claims over the fnancial rights underlying these certifcates as well as proportionately liable for obligations arising from these certifcates i.e. benefts and risks. 2.2 Types of Sukuk Al- Istithmar There are many types of Sukuk Al-Istithmar which can be issued in many forms and structured from any of the known Islamic investment transaction contracts such as Wakalah contract or Mudarabah contract or Salam contract or Ijarah contracts etc. in other words Sukuk Al-Istithmar must be issued in accordance with one of these known contracts. The most important of such contracts in this regard as set out in the AAIOFIShari ‘ah Standard are the following 3 : 2.2.1 Sukuk Milkiyyah Al-Maujudaat Al-Mu’ajjarah (i.e. Certifcates of ownership in leased assets) These are certifcates that represent equal value and are issued by the owner of leased asset or a tangible asset to be leased by promise, or by his fnancial agent with the aim of selling asset and recovering its value from subscription. Thus, the holders of the certifcates become owners of the assets. In this transaction the Issuer is the seller of a leased asset or a tangible asset to be leased on promise, the subscribers are the buyers of the asset, mobilized funds are the purchase price of the asset. The certifcate holders will become the owners of the assets jointly sharing the profts and losses on the basis of the partnership that exist between them. 2.2.2 Sukuk Milkiyyah Al- Mana f ‘a (i.e. Certifcates of ownership of usufructs) These Sukuk have diferent types as explained bellow: (a) Sukuk Milkiyyah Al- Mana f ‘a Al- a ‘ayaan Al-maujudah (i.e. Certifcates of ownership of usufructs of existing assets These are Certifcates of equal value that are issued either by the owner of an existing asset or a fnancial intermediary acting on the owner’s behalf, with the purpose of leasing or subleasing this asset and receiving the rental from the revenue of subscription. Thus, the holders of the certifcates become owners of the usufruct of the asset. In this transaction the Issuer is the seller of usufruct of an existing asset, the subscribers are the buyers of the usufructs and the mobilized funds are the purchase price of the usufructs. Thus, the certifcate holders become jointly the owners of the usufructs sharing its benefts and risks. (b) Sukuk Milkiyyah Al- Mana f ‘a Al- a ‘ayaan Al-mausufah f Al- dhimmah (i.e. Certifcates of ownership of usufructs of described future assets) These are certifcates of equal value issued for the aim of leasing out tangible assets that the lessor is liable to provide in the future whereby the rental is recovered from the subscription revenue. Thus, the holders of the certifcates become owners of the usufruct of these future assets. 2. Accounting and auditing organization for Islamic Financial Institutions (AAIOFI) Shari‘ah Standards, 2010, item 2 Shari‘ah Standard no. 17. PP. 307 – 309. 3. Ibid. (See the AAIOFI Shari’a Standard no. 17 for more details on these Sukuk). In this transaction whereby the ownership of described usufructs to be made available in the future the Issuer is the seller of such usufruct, the subscribers are the buyers of the usufructs and the mobilized funds from subscription are the purchase price of the usufructs. Thus, the certifcate holders become jointly the owners of the usufructs sharing its benefts and risks. (c) Sukuk Milkiyyah Al-Khadamaat min taraf mu ‘ayyan (i.e. Certifcates of ownership of services of a specifed party) These are certifcates of equal value issued for the aim of providing services through a specifed provider (such as educational benefts in a nominated university) and obtaining the value in the form of subscription income. Thus, the certifcates holders become owners of the services. (d) Sukuk Milkiyyah Al-Khadamaat min taraf mausufun f Al- dhimmah (i.e. Certifcates of ownership of described future services) These are certifcates of equal value issued for the purpose of providing future services through described provider (such as educational benefts/ programs of determined specifcations without mentioning the educational institution) and obtaining the fee in the form of subscription income. Thus, the holders of the certifcates become owners of the services. In these transactions (c & d) the issuer is the seller of services, the subscribers are the buyers of the services and the mobilized funds are the purchase price of the services. The certifcate holders are entitled to sell all types of usufructs of (b, c & d) in addition to the funds of reselling such usufructs 4 . 2.2.3 Sukuk Al- Istisna ‘a These are certifcates that represent equal value issued with the aim of mobilizing required funds to be used for the production of certain goods which to be owned by the certifcate holders when its produced on Istisna ‘a basis. In this transaction the issuer of these certifcates is the manufacturer (Seller), the subscribers are the buyers of the goods to be produced and the mobilized funds are the cost of the goods. The certifcate holders are entitled to the goods or the selling price of the manufactured goods on the basis of a parallel Istisna ‘a if any. 2.2.4 Sukuk Al- Murabahah These are certifcates that represent equal value issued for the purpose of fnancing the purchase of Murabahah commodity and therefore, the certifcate holders become the owners of the purchased commodity. In this transaction, the issuer of these certifcates is the seller of the Murabahah commodity, the subscribers are the buyers of that commodity and mobilized funds are the purchasing cost of the commodity. The certifcate holders own the Murabahah commodity and are entitled to its sale price. 2.2.5 Sukuk Al- Musaqaah (i.e. Irrigation certifcates) 5 These are certifcates that represent equal value issued on the basis of an irrigation contract for the purpose of using the mobilized funds for irrigating trees that produce fruits as well as meeting other expenses relating to the maintenance of the trees and therefore, the certifcate holders become entitled to a share in the crop as per agreement. In this transaction, the issuer of these certifcates is the owner of the garden/ land that consist of trees, the 5 4. Accounting and auditing organization for Islamic Financial Institutions (AAIOFI) Shari‘ah Standards, 2010, item 5/1/5/2 Shari‘ah Standard no. 17. P. 311. 5. This is a type of contract in which the owner of agricultural land shares its produce with another person in return for his services in irrigating the garden. subscribers are those who assume the obligation of irrigation process on the basis of Al- Musaqah contract and the mobilized funds stand as the maintaining cost of the garden/ trees. The certifcate Holders are entitled to a share in the produce of the trees as per the agreement. 2.2.6 Sukuk Al- Musharakah (i.e. participation certifcates) These are certifcates that represent equal value issued with the aim of using the mobilized funds for establishing a new project or developing an existing one or fnancing a business activity on the basis of any of partnership contracts. Thus, the certifcate holders become the owners of the project or the assets of the activity as per their respective shares. Sukuk Al-Musharakah however, may be managed on the basis of Al- Shirkah i.e. participation or Al- Mudarabah or trough Al- Wakalah bil Istithmar i.e. investment agency as explained below: 2.2.6.1 Sukuk Al- Sharikah (i.e. Participation certifcates) These are certifcates representing projects or activities that are managed on the basis of Musharakah contract by appointing either one of the parties or any other party to manage the operation. In this transaction, the issuer is the inviter to a partnership with him in a specifc project or determined activity, the subscribers are the partners in the Musharakah contract and mobilized funds are the share contribution of the subscribers in the Musharakah capital. Thus, the certifcate holders own the assets of partnership including profts and losses and they are entitled to share of proft, if any. 2.2.6.2 Sukuk Al- Mudarabah 6 These are certifcates that represent projects or activities that are managed on the basis of Mudarabah contract by appointing Mudarib who could be one of the partners or any other person for the management of the operation. In this transaction, the issuer of these certifcates is the Mudarib, the subscribers are the capital owners and mobilized funds are the Mudarabah capital. Thus, the certifcate holders own the assets of Mudarabah and share the proft as per the agreement. They also being the capital providers, bear the losses, if any. 2.2.6.3 Sukuk Al – Wakalah bil Istithmar (i.e. Certifcates of investment agency) These are certifcates that represent projects or activities that are managed on the basis of investment agency by appointing an agent to manage the operation on behalf of the certifcate holders. In this transaction, the issuer of these certifcates is the investment agent, the subscribers are the principals and the mobilized funds are the entrusted capital of the investment. Thus, the certifcate holders own the assets represented by the certifcates with its benefts and risks, and also they are entitled to the profts if any. 2.2.7 Sukuk Al- Muzara’ah (i.e. sharecropping certifcates) 7 These are certifcates of equal value issued for the objective of using the mobilized funds in fnancing a project on the basis of a Muzara’ah contract. Thus, the certifcate holders become entitled to a share in the crop as per the terms of the agreement. In this transaction the issuer of these certifcates is the owner of the land, the subscribers are the cultivators who invest on the basis of Muzara’ah contract and the mobilized funds are the cultivation cost. Thus, the certifcate holders are entitled to a share of the produce of the land as per the agreement. 6 6. Al- Mudarabah or Al-Qiradh: Is a contract between a Rabbul Mal (capital provider) and (an entrepreneur) under which the Rabbul Mal provides capital to be managed by the Mudarib and any proft generated from the capital is shared between the two parties (Rabbul mal and Mudarib} according to mutually agreed proft sharing ratio whilst fnancial losses are borne by the Rabbul Mal provided that such losses are not due to the Mudarib’s misconduct, negligence or breach of specifed terms of the contract. 7. This is a type of contract in which one person works on the land of another person in return for a share in the produce of the land. 2.2.8 Sukuk Al - Salam 8 These are certifcates of equal value issued for the aim of mobilizing Salam capital so that the goods to be delivered on the basis of Salam contract are owned by the certifcate holders. In this transaction the issuer of these certifcates is the seller of the Salam goods, the subscribers are the buyers of the goods and the mobilized funds are the purchase price of the commodity, which is the Salam capital. Thus, the certifcate holders are the owners of Salam goods and they are also entitled to the sale price of the certifcate or the sale price of the Salam goods sold through a parallel Salam, if any. 2.3 Characteristics of Sukuk Al- Istithmar 9 Sukuk Al-Istithmar is characterized with many features that distinguish them from the non Shari ‘ah complaint bonds. These features include: (a) Sukuk Al-Istithmar are certifcates of equal value issued in the name of investor therefore, a legitimate claim of its owner/investor over the fnancial rights and obligations represented by the certifcate can be established. (b) It represents a common share in the ownership of the tangible assets earmarked for investment, usufructs, services etc. and hence, it does not represent debt as in the case of non Shari ‘ah compliant bonds. (c) It is issued on the basis of known and acceptable Shari ‘ah investment contracts and in accordance with Shari ‘ah principles which governing its issuance as well as its trading. (d) Investors in Sukuk Al-Istithmar share the proft according to the agreement set forth in the prospectus and also bear the losses if any, based on the percentage/proportion owned by each investor. 3. Fundamental diferences between Sukuk Al- Istithmar and Bonds Bond is defned as: “A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defned period of time at a fxed interest rate” 10 . Based on this defnition of the bonds, we can see that the fundamental diferences between Bonds and Sukuk Al-Istithmar is in the fact that Sukuk Al-Istithmar are not fxed – income securities, because they do not represent debts between the issuer and the investors. Rather, the investors share Sukuk returns and proceeds according to percentages stated in the prospectus, and bear losses in proportion to the number of the Sukuk certifcates held by them. AAIOFI Shari ‘ah Standard clearly stated that these Sukuk Al-Istithmar are investment Sukuk in order to distinguish them from shares, bonds etc. which, as well as other large part of the conventional securitization market, are not conform to theShari ‘ah principles of transaction as its income element of the cash fow is considered to be Riba (i.e. interest) hence, could not be accepted as an asset class as well as it represent debt rather than Shari‘ahh compliant acceptable commodity. 4. Conclusion The of this chapter can be summarized in the following points: 4.1 There is no any objection from theShari ‘ah to issue Sukuk Al-Istithmar certifcate on the basis of any known Sahari ‘ah investment contracts, such as Wakalah or Mudarabah or Salam or Ijarah contracts etc. and the certif- 8. Al –Salam i.e. Advance purchase contract. 9. Accounting and auditing organization for Islamic Financial Institutions (AAIOFI) Shari‘ah Standards, 2010, item 4 Shari‘ah Standard no. 17. PP.309-310. 10. http://www.investopia.com/terms/b/bond.asp#ixzz2LWMKa0x6. 7 cates must be issued for asset that are tangible assets, usufructs and services by dividing them into equal shares and issuing Sukuk for their value. In other words, it must be backed by aShari ‘ah compliant real underlying assets that are subject to aShari ‘ah known contracts and the rights and obligations of all parties in the transaction should be spelled out clearly and identifed in a transparent manner. Also its documentation must demonstrate that any income arising must derive from the underlying activities for which the funding has been used, and not simply comprise Riba (i.e. interest) as these Sukuk Al-Istithmar deferred from bonds and fxed-income securities which represent debts. 4.2 Under the umbrella of Sukuk Al istithmar there are diferent types of Sukuk with diferentShari ‘ah rulings and structures. All these Sukuk are called Sukuk Al istithmar in order to distinguish them from shares and bonds. 4.3 Sukuk Al-Istithmar represents undivided shares in the ownership of all the assets made available for invest- ment of whatever type. Therefore, the relationship between the investors and issuer is based on some kind of partnership in proft and loss sharing not on debt as debts owed as liability are not allowed inShari ‘ah to securitize them for the purpose of trading. 4.4 For the sake of information, Sukuk Al Wakalah bi Al-Istithmar (i.e. Certifcate of investment agency) is under the umbrella of Sukuk Al istithmar which includes as mentioned above, various Islamic contracts. Some in the Sukuk industry are not aware of this as they suggested in their writings that Sukuk Al-istithmar should be distinguished from Sukuk Al- Mudarabah and Sukuk al-Wakalah bi Al-Istithmar. 4.5 It is a Shari ‘ah requirement that Sukuk Al-Istithmar must be structured and issued on the basis of any known Islamic investment contracts, so that the transactions will be subjected to its (i.e. the investment contracts) gen- eral provisions and conditions. This is after closing subscription, receipt of the value of the certifcates and putting it to use as planned. Below diagram illustrate the types of Sukuk Al- Istithmar where they must be structured and issued on the basis of any of the Islamic nominated Investment contract: 8 12 Types of Sukuk Al - Istthmar Sukuk Al-Ijarah Sukuk Al-Murabahah Sukuk Al- Muzara'ah Sukuk of ownership of usufructs.These Sukuk have different types as follows: Sukuk Al- Istsna ‘a Sukuk Al- Musaqaah Sukuk Al - Salam Sukuk Al- Musharakah may be managed on the following basis (a) Sukuk of ownership of usufructs of existng assets. (b) Sukuk of ownership of usufructs of described future assets. ( c) Sukuk of ownership of services of a specified party. (d) Sukuk of ownership of described future (a) SukukAl -Sharikah (b) Sukuk Al-Mudharabah (c ) Sukukof investment agency (i.e.Al – Wakalah bil Istthmar) Mixed asset Sukuk or hybrid Sukuk Combine two or more forms of Islamic financing in their structure. The underlying pool of assets can comprise of Istsn‘a, Murabahah receivables as well as Ijarah etc. OVERVIEW OF THE GLOBAL SUKUK MARKET 2.1 Resurgence of Sukuk Market Islamic Capital Market continued its upward trend in recent years and is led by the key Islamic fxed profle instrument known as Sukuk. After a relatively large dip in the Sukuk issuances in mid 2008 to 2009, the year 2010 showed the glimpse of true potential of Sukuk. The global fnancial crisis had a direct impact on Sukuk market and the few holders of troubled Sukuk were facing the default and insolvency proceedings and uncertainty on legal difculties in restructuring Sukuk. However, once several defaulting Sukuk were restructured and legal certainty was established the market confdence returned. The most recent restructuring of Sukuk is Dana Gas US$ 1 billion Sukuk which is expected to be soon approved by the creditors. The Dana Gas restructuring involve partial cash repayment and issuance of US$ 425 million Convertible Sukuk & US$ 425 million Sukuk which shows that legal system is present to tackle such events though further improvement may be required to tackle certain issues specifc to Islamic Finance. Furthermore, the Islamic jurisdictions also stepped in and started bench mark Sukuk issuances both in their Domestic Market as well as in International Market. A number of Islamic countries such as Indonesia, Turkey, Pakistan, GCC countries and others gave priority to developing the Islamic Financial Services Industry particularly Sukuk market. The year 2011 & 2012 witnessed record Sukuk issuances by Sovereigns, Quasi Sovereigns & Corporates and this was in line with IIFM’s Sukuk Report 2nd edition indication that Sukuk market will grow and Islamic jurisdictions will lead the Sukuk market recovery. The other helpful and much needed development is use of Sukuk in project fnancing as well as for aircraft fnancing (Emirates Airline, Malaysian Airline, Air Asia) which are of long term nature and Sukuk is well suited for these kind of fnancing requirement. Finally, fnancial institutions are no longer the majority investors in Sukuk as fund managers; Takaful operators, high Net worth Individuals and others are now investing in Sukuk which is one of the reason why most of the Sukuk are issued on fxed proft rate basis. 2.2 Global Sukuk Issuances As illustrated in the below chart, the share of sovereign as well as Quasi Sovereign Sukuk issuances has increased a great deal during Jan 2011 – Jan 2013 period and is contributing to the further development of Sukuk market: Chapter Two 9 Chart 1: Total Global Sukuk Issuance (All Currencies) - Jan 2001 – Jan 2013 US$ Millions Global Sukuk market continued its positive upward momentum after the initial shock of the fnancial crisis. Sukuk issuance enjoying a very successful runs that began in 2010 and recorded another pinnacle in 2012, and in doing so, it crossed the $100 Billion mark of fnancing arranged via Sukuk. The market achieved a very respectable issuance of US$ 137 Billion. The Financial crisis of 2008, which pressured developed market fnancial institution into contracting and deleveraging, played a big part in propelling Sukuk issuance to new heights. Sukuk is now establishing a frm base as an alternative source of funding, not just for the GCC and Malaysian market but with interest gathering from Europe, African continent and the CIS countries. We witnessed many milestones in 2012, just to highlight a few: a) The biggest Sukuk issuance from PLUS - Malaysia b) The biggest Saudi Sukuk by the Civil Aviation Authority c) First Intl Sukuk issuance with a Saudi Sovereign Guarantee d) Debut International Sukuk by The Republic of Turkey e) Debut Domestic Lira issuance by Republic of Turkey f ) First Sukuk issuance from a fnancial institution in Kazakhstan g) First Perpetual Sukuk by Abu Dhabi Islamic Bank h) First Tier 1 Sukuk by Abu Dhabi Islamic Bank 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 1,172 1,371 7,057 9,465 13,698 33,837 50,041 24,264 37,904 52,978 92,403 137,499 472,683 10,993 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 - J a n u a r y T o t a l 10 The following table gives a clear picture on the hallmark Global Sukuk issues during 2011 – Jan 2013: Table :1- Selected Hall Mark Global Sukuk Issues & Trends -2011- January 2013 (US$ 700 Millions or greater) 2012 PLUS Berhad Twenty Three Domestc Quasi- Sovereign Sukuk issuances of various tenors, Al Musharaka, issuer from Malaysia 9,728 16 2012 Abu Dhabi Islamic Bank Internatonal Corporate, Mudarabah Sukuk, Tier 1 & perpetual, issuer 1,000 Perpetual 2012 Qatar Internatonal Islamic Bank Internatonal Corporate Hybrid Sukuk 700 5 2012 Qatar Islamic Bank Internatonal Corporate Sukuk Al Wakalah 750 5 2012 Celcom Transmission Five Domestc Corporate Sukuk Issuances, Al Murabahah, Issuer from Malaysia 1,442 8 2012 Tanjung Bin Power 9 Nine Domestc Corporate Sukuk Issuances of various tenors, Al Ijarah, issuer from Malaysia 1,101 12 2012 Emirates Islamic Bank Two Internatonal Corporate Sukuk issuances, Al Musharaka, issuer from Dubai 1,000 6 2012 Johor Corporaton Three Domestc Corporate Sukuk issuances, Al Wakalah, issuer from Malaysia 941 7 2012 Banque Saudi Fransi Internatonal Corporate Sukuk, Al Wakalah, Tier 2, issuer from KSA 750 5 2012 Maxis Berhad Domestc Corporate Sukuk, Al Musharaka, issuer from Malaysia 811 10 2012 Sarawak Energy Bhd Two Domestc Corporate Sukuk issuances, Al Musharaka, issuer from Malaysia 801 13 2012 Government of Malaysia Seven Domestc Sovereign Sukuk issuances of various tenors, Al Murabahah 2,527 12 2012 Government of Indonesia Internatonal Sovereign Sukuk Al Ijarah 3.3% p.a. profit rate 1,000 10 2012 Government of Turkey Internatonal Sovereign Sukuk Al Ijarah 2.8% p.a. profit rate 1,500 6 2012 Government of Qatar Two Internatonal Sovereign Sukuk issuances, avg profit rate of 2.67% p.a. Al Ijarah 4,000 16 2012 Government of Indonesia Thirteen Domestc Sovereign Sukuk Issuances of various tenors, Al Ijarah 3,620 9 2012 Government of Pakistan Six Domestc Sovereign Sukuk Issuances, Al Ijarah 3,135 3 2012 Government of Dubai Two Internatonal Sovereign Sukuk issuances, Al Ijarah, avg. profit rate 4.39% p.a. 1,250 8 Issue Year Issuer Highlight Amount in Millions USD or USD Equivalent Average Tenor (Years) 2013 Sime Darby Berhad The World biggest Palm Oil producer and lowest – ever USD profit by any corporaton globally, two Sukuk tranches having 5 & 10 – years tenor (Sukuk Al Ijarah Malaysian Issuer) 800 8 2013 Government of Dubai Internatonal Sovereign Sukuk Al Ijarah Issuer Dubai, 750 10 2012 Islamic Development Bank Two Internatonal Quasi-Sovereign Sukuk Issuances, Al Wakalah and only AAA rated Sukuk 1,300 5 2012 Khazanah Nasional Bhd Four Domestc Quasi-Sovereign Sukuk issuances of various tenors, Al Musharakah, Issuer from Malaysia , 1,450 15 2012 Natonal Higher Educaton Fund Corporaton Malaysia Two Domestc Quasi-Sovereign Sukuk issuances, Al Murabahah, Government of Malaysia 1,118 10 2012 Saudi Electricity Company Two Internatonal Quasi-Sovereign Sukuk Issuances, Al Ijarah, issuerfrom KSA 1,750 8 2012 General Authority Of Civil Aviaton Domestc Quasi-Sovereign Sukuk, Al Murabahah, issuer from KSA 4,000 10 11 Continuous innovation together with more Debut Sukuk issuances and refnancing of maturing Sukuk is likely to maintain the Sukuk Volume trajectory upwards in 2013 and beyond, as countries and corporate look to take advantage of extremely attractive low yields being priced by the market. 2011 Malaysian Airline Nine Domestc Quasi-Sovereign Sukuk issuances of various tenors, Al Murabahah 2,576 7 2011 Islamic Development Bank 1 Internatonal Quasi-Sovereign Sukuk Al Wakalah from KSA 750 5 2011 Manjung Island Energy Berhad 7 Domestc Corporate Sukuk Al Ijarah from Malaysia 1,242 9 2011 Saudi Arabian Aramco Domestc Corporate Sukuk Al Musharakah longer tenor 1,000 14 2011 Nakheel Group Domestc Corporate Sukuk Al Ijarah, issuer from Dubai 1,034 5 2011 Sarawak Energy Bhd Four Domestc Corporate Sukuk Issuances of various tenors, AlMusharaka, issuer from Malaysia 990 9 2011 Central Bank of Bahrain Internatonal Sovereign Sukuk Al Ijarah, 6.27% p.a. profit rate 750 7 2011 Government of Indonesia Internatonal Sovereign Sukuk Al Ijarah, 4% p.a. profit rate 1,000 7 2011 Government of Indonesia Five Domestc Sovereign Sukuk Issuances, Al Ijarah 2,033 10 2011 Government of Malaysia Two Internatonal Sovereign Sukuk Issuances, Al Wakalah, 2,000 8 2011 Government of Malaysia Two Domestc Sovereign Sukuk Al Murabahah, 984 9 2011 Government of Qatar Domestc Sovereign Sukuk Al Ijarah, 9,067 3 Source: IIFM Sukuk Issuance Database (Jan 2011 – Jan 2013) 2012 PLUS Berhad Twenty Three Domestc Quasi- Sovereign Sukuk issuances of various tenors, Al Musharaka, issuer from Malaysia 9,728 16 2012 Abu Dhabi Islamic Bank Internatonal Corporate, Mudarabah Sukuk, Tier 1 & perpetual, issuer 1,000 Perpetual 2012 Qatar Internatonal Islamic Bank Internatonal Corporate Hybrid Sukuk 700 5 2012 Qatar Islamic Bank Internatonal Corporate Sukuk Al Wakalah 750 5 2012 Celcom Transmission Five Domestc Corporate Sukuk Issuances, Al Murabahah, Issuer from Malaysia 1,442 8 2012 Tanjung Bin Power 9 Nine Domestc Corporate Sukuk Issuances of various tenors, Al Ijarah, issuer from Malaysia 1,101 12 2012 Emirates Islamic Bank Two Internatonal Corporate Sukuk issuances, Al Musharaka, issuer from Dubai 1,000 6 2012 Johor Corporaton Three Domestc Corporate Sukuk issuances, Al Wakalah, issuer from Malaysia 941 7 2012 Banque Saudi Fransi Internatonal Corporate Sukuk, Al Wakalah, Tier 2, issuer from KSA 750 5 2012 Maxis Berhad Domestc Corporate Sukuk, Al Musharaka, issuer from Malaysia 811 10 2012 Sarawak Energy Bhd Two Domestc Corporate Sukuk issuances, Al Musharaka, issuer from Malaysia 801 13 2012 Government of Malaysia Seven Domestc Sovereign Sukuk issuances of various tenors, Al Murabahah 2,527 12 2012 Government of Indonesia Internatonal Sovereign Sukuk Al Ijarah 3.3% p.a. profit rate 1,000 10 2012 Government of Turkey Internatonal Sovereign Sukuk Al Ijarah 2.8% p.a. profit rate 1,500 6 2012 Government of Qatar Two Internatonal Sovereign Sukuk issuances, avg profit rate of 2.67% p.a. Al Ijarah 4,000 16 2012 Government of Indonesia Thirteen Domestc Sovereign Sukuk Issuances of various tenors, Al Ijarah 3,620 9 2012 Government of Pakistan Six Domestc Sovereign Sukuk Issuances, Al Ijarah 3,135 3 2012 Government of Dubai Two Internatonal Sovereign Sukuk issuances, Al Ijarah, avg. profit rate 4.39% p.a. 1,250 8 12 It is also interesting to note that Sukuk pricing are now beginning to be more attractive than conventional as the liquidity and investors demand are creating pricing tension in favour of the issuer. While the market continues to keep risk aversion strategy intact, this we will most likely see continued Sovereign and Sovereign linked Sukuk to take centre stage. Against this backdrop, the hunt for yield continued apace and this has been refected in the strong performance of some previously unloved but relatively higher yielding issuers. While more depth is created in the Sukuk market, the issuance of Non-Local Currency Sukuk by foreign issuers is a positive development and will contribute in the growth of the Sukuk market. These issuances have also highlighted the need of currency hedging which is one of the key contributions of IIFM to the Islamic Financial Services Industry and standards developed by IIFM will be extremely benefcial in the risk mitigation arising from such Sukuk issuances. Following Table will give a clear picture on the Non-Local Currency hallmark global Sukuk issuances during last 2 years: Table: 2 - Selectd hallmark NM currency Sukuk issues 2011 Jan 2013 Most of the Sukuk being issued of late has been fxed rate, which is good for the Sukuk issuer as it locks in its funding cost at historic low rate. While the investor may well be pleased with its fxed return for now, but as soon as the global economy shows signs of growth, the yield will jack up and the investor may carry a book loss. Since IIFM has developed the ISDA / IIFM Tahawwut agreement, it would be prudent to keep an eye on the returns and at some point consider hedging to lock in a proft and Islamic Proft Rate Hedging is already used by several institutions based in GCC & Malaysia. Issue Year Issuer Issuance Currency Issuer Country Type of Issued Sukuk Structure Amount in Millions USD Equivalent Average Tenor (Years) 2012 First Resources Ltd MYR Singapore Corporate Sukuk Al Musharakah 319 5 2012 Natonal Bank of Abu Dhabi MYR United Arab Emirates Corporate Sukuk Al Murabahah 163 15 2012 Golden Agri-Resources Ltd MYR Indonesia Corporate Sukuk Al Murabahah 481 5 2012 Abu Dhabi Natonal Energy Company MYR United Arab Emirates Corporate Sukuk Al Murabahah 212 10 2012 Noble Group Limited CYN Hong Kong Corporate Sukuk Al Murabahah 195.8 3 2012 UMW Toyota Capital MYR Japan Corporate Sukuk Al Musharakah 89.56 4 2012 Bahrain Mumtalakat Holding Company MYR Bahrain Sovereign Sukuk Al Murabahah 97.44 5 2012 Axiata Berhad MYR Malaysia Corporate Hybrid Sukuk 157.85 2 2012 Development Bank of Kazakhstan MYR Kazakhstan Quasi- Sovereign Sukuk Al Murabahah 76.71 5 2012 Gulf Investment Corporaton MYR Kuwait Corporate Sukuk Al Wakalah 101.08 13 2011 Gulf Investment Corporaton MYR Kuwait Corporate Sukuk Al Wakalah 451 5 2011 Khazanah Nasional Bhd Malaysia Quasi- Sovereign Sukuk Al Musharakah 78.2 3 13 Following are landmark Fixed Proft Rate Sukuk Issuances during Jan 2011 – Jan 2013 period : Table: 3 - Landmark Fixed Proft Rate Sukuk Issuances 2.3 Distribution of the Global Sukuk Issuance by Issuer Status During the post fnancial crisis until 2011, the appetite for the corporate risk, especially in GCC, was subdued and the Sovereign issuers have been main driver of growth in Sukuk market. The share of Sovereign has increased to 54% as compare to sovereign market share of 34% during 2001 to 2010 period while corporate share has dropped to 38% from 63%. 24-Jan-13 Government of Dubai Sovereign Internatonal Sukuk Al Ijarah 750 3.88% 16-Nov-12 Government of Indonesia Sovereign Internatonal Sukuk Al Ijarah 1,000 3.30% 12-Nov-12 Abu Dhabi Islamic Bank Corporate Internatonal Hybrid Sukuk 1,000 6.38% 11-Oct-12 Qatar Internatonal Islamic Bank Corporate Internatonal Hybrid Sukuk 700 2.69% 3-Oct-12 Qatar Islamic Bank Corporate Internatonal Sukuk Al Wakalah 750 2.50% 26-Sep-12 Government of Turkey Sovereign Internatonal Sukuk Al Ijarah 1,500 2.80% 18-Jul-12 Emaar Propertes, Dubai Corporate Internatonal Sukuk Al Ijarah 500 6.40% 11-Jul-12 Government of Qatar Sovereign Internatonal Sukuk Al Ijarah 2,000 2.10% 11-Jul-12 Government of Qatar Sovereign Internatonal Sukuk Al Ijarah 2,000 3.24% 25-Jun-12 Islamic Development Bank Quasi- Sovereign Internatonal Sukuk Al Wakalah 800 1.36% 19-Jun-12 Jebel Ali Free Zone, Dubai Corporate Internatonal Sukuk Al Wakalah 650 7.00% 15-Jun-12 Natonal Higher Educaton Fund Corporaton Malaysia Quasi- Sovereign Domestc Sukuk Al Murabahah 789 3.85% 14-Jun-12 Johor Corporaton,Malaysia Corporate Domestc Sukuk Al Wakalah 564 3.84% 30-May-12 Dubai Islamic Bank,UAE Corporate Internatonal Sukuk Al Ijarah 500 4.75% 22-May-12 Banque Saudi Fransi Corporate Internatonal Sukuk Al Wakalah 750 2.95% 25-Apr-12 Government of Dubai Sovereign Internatonal Sukuk Al Ijarah 650 6.45% 25-Apr-12 Government of Dubai Sovereign Internatonal Sukuk Al Ijarah 600 4.90% 28-Mar-12 Saudi Electricity Company Quasi- Sovereign Internatonal Sukuk Al Ijarah 500 2.67% 28-Mar-12 Saudi Electricity Company Quasi Sovereign Internatonal Sukuk Al Ijarah 1,250 4.21% 18-Jan-12 General Authority Of Civil Aviaton,Saudi Arabia Quasi- Sovereign Domestc Sukuk Al Murabahah 4,000 2.50% 18-Jan-12 First Gulf Bank,UAE Corporate Internatonal Hybrid Sukuk 500 4.05% 30-Nov-11 Abu Dhabi Commercial Bank,UAE Corporate Internatonal Hybrid Sukuk 500 3.78% 22-Nov-11 Central Bank of Bahrain Sovereign Internatonal Sukuk Al Ijarah 750 6.27% 21-Nov-11 Government of Indonesia Sovereign Internatonal Sukuk Al Ijarah 1,000 4.00% 25-Aug-11 Nakheel Group ,UAE Corporate Domestc Sukuk Al Ijarah 1,034 10.00% 2-Aug-11 First Gulf Bank Sukuk,UAE Corporate Internatonal Hybrid Sukuk 650 3.80% 2-Jun-11 HSBC Bank Middle East Limited,UAE Corporate Internatonal Hybrid Sukuk 500 3.58% 25-May-11 Islamic Development Bank Quasi- Sovereign Internatonal Sukuk Al Wakalah 750 2.35% 3-Feb-11 Emaar Propertes, Dubai Corporate Internatonal Sukuk Al Ijarah 500 8.50% Issue Date Issuer Type of Issued Sukuk Internatonal or Domestc Structure Amount in Millions USD or USD Equivalent Rate of Return Per Annum 14 Table: 4 - Global Sukuk Issuances by Issuer Status 2001- Jan 2013 Following are the tables for Hall Mark Sukuk Issuances in Sovereign, Corporate and Quasi-Sovereign Table: 5 - Global Sovereign Sukuk Issues -Selected Value Leaders 2011-2013 - Year wise latest frst US $ 100 Millions or greater (International & Domestic) Issuer Status No. of Issues Value (USD Millions) % of Total Value Sovereign 1,034 255,506 54% Corporate 2,743 179,416 38% Quasi-Sovereign 98 37,762 8% Total 3,875 472,683 100% Issue Year Issuer Number of Issues Issuer Country Internatonal or Domestc Structure Amount in Millions USD or USD Equivalent Average Tenor (Years) 2013 Government of Dubai 1 United Arab Emirates Internatonal Sukuk Al Ijarah 750 10 2012 Government of Malaysia 7 Malaysia Domestc Sukuk Al Murabahah 2,527 12 2012 Government of Indonesia 1 Indonesia Internatonal Sukuk Al Ijarah 1,000 10 2012 Government of Turkey 1 Turkey Internatonal Sukuk Al Ijarah 1,500 6 2012 Central Bank of Bahrain 1 Bahrain Domestc Sukuk Al Ijarah 424 5 2012 Government of Qatar 2 Qatar Internatonal Sukuk Al Ijarah 4,000 16 2012 Government of Indonesia 13 Indonesia Domestc Sukuk Al Ijarah 3,620 9 2012 Government of Pakistan 6 Pakistan Domestc Sukuk Al Ijarah 3,135 3 2012 Government of Dubai 2 United Arab Emirates Internatonal Sukuk Al Ijarah 1,250 8 2011 Central Bank of Bahrain 1 Bahrain Internatonal Sukuk Al Ijarah 750 7 2011 Government of Indonesia 1 Indonesia Internatonal Sukuk Al Ijarah 1,000 7 2011 Government of Indonesia 5 Indonesia Domestc Sukuk Al Ijarah 2,033 10 2011 Government of 2 Malaysia Internatonal Sukuk Al 2,000 8 Malaysia Wakalah 2011 Government of Sudan 1 Sudan Domestc Hybrid Sukuk 286 5 2011 Government of Malaysia 2 Malaysia Domestc Sukuk Al Murabahah 984 9 2011 Government of Qatar 1 Qatar Domestc Sukuk Al Ijarah 9,067 3 15 Table: 6 - Global Corporate Sukuk Issues -Selected Value Leaders 2011- Jan 2013 - Year wise latest frst US $ 100 Millions or greater (International & Domestic) Issue Year Issuer Number of Issues Issuer Country Internatonal or Domestc Structure Amount in Millions USD or USD Equivalent Average Tenor (Years) 2013 Sime Darby Berhad 2 Malaysia Internatonal Sukuk Al Ijarah 800 8 2013 Savola Group 1 Saudi Arabia Domestc Hybrid Sukuk 400 7 2013 Malakoff Corporaton Berhad 3 Malaysia Domestc Sukuk Al Murabahah 696 9 2013 Segari Energy Ventures 1 Malaysia Domestc Sukuk Al Murabahah 559 15 2012 UEM Land Holdings Berhad 1 Malaysia Domestc Sukuk Al Murabahah 196 5 2012 Banque Saudi Fransi 1 Saudi Arabia Domestc Sukuk Al Mudharabah 507 7 2012 Sime Darby Bhd 1 Malaysia Domestc Sukuk Al Murabahah 131 15 2012 First Resources Ltd 2 Singapore Internatonal Sukuk Al Musharakah 319 5 2012 Natonal Bank of Abu Dhabi 1 United Arab Emirates Internatonal Sukuk Al Murabahah 163 15 2012 Saudi Hollandi Bank 1 Saudi Arabia Domestc Sukuk Al Murabahah 373 7 2012 Imtaz Sukuk Berhad 1 Malaysia Domestc Sukuk Al Musharakah 228 5 2012 Golden Agri-Resources Ltd 1 Indonesia Internatonal Sukuk Al Murabahah Sukuk Al Murabahah 481 5 2012 Abu Dhabi Islamic Bank 1 United Arab Emirates Internatonal 1,000 Perpetual 2012 Qatar Internatonal Islamic Bank 1 Qatar Internatonal Hybrid Sukuk 700 5 2012 Qatar Islamic Bank 1 Qatar Internatonal Sukuk Al Wakalah 750 5 2012 HSBC Amanah 1 Malaysia Domestc Sukuk Al Wakalah 162 5 2012 Kuala Lumpur Kepong Berhad 1 Malaysia Domestc Sukuk Al Ijarah 320 10 2012 Malakoff Corporaton Berhad 1 Malaysia Domestc Sukuk Al Musharakah 576 30 2012 Celcom Transmission 5 Malaysia Domestc Sukuk Al Murabahah 1,442 8 2012 Tanjung Bin Power 9 Malaysia Domestc Sukuk Al Ijarah 1,101 12 2012 DanaInfra Nasional Berhad 3 Malaysia Domestc Sukuk Al Murabahah 665 12 2012 Emaar Propertes 1 United Arab Emirates Internatonal Sukuk Al Ijarah 500 7 2012 Cagamas Berhad 1 Malaysia Domestc Sukuk Al Ijarah 132 5 2012 Emirates Islamic Bank 2 United Arab Emirates Internatonal Sukuk Al Musharakah 1,000 6 2012 Olayan Group 1 Saudi Arabia Domestc Hybrid Sukuk 173 5 2012 Jebel Ali Free Zone 1 United Arab Emirates Internatonal Sukuk Al Wakalah 650 7 2012 Johor Corporaton 3 Malaysia Domestc Sukuk Al Wakalah 941 7 16 Contnue in next page 2012 Dubai Islamic Bank 1 United Arab Emirates Internatonal Sukuk Al Ijarah 500 5 2012 Banque Saudi Fransi 1 Saudi Arabia Internatonal Sukuk Al Wakalah 750 5 2012 Saudi Arabia Natonal Industrialisaton Company 1 Saudi Arabia Domestc Hybrid Sukuk 533 7 2012 Aman Sukuk Berhad 1 Malaysia Domestc Sukuk Al Musharakah 116 10 2012 Saudi Britsh Bank 1 Saudi Arabia Domestc Hybrid Sukuk 400 5 2012 Al Marai Company 1 Saudi Arabia Domestc Hybrid Sukuk 267 7 2012 Abu Dhabi Natonal Energy Company 1 United Arab Emirates Internatonal Sukuk Al Murabahah 212 10 2012 Maxis Berhad 1 Malaysia Domestc Sukuk Al Musharakah 811 10 2012 DRB-HICOM Bhd 1 Malaysia Domestc Sukuk Al Murabahah 132 9 2012 Majid Al Futaim Propertes 1 United Arab Emirates Internatonal Sukuk Al Wakalah 400 5 2012 Sarawak Energy Bhd 2 Malaysia Domestc Sukuk Al Musharakah 801 13 2012 First Gulf Bank 1 United Arab Emirates Internatonal Hybrid Sukuk 500 5 2012 Tamweel Funding 1 United Arab Emirates Internatonal Hybrid Sukuk 300 5 2011 Abu Dhabi Commercial Bank 1 United Arab Emirates Internatonal Hybrid Sukuk 500 5 2011 Manjung Island Energy Berhad 7 Malaysia Domestc Sukuk Al Ijarah 1,242 9 2011 Kuveyt Türk Kat l m Bankas 1 Turkey Internatonal Hybrid Sukuk 350 5 2011 Saudi Arabian Aramco Total Services Company 1 Saudi Arabia Domestc Sukuk Al Musharakah 1,000 14 2011 AmIslamic Bank Berhad 1 Malaysia Domestc Sukuk Al Musharakah 192 10 2011 Nakheel Group 1 United Arab Emirates Domestc Sukuk Al Ijarah 1,034 5 2011 SapuraKencana Petroleum 1 Malaysia Domestc Sukuk Al Mudharabah 158 5 2011 Kencana Petroleum Bhd 1 Malaysia Domestc Sukuk Al Mudharabah 167 5 2011 Gulf Investment Corporaton 2 Kuwait Internatonal Sukuk Al Wakalah 451 5 2011 First Gulf Bank 1 United Arab Emirates Internatonal Hybrid Sukuk 650 5 2011 Almana Group W.L.L 1 Qatar Internatonal Sukuk Al Wakalah 215 5 2011 Sarawak Energy Bhd 4 Malaysia Domestc Sukuk Al Musharakah 990 9 2011 Saudi Internatonal Petrochemical Company 1 Saudi Arabia Domestc Sukuk Al Mudharabah 480 5 2011 Bank Muamalat Malaysia Berhad 1 Malaysia Domestc Sukuk Al Musharakah 132 10 2011 HSBC Bank Middle East Limited 1 United Arab Emirates Internatonal Hybrid Sukuk 500 5 2011 Sharjah Islamic Bank 1 United Arab Emirates Internatonal Sukuk Al Wakalah 400 5 2011 Al Rajhi Cement 1 Jordan Domestc Sukuk Al Ijarah 119 7 2011 Maybank Islamic 1 Malaysia Domestc Sukuk Al Musharakah 330 10 2011 Bank Al Jazira 1 Saudi Arabia Domestc Hybrid Sukuk 267 10 2011 Cagamas Berhad 1 Malaysia Domestc Hybrid Sukuk 131 5 2011 First Investment Company 1 Kuwait Domestc Sukuk Al Wakalah 332 5 2011 Emaar Propertes 1 United Arab Emirates Internatonal Sukuk Al Ijarah 500 6 17 Table: 7 - Global Quasi-Sovereign Sukuk Issues -Selected Value Leaders 2011-2012 Year wise latest frst US $ 100 Millions or greater (International & Domestic) Following are chart on Domestic and International Sukuk market: Chart 2: Total Global Sukuk Issuance (All Currencies) – Breakdown by Issuer Status It is no surprise that the domestic market is very much Sovereign lead, as the domestic market needs local currency instruments to manage their Liquidity while the domestic investors prefer to invest in their home currency so as not to be exposed to currency risk. Sovereign will certainly keep a bigger share of the local market as Islamic fnance activities grows around the globe, more countries will issue Sukuk in their home currency as part of the Government own funding needs and to develop bench mark curve to facilitate growth of their domestic market. Issue Year Issuer Number of Issues Issuer Country Internatonal or Domestc Structure Amount in Millions USD or USD Equivalent Average Tenor (Years) 2012 Malaysia Airports Capital Berhad 1 Malaysia Domestc Sukuk Al Ijarah 196 12 2012 Islamic Development Bank 2 Saudi Arabia Internatonal Sukuk Al Wakalah 1,300 5 2012 Khazanah Nasional Bhd 4 Malaysia Domestc Sukuk Al Musharakah 1,450 15 2012 Natonal Higher Educaton Fund Corporaton Malaysia 2 Malaysia Domestc Sukuk Al Murabahah 1,118 10 2012 Malaysian Airline System Berhad 2 Malaysia Domestc Sukuk Al Musharakah 479 10 2012 Syarikat Prasarana Negara Berhad 2 Malaysia Domestc Sukuk Al Murabahah 642 13 2012 Saudi Electricity Company 2 Saudi Arabia Internatonal Sukuk Al Ijarah 1,750 8 2012 Khazanah Nasional Bhd 1 Malaysia Internatonal Sukuk Al Musharakah 358 7 2012 General Authority Of Civil Aviaton 1 Saudi Arabia Domestc Sukuk Al Murabahah 4,000 1 2012 PLUS Berhad 23 Malaysia Domestc Sukuk Al Musharakah 9,728 16 2011 Pengurusan Aset Air Berhad 9 Malaysia Domestc Sukuk Al Murabahah 2,576 7 2011 Syarikat Prasarana Negara Berhad 2 Malaysia Domestc Sukuk Al Ijarah 673 13 2011 Islamic Development Bank 1 Saudi Arabia Internatonal Sukuk Al Wakalah 750 5 2011 Khazanah Nasional Bhd 1 Malaysia Domestc Sukuk Al Musharakah 334 20 Domestc Sukuk Issuances 2001-2010 Sovereign, (86,498) 47% Corporate, (93,022) 51% Quasi- Sovereign, (4,104)2% Quasi- Sovereign, (22,392)1 1% Sovereign, (148,132) 70% Corporate (40,210) 19% Domestc Sukuk Issuances 2011-Jan 2013 18 As the market is now recovering from the shock of the Global Financial crisis, Corporate sector will undoubtly will increase their share, attracted by lower yield and investors demand for Sukuk. In the international cross border market, Corporate were the earlier years dominant issuers but only after Sovereign or Quasi Sovereign laid the foundation that provided confdence in the Sukuk as an acceptable and viable instrument. (Eg; Bahrain, Dubai, Malaysia, Qatar, and IDB) The fallout from the Financial crisis lead investors to move towards safe haven investment strategy and the Sovereign and Quasi Sovereign stepped up to provide confdence and stability. In addition many new Sovereign / Quasi Sovereign issuer lent support to the Sukuk market, (Eg; Saudi Civil Authourity, Turkey,). Not only these chunk size Sukuk issuance from high credit quality issuer helped absorbed some of the liquidity but in doing so, is paving the way for more Sovereign Debutant Sukuk. Moreover, when putting the Global issues together from 2001 to Jan 2013, then the Sovereign and Quasi Sovereign takes almost 62% of all issuance to date. Between 2011 and Jan 2013, surprisingly Qatar Sovereign came in as the top issuer of combined Domestic and International with US $ 13 Billion, Indonesia with US $7.7 Billion and Malaysia with US $ 5.5 Billions. The standing changes considerably with Malaysia taking a handsome lead with US $ 36 Billions, followed by Qatar US $ 15 Billion, Saudi US $ 13 Billions and UAE with US $ 11 Billions when including Quasi Sovereign and Corporate. A healthy development in the Sukuk Mutual Funds space is taking shape with number of banks having set up their own Sukuk Fund to ofer to their private clients, this is a positive sign, that the Sukuk market is coming of age. Development of the Sukuk Fund is timely, as the current split between Sovereign and Corporate risk is very much desirable, since it ofers investors and fund managers with a good mix of Sovereign and Corporate risk to consider. The choice ofers the fund manager to not only diversify credit risk but also take into account their risk return profle in allocating to their portfolio. 2.4 International Sukuk Market The year 2012 was record year in terms of International Sukuk issuances and the year closed at US$ 20 billion Sukuk issuances as compare to previous 2007 pre-crisis record of US$13.80 billion. Currently outstanding International Sukuk fgure is approximately US$ 45 bio and it is expected that Q1 of 2013 will close with US$ 50 billion outstanding Sukuk market. There were several landmark Sukuk issuances from Malaysia, Qatar, Turkey, UAE, Saudi Arabia, Indonesia, Bahrain etc., this indicates that Sukuk market has fully emerged from the declining trend witnessed in 2008 & 2009 and further double digit growth prospects are intact for next coming years and existing Sukuk issuance pipeline is the confrmation of this prediction. International Sukuk Issuances 2001-2010 International Sukuk Issuances 2011-Jan 2013 Sovereign (8,529) 18% Quasi- Sovereign (6,953) 14% Corporate, (32,681) 68% Corporate, (13,502) 45% Sovereign, (12,347) 41% Quasi- Sovereign, (4,313)14% 19 The following table illustrates the regional break-up of the total international Sukuk issuance during the period of Jan 2001 – Jan 2013: Table: 8 - Regional Break-Up of the Total International Sukuk Issuance 2001-Jan 2013 ASIA & FAR EAST Number of Issues Amount USD Millions % of Total Value Malaysia 19 9,677 12.4% Indonesia 4 3,131 4% Pakistan 1 600 0.77% Singapore 2 319 0.41% Hong Kong 2 196 0.25% Japan 3 190 0.24% Total 31 14,113 18% GCC & MIDDLE EAST Number of Issues Amount USD Millions % of Total Value Bahrain 93 6,780 8.7% Qatar 9 7,685 9.8% Saudi Arabia 15 9,990 12.8% United Arab Emirates 50 34,536 44.1% Kuwait 13 2,127 2.7% Total 180 61,119 78% AFRICA Number of Issues Amount USD Millions % of Total Value Sudan 1 130 0.17% Total 1 130 0.17% EUROPE & OTHERS Number of Issues Amount USD Millions % of Total Value Turkey 3 1,950 2.5% Germany 1 55 0.07% UK 3 282 0.36% France 1 1 0.00% USA 2 600 0.77% Kazakhstan 1 77 0.10% Total 11 2,965 4% Grand Total 223 78,326 100% 20 Table : 9 - Selected Value Leaders in International Sukuk Market for Jan 2011- Jan 2013 (US $ 50 million or greater) Issue Year Issuer Number of Issues Issuer Country Type of Issued Sukuk Structure Millions USD Average Tenor (Years) 2013 Sime Darby Berhad 2 Malaysia Corporate Sukuk Al Ijarah 800 8 2013 Government of Dubai 1 United Arab Emirates Sovereign Sukuk Al Ijarah 750 10 2012 FWU AG Group 1 Germany Corporate Sukuk Al Ijarah 55 7 2012 Abu Dhabi Islamic Bank 1 United Arab Emirates Corporate Hybrid Sukuk 1,000 Perpetual 2012 Qatar Internatonal Islamic Bank 1 Qatar Corporate Hybrid Sukuk 700 5 2012 Qatar Islamic Bank 1 Qatar Corporate Sukuk Al Wakalah 750 5 2012 Emaar Propertes 1 United Arab Emirates Corporate Sukuk Al Ijarah 500 7 2012 Emirates Islamic Bank 2 United Arab Emirates Corporate Sukuk Al Musharakah 1,000 6 2012 Jebel Ali Free Zone 1 United Arab Emirates Corporate Sukuk Al Wakalah 650 7 2012 Dubai Islamic Bank 1 United Arab Emirates Corporate Sukuk Al Ijarah 500 5 2012 Banque Saudi Fransi 1 Saudi Arabia Corporate Sukuk Al Wakalah 750 5 2012 Majid Al Futaim Propertes 1 United Arab Emirates Corporate Sukuk Al Wakalah 400 5 2012 First Gulf Bank 1 United Arab Emirates Corporate Hybrid Sukuk 500 5 2012 Tamweel Funding 1 United Arab Emirates Corporate Hybrid Sukuk 300 5 2012 Islamic Development Bank 2 Saudi Arabia Quasi- Sovereign Sukuk Al Wakalah 1,300 5 2012 Saudi Electricity 2 Saudi Arabia Quasi- Sukuk Al Ijarah 1,750 8 Company Sovereign 2012 Khazanah Nasional Bhd 1 Malaysia Quasi- Sovereign Sukuk Al Musharakah 358 7 2012 Government of Indonesia 1 Indonesia Sovereign Sukuk Al Ijarah 1,000 10 2012 Government of Turkey 1 Turkey Sovereign Sukuk Al Ijarah 1,500 6 2012 Government of Qatar 2 Qatar Sovereign Sukuk Al Ijarah 4,000 16 2012 Government of Dubai 2 United Arab Emirates Sovereign Sukuk Al Ijarah 1,250 8 2011 Abu Dhabi Commercial Bank 1 United Arab Emirates Corporate Hybrid Sukuk 500 5 2011 Kuveyt Türk Kat l m Bankas 1 Turkey Corporate Hybrid Sukuk 350 5 2011 First Gulf Bank 1 United Arab Emirates Corporate Hybrid Sukuk 650 5 2011 Almana Group W.L.L 1 Qatar Corporate Sukuk Al Wakalah 215 5 2011 HSBC Bank Middle East Limited 1 United Arab Emirates Corporate Hybrid Sukuk 500 5 2011 Sharjah Islamic Bank 1 United Arab Emirates Corporate Sukuk Al Wakalah 400 5 2011 Emaar Propertes 1 United Arab Emirates Corporate Sukuk Al Ijarah 500 6 2011 Islamic Development Bank 1 Saudi Arabia Quasi- Sovereign Sukuk Al Wakalah 750 5 2011 Central Bank of Bahrain 1 Bahrain Sovereign Sukuk Al Ijarah 750 7 2011 Government of Indonesia 1 Indonesia Sovereign Sukuk Al Ijarah 1,000 7 2011 Government of Malaysia 2 Malaysia Sovereign Sukuk Al Wakalah 2,000 8 21 2.5 Domestic Sukuk Market As far as the domestic Sukuk market is concern, Malaysia has the lion’s share in terms of both volume and value. Malaysia remains as the largest domestic Sukuk issuer with 79.8% though the countries like Indonesia, Pakistan, Qatar and Saudi Arabia while Turkey has entered the market as new potential leader plus Yemen has also entered the Sukuk market at domestic level. Bahrain has also kept its presence felt in Sukuk issuances and has seen several landmark issuances and issuance volume has increased by almost 50%. Qatar has also issued landmark Sukuk issuances and its domestic Sukuk market is growing quite rapidly. The domestic Sukuk market in a number of jurisdictions (as shown in table below) is becoming active particularly Indonesia & Pakistan and central banks are providing avenues to Islamic banks and other investors to invest their surplus liquidity in government Sukuk programs designed to provide level playing feld to the Islamic institutions. The total outstanding Domestic Sukuk at Dec 2012 stood at US$ 191 billion and it is expected that 2013 will close with even higher fgure as sovereigns, quasi sovereign & corporates in jurisdictions like Malaysia, Indonesia, Turkey and several other countries including GCC are getting more active in Sukuk issuances Table: 10 - Regional break-up of the Total Domestic Sukuk Issuance 2001-Jan 2013 ASIA & FAR EAST Number of Issues Amount USD Millions % of Total Value Malaysia 3026 314,820 79.8% Indonesia 146 12,029 3.1% Pakistan 43 6,045 1.5% Brunei Darussalam 84 3,929 1.0% Singapore 5 192 0.05% Total 3,304 337,015 85.5% GCC & MIDDLE EAST Number of Issues Amount USD Millions % of Total Value Bahrain 173 5,675 1.4% Qatar 3 9,548 2.4% Saudi Arabia 26 18,712 4.7% United Arab Emirates 13 8,218 2.1% Kuwait 1 332 0.08% Jordan 1 119 0.03% Yemen 2 253 0.06% Total 219 42,856 10.9% AFRICA Number of Issues Amount USD Millions % of Total Value Sudan 22 13,214 3.4% Gambia 104 78 0.02% Total 126 13,292 3.37% EUOROPE & OTHERS Number of Issues Amount USD Millions % of Total Value Turkey 1 905 0.23% Germany 1 123 0.03% USA 1 167 0.04% Total 3 1,195 0.30% Grand Total 3,652 394,358 100% 22 Table: 11- Domestic Sukuk Issues -Selected Value Leaders in Local Currency 2011- 2013 Year wise latest frst US $ 100 Millions or greater (Corporate, Sovereign & Quasi-Sovereign) 2013 Malakoff Corporaton Berhad 3 Malaysia Corporate Sukuk Al Murabahah 696 9 2013 Segari Energy Ventures 1 Malaysia Corporate Sukuk Al Murabahah 559 15 2012 UEM Land Holdings Berhad 1 Malaysia Corporate Sukuk Al Murabahah 196 5 2012 Banque Saudi Fransi 1 Saudi Arabia Corporate Sukuk Al Mudharabah 507 7 2012 Sime Darby Bhd 1 Malaysia Corporate Sukuk Al Murabahah 131 15 2012 Saudi Hollandi Bank 1 Saudi Arabia Corporate Sukuk Al Murabahah 373 7 2012 Imtaz Sukuk Berhad 1 Malaysia Corporate Sukuk Al Musharakah 228 5 2012 HSBC Amanah 1 Malaysia Corporate Sukuk Al Wakalah 162 5 2012 Kuala Lumpur Kepong Berhad 1 Malaysia Corporate Sukuk Al Ijarah 320 10 2012 Malakoff Corporaton Berhad 1 Malaysia Corporate Sukuk Al Musharakah 576 30 2012 Celcom Transmission 5 Malaysia Corporate Sukuk Al Murabahah 1,442 8 2012 Tanjung Bin Power 9 Malaysia Corporate Sukuk Al Ijarah 1,101 12 2012 DanaInfra Nasional Berhad 3 Malaysia Corporate Sukuk Al Murabahah 665 12 2012 Cagamas Berhad 1 Malaysia Corporate Sukuk Al Ijarah 132 5 2012 Olayan Group 1 Saudi Arabia Corporate Hybrid Sukuk 173 5 2012 Johor Corporaton 3 Malaysia Corporate Sukuk Al Wakalah 941 7 2012 Saudi Arabia Natonal Industrialisaton Company 1 Saudi Arabia Corporate Hybrid Sukuk 533 7 2012 Aman Sukuk Berhad 1 Malaysia Corporate Sukuk Al Musharakah 116 10 2012 Saudi Britsh Bank 1 Saudi Arabia Corporate Hybrid Sukuk 400 5 2012 Al Marai Company 1 Saudi Arabia Corporate Hybrid Sukuk 267 7 2012 Maxis Berhad 1 Malaysia Corporate Sukuk Al Musharakah 811 10 2012 DRB-HICOM Bhd 1 Malaysia Corporate Sukuk Al Murabahah 132 9 2012 Sarawak Energy Bhd 2 Malaysia Corporate Sukuk Al Musharakah 801 13 2012 Government of Malaysia 7 Malaysia Sovereign Sukuk Al Murabahah 2,527 12 2012 Central Bank of Bahrain 1 Bahrain Sovereign Sukuk Al Ijarah 424 5 2012 Government of Indonesia 13 Indonesia Sovereign Sukuk Al Ijarah 3,620 9 2012 Government of Pakistan 6 Pakistan Sovereign Sukuk Al Ijarah 3,135 3 2012 Malaysia Airports Capital Berhad 1 Malaysia Quasi- Sovereign Sukuk Al Ijarah 196 12 2012 Khazanah Nasional Bhd 4 Malaysia Quasi- Sovereign Sukuk Al Musharakah 1,450 15 Issue Year Issuer Number of Issues Issuer Country Issued Sukuk Structure Amount in Equivalent Average Tenor (Years) 2013 Savola Group 1 Saudi Arabia Corporate Hybrid Sukuk 400 7 23 2.6 Structural Break-up of Global Sukuk Market Ijarah Sukuk structure has been the most popular and widely used structure for both International & Domestic Sukuk issuance although in terms of volume Murabaha share in the domestic market is higher than the Ijarah and the reason for this is due to issuance by certain larger market share countries. Educaton Fund Corporaton Malaysia Sovereign 2012 Malaysian Airline System Berhad 2 Malaysia Quasi- Sovereign Sukuk Al Musharakah 479 10 2012 Syarikat Prasarana Negara Berhad 2 Malaysia Quasi- Sovereign Sukuk Al Murabahah 642 13 2012 General Authority Of Civil Aviaton 1 Saudi Arabia Quasi- Sovereign Sukuk Al Murabahah 4,000 10 2012 PLUS Berhad 23 Malaysia Quasi- Sovereign Sukuk Al Musharakah 9,728 16 2011 Manjung Island Energy Berhad 7 Malaysia Corporate Sukuk Al Ijarah 1,242 9 2011 Saudi Arabian Aramco Total Services Company 1 Saudi Arabia Corporate Sukuk Al Musharakah 1,000 14 2011 AmIslamic Bank Berhad 1 Malaysia Corporate Sukuk Al Musharakah 192 10 2011 Nakheel Group 1 United Arab Emirates Corporate Sukuk Al Ijarah 1,034 5 2011 SapuraKencana Petroleum 1 Malaysia Corporate Sukuk Al Mudharabah 158 5 2011 Kencana Petroleum Bhd 1 Malaysia Corporate Sukuk Al Mudharabah 167 5 2011 Sarawak Energy Bhd 4 Malaysia Corporate Sukuk Al Musharakah 990 9 2011 Saudi Internatonal Petrochemical Company 1 Saudi Arabia Corporate Sukuk Al Mudharabah 480 5 2011 Bank Muamalat Malaysia Berhad 1 Malaysia Corporate Sukuk Al Musharakah 132 10 2011 Al Rajhi Cement 1 Jordan Corporate Sukuk Al Ijarah 119 7 2011 Maybank Islamic 1 Malaysia Corporate Sukuk Al Musharakah 330 10 2011 Bank Al Jazira 1 Saudi Arabia Corporate Hybrid Sukuk 267 10 2011 Cagamas Berhad 1 Malaysia Corporate Hybrid Sukuk 131 5 2011 First Investment Company 1 Kuwait Corporate Sukuk Al Wakalah 332 5 2011 Government of Indonesia 5 Indonesia Sovereign Sukuk Al Ijarah 2,033 10 2011 Government of Sudan 1 Sudan Sovereign Hybrid Sukuk 286 5 2011 Government of Malaysia 2 Malaysia Sovereign Sukuk Al Murabahah 984 9 2011 Government of Qatar 1 Qatar Sovereign Sukuk Al Ijarah 9,067 3 2011 Pengurusan Aset Air Berhad 9 Malaysia Quasi- Sovereign Sukuk Al Murabahah 2,576 7 2011 Syarikat Prasarana Negara Berhad 2 Malaysia Quasi- Sovereign Sukuk Al Ijarah 673 13 2011 Khazanah Nasional Bhd 1 Malaysia Quasi- Sovereign Sukuk Al Musharakah 334 20 2012 Natonal Higher 2 Malaysia Quasi- Sukuk Al Murabahah 1,118 10 24 Chart 3: Total Global Sukuk Issuance by Value (All currencies) – Structural Breakdown Chart 4: Total Global Sukuk Issuance by currency Breakdown 2001- Jan 2013 Malaysian Ringgit takes the frst spot mainly due to its strong and deep local fxed income market. Malaysian market attracted some GCC institutions, Supra national Agencies and Japanese institution to raise their funding needs in Malaysian Ringgit. These institution took advantage of the fne pricing due to local demands and the attractive currency swap rates that achieved lower yield as well as to diversify its investors. US Dollars continue to be the favored currency for attracting international investors around the globe. We most likely to see developments of local currency Sukuk in the comings year as more OIC countries develop their domestic Sukuk market. This trend is taking shape with Indonesia, Turkey, Pakistan and the GCC countries issuing local currency Sukuk. Sovereign or sovereign linked entities currently dominate issuance in these countries and this fow will continue, since the sovereign needs to fund its budget while also sets up the local benchmark curves. Sukuk Al Wakalah (371) 0% Hybrid Sukuk (10,552) 6% Bai’ Bithaman Ajil (12,207) 7% Sukuk Al Istsna’a (3,469) 2% Sukuk Al Salam (1,291) 1% Sukuk Al Musharakah (39,318) 21% Sukuk Al Murabaha, (76,802) 42% Sukuk Al Ijarah (35,746) 19% Sukuk Al Mudharabah (3, 458) 2% Islamic Exchangeable Sukuk (408) 0% Hybrid Sukuk (3,516) 2% Bai’ Bithaman Ajil (18,782) 9% Sukuk Al Murabaha (122,173) 58% Sukuk Al Ijarah (32,214) 15% Sukuk Al Wakalah (1,595) 1% Sukuk Al Mudharabah (7,029) 3% Sukuk Al Istsna’a (19) 0% Sukuk Al Musharakah (23,932) 11% Sukuk Al Salam (1,473) 1% Islamic Exchangeable Sukuk (6,190) 13% Sukuk Al Mudharabah (4,725) 10% Sukuk Al Wakalah (3,228) 7% Hybrid Sukuk (1,237) 2% Sukuk Al Murabahah (756) 2% Sukuk Al Salam (1,958) 4% Sukuk Al Musharakah (9,286) 19% Sukuk Al Ijarah (20,784) 43% Sukuk Al Wakalah (7,767) 26% Hybrid Sukuk (4,658) 15% Sukuk Al Murabahah (1,527) 5% Sukuk Al Musharakah (1,845) 6% Sukuk Al Mudharabah (1) 0% Sukuk Al Ijarah (14,366) 48% 25 Singapore Dollars (SGD) 0% Turkish lira (TRY) 0% Emirat Dirhams (AED) 2% Bahraini Dinars (BHD) 1% Bruneian Dollars (BND) 1% Chinese Yuan Renminbi (CNY) 0% Britsh Pounds (GBP) 0% Gambian Dalasi (GMD) 0% Indonesian Rupiah (IDR) 3% Jordanian Dinars (JOD) 0% Euros (EUR) 0% Kuwait Dinars (KWD) 0% Malaysian Ringgit (MYR) 67% Yemeni Riyals (YER) 0% United States Dollars (USD) 16% Sudanese Pounds (SDG) 3% Saudi Riyals (SAR) 4% Qatari Riyals (QAR) 2% Pakistani Rupees (PKR) 1% Domestic Sukuk Issuances 2001-2010 International Sukuk Issuances 2001-2010 Domestic Sukuk Issuances 2011 - Jan 2013 International Sukuk Issuances 2011 - Jan 2013 Chart 5: Total Global Sukuk Issuance by Regional Breakdown 2001- Jan 2013 Asia will continue to dominate the Sukuk issuance in the short term due to its deep Local currency Fixed income market with Malaysia and Indonesia being the driving force in that region. However, we are likely to see the GCC & Middle East pie get larger with a heavy future funding needs due to healthy pipeline of infrastructure projects coupled with greater participation from Corporates in issuing Sukuk. With the game plan in Europe changing due to the fnancial crisis & Basel III, and coupled with abundant liquidity in the Sukuk market, we may well witness European Corporates line up to take advantage of current favourable pricing. Table: 12 - Cross Border International Sukuk Maturing 2013 Cross border Global Sukuk Maturities in 2013 is extremely light as the new issuance in 2008 was pretty much subdued following the onslaught of the fnancial crisis. Table: 13 - Cross Border International Sukuk Maturing 2014 Europe & Others (4,159) 1% Africa (13, 422) 3% GCC & Middle East (103,975) 22% Asia & Far East, (351,12)74% Year Sukuk Issuer Issuer Currency Issue Type Intl Sukuk Amount (US$m) Tenor Maturity Date Issued Country Type Month 2010 KT Turkey sukuk Limited Turkey USD Corporate Intl Murabahah 100 36 31-Aug-13 2008 Government of Bahrain Bahrain USD Sovereign Intl Ijarah 350 60 31-Mar-13 2008 Khazanah Nasional Bhd Malaysia USD Quasi- Sovereign Intl Exchangeable 550 60 31-Mar-13 2008 Gulf Holding Company ( Villamar Sukuk company limited) Kuwait USD Corporate Intl Musharakah 190 60 31-May-13 Total Maturity Value 1,190 Issue Sukuk Issuer Issuer Country Currency Issue Type Intl Sukuk Type Amount Tenor Maturity Date Year (US$m) Month 2009 Indonesian Government Shariah securites Indonesia USD Sovereign INTL Ijarah 650 60 30-Apr-14 2009 Government of Bahrain Bahrain USD Sovereign INTL Ijarah 750 60 30-Jun-14 2009 Govt of Ras Al Khaimah UAE USD Sovereign INTL Ijarah 400 60 31-Jul-14 2009 Petroliam Nasional Bhd (Petronas) Malaysia USD Corporate INTL Ijarah 1,500 60 31-Aug-14 2005 Sanctuary Building Sukuk UK GBP Corporate INTL Musharakah 261 108 31-Aug-14 2012 Axiata Berhad Malaysia CNY Corporate INTL Sukuk 158 24 18-Sep-14 2007 Berber Cement Co, Sudan Sudan USD Corporate INTL Musharakah 130 84 30-Sep-14 2009 Islamic Development Bank (IDB) Saudi Arabia USD Quasi- Sovereign INTL Wakalah 850 60 30-Sep-14 2009 Government of Dubai UAE USD Sovereign INTL Ijarah 1,250 60 31-Oct-14 2009 Tourism Deveopment Investment Company UAE USD Corporate INTL Ijarah 1,000 60 31-Oct-14 2009 General Electric USA USD Corporate INTL Ijarah 500 60 30-Nov-14 2009 Hilal Sukuk Company USA USD Corporate INTL Ijarah 100 60 30-Nov-14 2011 Gulf Internatonal Bank Bahrain USD Corporate INTL Murabahah 300 36 31-Dec-14 Total Maturity Value 7,849 26 Starting from 30th June to 31st Dec 2014 we have 12 Sukuk maturing which could well provide some refnancing opportunities. UAE ‘s three emirates tops the maturity with US $ 2.65 billion , followed by Malaysian Issuers with US $ 1.657.8 Billion and the other Billion + maturity coming out of Bahraini issuers. On the other hand, if no or little fnancing is required then the Investors would most probably looking to reinvest the maturing Sukuk proceed , thereby, increasing the investable liquidity. Table : 14 - Domestic Sukuk Maturing 2013 Almost 50% of the Domestic market is denominated in Malaysian Ringgits (US $ 6.6 Billion) the next to maturities are: UAE (US$ 2.6 Billion) and Indonesia (US $ 1.5Billion ) Year Obligor Issuer Currency Issue Type Domestc Sukuk Amount (US$m) Maturity Country Type Month 2008 Government of Sudan Sudan SDG Sovereign Domestc ijara 131 60 31-Jan-13 2006 Putrajaya Holdings Sdn Bhd Malaysia MYR Corporate Domestc Murabahah 579 84 31-Jan-13 2010 Indonesian Government Indonesia IDR Sovereign Domestc Ijarah 880 36 28-Feb-13 2008 Government of Malaysia Malaysia MYR Sovereign Domestc Murabahah 627 60 31-Mar-13 2003 Petronas Fertliser Sdn Bhd Malaysia MYR Corporate Domestc BBA 198 120 31-Mar-13 2006 Rantau Abang Capital Bhd Malaysia MYR Corporate Domestc Musharakah 789 84 31-Mar-13 2006 Rantau Abang Capital Bhd Malaysia MYR Corporate Domestc Musharakah 2,029 84 31-Mar-13 2010 Bank Pembangunan Malysia Malaysia MYR Sovereign Domestc Murabahah 157 36 30-Apr-13 2007 Nucleus Avenue Malaysia Bhd Malaysia MYR Corporate Domestc Musharakah 205 72 30-Apr-13 2010 Indonesian Government Indonesia IDR Sovereign Domestc Ijarah 465 36 17-May-13 2010 Cagamas Berhad Malaysia MYR Corporate Domestc Ijarah 184 36 31-May-13 2008 Dubai Elec (DEWA) UAE AED Corporate Domestc Ijarah 871 60 31-May-13 2006 Gas Malaysia Malaysia MYR Corporate Domestc Murabahah 132 84 31-May-13 2008 Gov of Ras Al Khaimah UAE AED Sovereign Domestc Ijarah 272 60 31-May-13 2008 Mohammed H. Al Mana Grp UAE AED Corporate Domestc Mudharabah 163 60 31-May-13 2006 Putrajaya Holdings Sdn Bhd Malaysia MYR Corporate Domestc Murabahah 395 84 31-May-13 2012 Sime Darby Bhd Malaysia MYR Corporate Domestc Murabahah 157 12 31-May-13 2008 Aldar Propertes PJSC UAE AED Corporate Domestc Ijarah 1,021 60 30-Jun-13 2008 Tamweel PJSC UAE AED Corporate Domestc Ijarah 299 60 31-Jul-13 2010 Cagamas Berhad Malaysia MYR Corporate Domestc Ijarah 318 36 31-Aug-13 2003 Putrajaya Holdings Sdn Bhd Malaysia MYR Corporate Domestc BBA 225 124 31-Aug-13 2006 Rantau Abang Capital Berhad Malaysia MYR Corporate Domestc Musharakah 395 84 31-Aug-13 2008 Binladin Group, Saudi Saudi SAR Corporate Domestc 267 60 30-Sep-13 Arabia Arabia Mudharabah 2009 Government of Pakistan Pakistan PKR Sovereign Domestc Ijarah 174 48 30-Sep-13 2006 Scomi Group Malaysia MYR Corporate Domestc Murabahah 166 84 31-Oct-13 2010 Government of Sudan Sudan SDG Sovereign Domestc Hybrid 313 36 30-Nov-13 2010 Government of Pakistan Pakistan PKR Sovereign Domestc Ijarah 592 36 30-Nov-13 2006 Am Islamic Bank Berhad Malaysia MYR Corporate Domestc Musharakah 105 84 31-Dec-13 2010 Cagamas Berhad Malaysia MYR Corporate Domestc Ijarah 223 36 31-Dec-13 2006 MISC Berhad Malaysia MYR Corporate Domestc Murabahah 263 84 31-Dec-13 2010 Government of Pakistan Pakistan PKR Sovereign Domestc Ijarah 424 36 31-Dec-13 Total Maturity Value 13,019 27 Table : 15 - Domestic Sukuk Maturing 2014 Of the US $ 22.32 Billion total domestic market maturities, Qatar Government heads the list with a US $ 9.1 billion followed by Malaysia’s government and other corporate totaling US $ 9 Billion equivalent. Two other big maturities are from relatively new Domestic issuers, Turkey US $ 900 million and Indonesia US $ 800 million. Year Obligor Issuer Country Currency Issue Type Domestc Type Amount (US$m) Tenor Maturity Date 2011 Qatar Central Bank Qatar QAR Sovereign Domestc Ijara 9,067 36 16-Jan-14 2009 Sudan Govt Sudan SDG Sovereign Domestc Hybrid 125 60 31-Jan-14 2011 Padiberas Nasional Bhd Malaysia MYR Corporate Domestc Musharaka 114 36 31-Jan-14 2011 Pakistan Govt Pakistan PKR Sovereign Domestc Ijara 555 36 28-Feb-14 2011 Pengurusan Aset Air Bhd Malaysia MYR Quasi- Sovereign Domestc Murabaha 395 36 28-Feb-14 2009 Penerbangan Malaysia Bhd Malaysia MYR Quasi- Sovereign Domestc Murabaha 406 60 31-Mar-14 2012 Central Bk of Yemen Yemen YER Sovereign Domestc Salam 234 12 1-Apr-14 2005 Golden Crop Returns Bhd Malaysia MYR Corporate Domestc Ijara 116 102 30-Apr-14 2009 Khazanah Nasional Bhd Malaysia MYR Quasi- Sovereign Domestc Musharaka 303 60 30-Apr-14 2007 Kuala Lumpur Sentral Sdn Bhd Malaysia MYR Corporate Domestc Musharaka 208 84 30-Apr-14 2013 Malakoff Power Sdn. Bhd. Malaysia MYR Corporate Domestc Murabaha 232 15 30-Apr-14 2007 Nucleus Avenue Malaysia Bhd Malaysia MYR Corporate Domestc Musharaka 205 84 30-Apr-14 2011 GovPakistan Pakistan PKR Sovereign Domestc Ijara 537 36 8-May-14 2009 (Dar Al Arkan) Saudi Arabia SAR Corporate Domestc Ijarah 200 60 31-May-14 2007 Cagamas Berhad Malaysia MYR Corporate Domestc Ijarah 2,890 84 30-Jun-14 2011 Pengurusan Aset Air Berhad Malaysia MYR Quasi- Sovereign Domestc Murabahah 164 36 30-Jun-14 2007 Silterra Malaysia Malaysia MYR Corporate Domestc Ijarah 529 84 30-Jun-14 Sdn.Bhd 2011 Cagamas Berhad Malaysia MYR Corporate Domestc Ijarah 207 36 31-Jul-14 2004 Bahrain Govt Bahrain BHD Sovereign Domestc Ijarah 106 120 31-Jul-14 2012 Indonesia Govt Indonesia IDR Sovereign Domestc Ijarah 104 60 9-Aug-14 2010 Indonesian Govt Indonesia IDR Sovereign Domestc Ijarah 313 48 9-Aug-14 2012 Indonesia Govt Indonesia IDR Sovereign Domestc Ijarah 156 96 25-Aug-14 2005 Bayu Padu Sdn Bhd Malaysia MYR Corporate Domestc Istsna'a 132 108 31-Aug-14 2004 Gas Malaysia Malaysia MYR Corporate Domestc BBA 184 120 30-Sep-14 2011 Government of Malaysia (GII) Malaysia MYR Sovereign Domestc BBA 958 33 30 - Sep-14 2011 Government of Malaysia (GII) Malaysia MYR Sovereign Domestc Murabahah 1,322 42 30-Sep-14 2011 MISC Berhad Malaysia MYR Corporate Domestc BBA 160 36 30-Sep-14 2004 Optmal Chemicals Sdn Bhd Malaysia MYR Corporate Domestc BBA 149 120 30-Sep-14 2004 Optmal Glycols Malaysia MYR Corporate Domestc Murabahah 119 120 30-Sep-14 2006 Perwaja Steel Sdn Bhd Malaysia MYR Corporate Domestc Istsna'a 105 96 30-Sep-14 2004 Sarawak Specialist Hospital Bhd Malaysia MYR Corporate Domestc Al Ijarah 112 120 30-Sep-14 2012 The Republic of Turkey Turkey TRY Sovereign Domestc Ijarah 905 24 2-Oct-14 2010 Indonesian Govt Indonesia IDR Sovereign Domestc Ijarah 219 48 7-Oct-14 2011 Pakistan Govt Pakistan PKR Sovereign Domestc Ijarah 785 36 25-Dec-14 Total Maturity Value 22,317 28 2.7 Short Term Sukuk Market Short term Sukuk with maturity of 1 year or less are essential in the development of Islamic Inter-bank market and they play a key role in the liquidity management of the fnancial institutions. Malaysia remains the leader in domestic short term Sukuk issuances followed by Sudan, Bahrain, and Brunei. Indonesia is showing sign of playing a leading issuance role in this type of Sukuk and is a country to watch in coming years. The appetite for short term Sukuk is far greater than longer tenor Sukuk as evident by these issuers. The trend towards issuing shorter tenor Sukuk is increasing and is driven by sovereign issuers through central banks. Malaysian and some GCC corporate issuers are getting in this segment of the Sukuk market and are providing diversity and depth to the local markets which is essential in the development of money market. Bahrain has kept its leading role in Short Term Sukuk issuances and it regular issuances are always oversubscribed. The outlook for Short Term Sukuk is encouraging and it is expected this segment will continue its growth trend. The following table illustrates the total short-term Sukuk issuance globally with a tenor of 1 year or less during the period of Jan 2001 – Jan 2013: Table: 16 - Total Global Short-Term Sukuk Issuance – All Currencies (Less than or Equal to 12 Months 2001-Jan 2013) The following chart illustrates the currency wise break down of Short Terms Sukuk issuances. Though Malaysia, Sudan & Bahrain leads the table of short term issuers, however; several countries such as Indonesia has also started regular issuance of short term Sukuk program which will greatly help the liquidity management requirement of Islamic institutions. Issuer Country No. of Issues Value (USD Millions) Value Malaysia 1705 175,300 89% Sudan 12 11,311 6% Bahrain 209 5,959 3% Brunei Darussalam 83 3,829 2% Indonesia 10 544 0.3% Saudi Arabia 2 454 0.2% Yemen 1 234 0.1% Gambia 104 78 0.04% Pakistan 3 62 0.03% Singapore 1 36 0.02% Total 2,130 197,807 100% Singapore Dollars (SGD) 36, 0.02% Saudi Riyals (SAR) 454, 0.23% Pakistani Rupees (PKR) 62, 0.03% Malaysian Ringgit (MYR) 175,300,88.62% Indonesian Rupiah (IDR) 544, 0.27% Bruneian Dollars (BND) 3, 829, 1.94% Bahraini Dinars (BHD) 3,981, 2.01% Yemeni Riyals (YER) 234, 0.12% United States Dollars (USD) 1,977, 1.00% Gambian Dalasi (GMD) 78, 0.04% Sudanese Pounds (SDG) 11, 311, 5.72% Bahrain is the frst jurisdiction which started the regular issuance of Short Term Sukuk mostly in Bahraini Dinar and it continues to improve on its Sukuk issuance plan while Indonesia and Pakistan are the recent entrant in this Sukuk market segment. Chart 6: Total Global Short-Term Sukuk Issuance by Currency All Amounts in US $ Millions 2001 - Jan 2013 29 CASE STUDIES OF SELECTED INTERNATIONAL SUKUK ISSUES By: IIFM & Ms. Shazia Farook 3.1 ABU DHABI ISLAMIC BANK (ADIB) SHIRKAT-UL-MILK 11 BASED SUKUK 2011 Abstract This case study intends to highlight on the successful issuance of the Shirkat-ul-Milk structure based Sukuk worth US $ 500 million issued in November 2011 by Abu Dhabi Islamic Bank (ADIB) a top tier Islamic fnancial services group in the United Arab Emirates (UAE). The issuance of this Sukuk has been a successful step towards diversifying and lengthening funding sources for Islamic fnancial institution. Background Abu Dhabi Islamic Bank (ADIB) is a top tier Islamic fnancial institution in the United Arab Emirates (UAE) which operates through a network of 73 retail branches in the country. The bank has won a number of prestigious awards including Sheikh Khalifa Excellence Award- Gold category in 2012 and the best Islamic Bank in the UAE by Global Finance for 2011. Chapter Three Sukuk Summary SPV Structure type Al Ijara Issuesize USD 500,000,000 Issue Date 30-Nov-11 Maturity date 11/30/16 Return 3.78% Fix or Variable Fixed Return frequency Semi Annual Pricing =Spread over mid-swaps, 245bp Book Runners HSBC, Citigroup, NBAD, Standard Chartered Bank, Nomura Securities Listing London S.E. ISIN RegS XS0711035286 ADIB Sukuk Company Ltd 11 Shirkat-ul-Milk: Shirkat-ul-Milk is defned as: a joint ownership of two or more persons in a particular property. This type of partnership i.e. shirkah; however, may come into existence in two diferent ways: (1) At the option of the parties. For example, if two or more persons purchase property etc, it will be owned jointly by both of them and the relationship between them with regard to that property is called shirkat-ul-milk. The relationship between the parties in this transaction has come into existence at their own option, because they themselves choose to purchase the equipment jointly. (2) Happened automatically without any action taken by the parties. For example, after the death of a person, all his heirs inherit his property which comes into their joint ownership as an automatic consequence of the death of that person. 30 Sukuk Al Musharakah 12 Musharakah Sukuk are certifcates of equal value issued with the aim of using the mobilized funds for establishing a new project, fnancing a business activity etc on the basis of any of partnership contract so that the certifcate holders become the owners of the project. (Musharakah Sukuk is an investment partnership between two or more entities which together provide the capital of the Musharakah and share in its profts and losses in pre-agreed ratios) ADIB Shirkat-ul-Milk based Sukuk ADIB returned successfully to the Sukuk markets with the issuance of US $ 500 million, 5-year Sukuk at a proft rate of 3.78 per cent in November 2011. This Sukuk which will be matured in November 30, 2016, had received an overwhelming response with orders worth 4 times the issue size spread across 122 investors. Fifty-seven per cent of the orders came from investors in the Middle East, 29 per cent from Europe and 13 per cent from Asia. Banks bought 52 per cent of the Islamic bond, fund managers 28 per cent and central banks 16 per cent. The Sukuk was rated A2 (stable outlook) and A+ (stable outlook) by Moody’s and Fitch respectively. This transaction marked the third benchmark deal by ADIB under its US $5 billion Sukuk Program initiated in 2007. However, the primary objective of issuing this Shirkat-ul-Milk Sukuk was to diversify and to lengthen the average maturity of funding sources of the bank. ADIB, Citibank, HSBC, National Bank of Abu Dhabi, Nomura and Standard Chartered Bank were the joint lead managers and book-runners for this Sukuk which was listed on the London Stock Exchange. The principal transaction documents are: Purchase Agreement, Management Agreement and Purchase Undertaking Deed. Sukuk Structure and Payment Flows (1) The Sukuk was issued through a Special Purpose Vehicle (SPV) under the name of ADIB Sukuk Company, registered in the Cayman Islands. (2) ADIB Sukuk Company was the issuer and the trustee for the certifcates. (3) Under a Master Purchase Agreement, ADIB (acting as seller) agreed to sell to ADIB Sukuk Company, from time to time, a co-ownership interest in a portfolio of Ijarah assets originated, co-owned and managed by ADIB (the trust assets). The composition of the trust assets in relation to each issue and the purchase price for such assets are mutually agreed between ADIB and ADIB Sukuk Company upon each issuance under the program. A Supplemental Purchase Contract is entered into between them to record the agreement. 13% 57% 30% Geographic Distributon ADIB Sukuk Investors Asia Middle East Europe 12 AAOIFI Shari‘ah standard no. 17, 2010, Musharaka Sukuk, page 308. 31 (4) Under a Management Agreement, ADIB (acting as managing agent) agrees to maintain the co-owned Ijarah assets. ADIB also maintains a collection account in respect of each series of Sukuk issued. Amounts credited to a collection account include revenues received from the co-owned assets that are attributable to ADIB Sukuk Company as its share. (5) The revenues that represent proft returns from the underlying assets are used to pay periodic distribu- tions under the Sukuk. Revenues that represent principal payments relating to the underlying assets are reinvested in new Shari‘ah compliant assets. If the proft returns in any period are insufcient to fund the periodic distribution payment of the Sukuk, ADIB will provide Shari‘ah compliant funding to ADIB Sukuk Company to make up for the shortfall. However, if proft returns are more than the amount needed to pay the relevant periodic distribution, the excess will be paid to ADIB as an incentive fee. (6) Pursuant to a Purchase Undertaking Deed, ADIB (acting as purchaser) agrees to repurchase the issuer’s in terest in the relevant trust assets at their market value, as estimated by ADIB. However, ADIB has agreed to ensure that the market value of the trust assets is never less than the face amount of the outstanding Sukuk. Therefore, the price paid by ADIB will be sufcient to meet the issuer’s obligations to pay Sukuk holders any amounts due following redemption of Sukuk upon maturity or earlier if an event of default occurs. Structure Diagram Set out below is the structure diagram and brief explanation of the structure and principal cash fows to assist in understanding the transaction documents relating to such a structure. Diagram Explanation (i) On the Issue Date, the certifcate holders will pay the issue price to ADIB Sukuk Company (as Issuer/Trustee). (ii) The proceeds will be used by ADIB Sukuk Company to purchase a co-ownership interest in a portfolio of Ijarah assets from ADIB (as Seller) under a Purchase Agreement. Source: ADIB Sukuk Base Prospectus ADIB as Seller of co-ownership interests Proceeds Return on Co-ownership interest Master Purchase Agreement and Supplemental Purchase Contract MasterTrust Deed and Supplenental Trust Deed Management Agreement Purchase Undertaking Deed Issuer Proceeds Periodic Distribution Amounts and Dissolution Amount Exercise Price Investors ADIB as Managing Agent ADIB as Purchaser 32 (iii) ADIB (as Managing Agent) agrees to maintain the co-owned Ijarah assets through a Management Agreement. (iv) ADIB will pay to the Issuer an amount representing its share of proft in respect of the co-ownership as sets on each Periodic Distribution Date. If the proft returns are insufcient to fund the periodic distribu- tion payment, ADIB will make up for the shortfall by providing Shari‘ah compliant funding to ADIB Sukuk Company. However, if proft returns are more than the amount needed to pay the relevant periodic distribution, the excess will be paid to ADIB as an incentive fee. (v) The Issuer will sell its co-ownership interest in the co-ownership assets to ADIB (as Purchaser) on the Maturity Date, pursuant to a Purchase Undertaking. (vi) The Exercise Price paid by ADIB is intended to fund the dissolution amount payable by the Issuer under the Trust Certifcates. The ADIB Shirkat-ul-Milk based Sukuk was well-received by investors globally , which is evidend by the order book size that crossed the $2 billion. Middles East investor being the main benefcaries, picking up over 50% of the issue and the balance spread between Asia and Europe. Having a diverse group of joint lead managers ensured acceptance and success of the Sukuk in terms of the structure and wider client distribution. It seems ADIB have established a good following amongst the investors base, allowing it to tap the market with ease and at a competitive pricing. References (1) ADIB Website: http://www.adib.ae/ (2) Bloomberg Business Week:http: //investing.businessweek.com/research/stocks/snapshot/snap shot.asp?ticker=ADIB:UH (3) Zawya: http://www.zawya.com/story/ADIB_issues_US500M_Sukuk_at_a_proft_rate_of_378- ZAWYA20111124075126/ 33 3.2 KHAZANAH NASIONAL WAKALAH BASED SUKUK 2011 ABSTRACT In October 2011, Khazanah Nasional Berhad issued a Wakalah structure based Sukuk worth Remembi (RMB) 500 million (also known as Chinese Yuan) equivalent to RM 246 million. The ofering was the frst Global Ofshore RMB denominated Sukuk issued by issuer based outside China. This case study intends to highlight Khazanah’s continued commitment towards the expansion of Islamic fnance in pursuit of Government of Malaysia’s agenda to establish the country as an Islamic fnance hub. Sukuk Summary Background Khazanah Nasional Berhad is the Government of Malaysia’s strategic investment fund. Its role as trustees to the Malaysian Government’s commercial assets is to promote economic growth and make strategic investments on behalf of the Malaysian Government which would contribute towards nation-building. Khazanah’s task includes nurturing the development of selected strategic industries in Malaysia with the aim of pursuing the Malaysian Government’s long-term economic interests. Khazanah has investments in over 50 major companies, both in Malaysia and abroad, and its companies are involved in a broad spectrum of industries. It is also the key agency mandated to drive shareholder value creation, efciency gains and enhance corporate governance in companies controlled by the Malaysian Government. Sukuk Al Wakalah Wakalah Sukuk are certifcates issued by the investment agent. The subscribers are the principals and the realised funds are the entrusted capital of the investment. The certifcate holders own the assets represented by the certifcates with its benefts and risks, and they are entitled to the profts, if any 13 . Khazanah Nasional Wakalah based Sukuk Khazanah Sukuk issued in October 2011 was based on Islamic contract of Wakalah due to the structure’s wider acceptability, practicality and ease of understanding. It is the frst ever RMB Islamic trust certifcates. The three (3) year Wakalah based Sukuk ofering, due in 2014, was issued under the Malaysia International Islamic Financial Centre (MIFC) initiative. The rationale behind the issuance of this Sukuk was as follows: SPV Danga Capital Bhd Structure type Wakala Issue Size CNY 500,000,000 Issue Date 20-Oct-11 Maturity date 20-Oct-14 Return 2.9 Fix or Variable Fixed Return frequency Semi Annual Book Runner RBS, BOC Intl, CIMB Listng Bursa Malaysia + Labuan ISIN RegS HK0000090669 13 AAOIFI Shari‘ah standard no. 17, 2010, Investment Sukuk, page 312. 34 • Asset liability matching to cater for investment requirements in China • Pushing the boundary of Sukuk market by venturing beyond familiar shores • Supporting MIFC’s agenda on Islamic fnance and profling Malaysia as the hub for Sukuk issuances The Sukuk was priced at the tightest end of 2.90 per cent proft rate. Due to overwhelming investor response, Khazanah had to upsize the Sukuk from an earlier announced size of RMB 300 million to RMB 500 million. The ofering was oversubscribed 3.6 times refecting robust demand from Malaysian and regional investors despite volatile global market conditions. The deal attracted a diverse group of investors comprising fnancial institutions, asset management companies, private banks and statutory bodies from Malaysia, Singapore, Hong Kong, the Middle East and Europe. Investors in Malaysia, Singapore and Hong Kong subscribed to 37 per cent, 30 per cent and 26 per cent of the ofering respectively. The principal transaction documents are Wakalah Agreement, Sale and Purchase Agreement, Obligor Undertaking, Issuer Undertaking, Purchase Undertaking, Commodity Murabahah Investment Agreement. The trust certifcates of the Sukuk are listed on Labuan International Financial Exchange and Bursa Malaysia. Sukuk Structure and Transaction Flows 1. SPV: Khazanah Sukuk was issued via a Malaysian-incorporated special purpose vehicle, Danga Capital Berhad. 2. Trustee: Deutsche Trustees Malaysia was the trustee for the Trust certifcate holders. Danga Capital Berhad was the trustee for the trust assets. 3. Use of Sukuk Proceeds: On the issue date, the Danga Capital (as Issuer) will issue the trust certifcates and the Islamic securities holders will subscribe to the certifcates by payment of the proceeds to the Issuer. Pursuant to the Wakalah Agreement, the Issuer (on behalf of the Trust Certifcates Holders) shall appoint Khazanah (Wakeel) as its agent and shall instruct the Wakeel to invest the proceeds in a Wakalah Venture which shall comprise invest- ments in: (i) certain Shari‘ah-compliant shares owned by Khazanah; and (ii) the Commodity Murabahah Arrangement with Khazanah (“Murabahah Investment”) 3.1. The Issuer shall make a declaration of trust over the proceeds and thereafter the Venture for the beneft of the Islamic securities holders. The Trust Certifcates will represent the Islamic securities holders’ proportionate and undivided ownership in the Venture. 3.2. Pursuant to the Sale and Purchase Agreement, the Issuer (acting through the Wakeel as agent) shall purchase from the seller certain Shari‘ah-compliant shares at their fair market value calculated in accordance with the mutually agreed Valuation Principles. The Wakeel shall manage the shares and exercise all rights as benefcial shareholder on behalf of the Issuer. During the term of the Sukuk, the aggregate fair market value of the relevant Private Banks 15% Asset Managers 45% Financial Insttutons 40% Distributon of Khazanah Sukuk Investors by Investor Type Singapore 30% Europe 6% Middle East 1% Hong Kong 26% Malaysia 37% Geographic Distributon Khazanah Sukuk Investors Distribution of Khazanah Sukuk Investors by Investor Type Geographic Distribution Khazanah Sukuk Investors 35 shares must be at least equal to the Shares Investment Minimum Value, as determined in accordance with the mutually agreed Valuation Principles. 3.3. Pursuant to the Obligor Undertaking granted by Khazanah (as the Obligor) in favour of the Issuer, if the aggregate fair market value of the shares falls below the Shares Investment Minimum Value at any time, the Obligor has undertaken that it will substitute existing shares with alternative Shari‘ah-compliant ones having fair market value equal to the agreed upon minimum value. A similar substitution will take place in case some of the shares are no longer Shari‘ah compliant. 3.4. Pursuant to the Issuer Undertaking granted by the Issuer (on behalf of the Trust Certifcates Holders) in favour of the Obligor, if before any Periodic Distribution Date, the fair market value of the shares exceeds the Shares Investment Minimum Value (the amount of such excess being referred to as the “Excess Shares”), the Issuer has undertaken that it will sell to the Obligor all or some of such Excess Shares. 3.5. The Commodity Murabahah Investment Agreement will be entered into between the Buyer, the Issuer (acting through the Wakeel as agent) and CIMB Islamic Bank Berhad as Facility Agent for investments in commodities. 4. Periodic Distribution Payments: The Wakeel shall calculate periodic income before each periodic distribution date. The Wakeel shall be eligible for an interim incentive fee, provided that the periodic income is sufcient to satisfy the aggregate periodic distribution amount and all amounts (if any) payable prior to it. Any loss incurred under the Wakalah Venture shall be borne by the Trust Certifcates Holders in proportion to the Nominal Value of the Trust Certifcates held by each Trust Certifcates Holder. 5. Dissolution Payments: The Obligor shall issue the Purchase Undertaking in favour of the Issuer and the Trustee (for the beneft of the Trust Certifcates Holders) under which it undertakes to purchase from the Issuer all of the investments in the Wakalah Venture in consideration for the Purchase Price on the maturity date or upon a Dissolution Event, whichever is earlier. The Purchase Price of the investments shall be determined in accordance with the mutually agreed Valuation Principles. Any amount of the market value of the Investments above the nominal value of the trust certifcates plus the accrued but unpaid Periodic Distributions under the trust certifcates shall be retained by Khazanah as incentive fee. Sukuk Structure and Diagram 10. Dissolution Distribution Amount on Disolution Event Redemption Date Trust Certificates holders Deutsche Trustees Malaysia (as Trustee for the Trust Certificates Holders) 9. Purachase Price on Dissolution Event Redemption Date Khazanah Nasional Berhad (as Obligor) Purchase Undertaking Purchase Undertaking 9. Purchase Price in respect of Maturity Date 3. Wakalah Agreement 4. Seies Proceeds 7. Periodic Income less Inteim Incentive Fee (if any) 11. Final Incentive Fee (if any) Khazanah Nasional Berhad (as Wakeel) Series Wakalah Venture 5. Series Proceeds 5. Periodic Income Incestment in Shares Commodaty Murabahah Invesment 1. Trust Certificates 2. Series Proceeds 3. Periodic Distribution Amounts 10. Dissolution Distribution Amount on Maturity Date Danga Capital Berhad (as Issuer and trustee of Trust Assets) 36 Diagram Explanation (i) Investors will subscribe to Islamic certifcates issued by Danga Capital Berhad (as Issuer) through payment of proceeds. (ii) The Issuer (on behalf of the Trust Certifcates Holders) shall instruct Khazanah (as the Wakeel) to invest the proceeds in a Wakalah Venture under a Wakalah Agreement. (iii) The Venture shall comprise investments in: 1) certain Shari‘ah-compliant shares owned by Khazanah and 2) the Commodity Murabahah Arrangement with Khazanah (“Murabahah Investment”). (iv) Khazanah, as Wakeel, shall manage the Venture for the Islamic Securities holders. (v) Returns generated from the Venture shall be distributed by Khazanah to Sukuk-holders as Periodic Distri- butions or One-of Distribution, as the case may be up to the Expected Returns. Returns in excess thereof shall be retained by the Khazanah as an incentive fee for the Wakeel. Any loss shall be borne by the Islamic Securities holders based on their respective capital contribution in the Venture. (vi) Khazanah (as Obligor) will enter into a Purchase Undertaking with the Issuer (acting on behalf of the Islamic Securities holders) and the Trustee to purchase the Investments at market value upon an Event of Default or upon the maturity of the Trust Certifcates, whichever is earlier. Conclusion Expanding the investment universe by ofering Sukuk in a new currency (Chinese Yuan), pushing the boundaries bodes well for the overall Global Sukuk market, as it lays down the foundation for possible Sukuk issuance from not only China, but other coroprates outside of China requiring fnancing in China. Adventuring International frms having CNY income fows could now raise their funding requirement with a Sukuk in CNY without having to taking on FX risk and be able to match their Asset & Liability. On the structuring, the unrestricted Wakalah arrangement is well thought out as it allows for balancing the assets between Shares and Murabahah aswell as facilitating share substitution and or, of selling of the shares . References (1) Khazanah Nasional Berhad Website: http://www.khazanah.com.my/docs/knb_Sukuk_131011.pdf 37 3.3 MAJID AL FUTTAIM (MAF) WAKALAH BASED SUKUK 2012 Abstract Majid Al Futtaim Holding LLC (MAF), issued in January 2012 Sukuk based on Wakalah structure worth US $ 400 million. This transaction represents its frst foray into the public debt market/Islamic capital market. The aim of this study is to highlight on how Islamic capital markets can be successfully accessed by privately held companies like Majid Al Futtaim to strategically diversify their sources of funding and extend their liability maturity profle. Sukuk Summary Background Established in 1992, Majid Al Futtaim Holding LLC (MAF) the conglomerate frm has established itself as the leading retail and leisure pioneer across the Middle East and North Africa region. It is the highest rated private corporate in the Middle East. The main business of the company includes the development of shopping malls, hotels and mixed-use communities across the Middle East and North Africa region with a customer base in excess of 107 million customers per annum. Managing hypermarkets such as Carrefour and developing new businesses that complement and reinforce the Group’s leadership in its core businesses. Sukuk Al Wakalah Wakalah Sukuk are certifcates issued by the investment agent. The subscribers are the principals and the realised funds are the entrusted capital of the investment. The certifcate holders own the assets represented by the certifcates with its benefts and risks, and they are entitled to the profts, if any 14 . Majid Al Futtaim Wakalah based Sukuk MAF successfully priced a US $ 400 million Sukuk issue on 31 January, 2012. The certifcates were issued under the company’s US $ 1 billion regional Sukuk Program set up earlier this year. The Sukuk will mature in 2017 and will pay a proft rate of 5.85 per cent per annum payable semi-annually in arrears. The proceeds will be used to fund d t L k u k u S F A M V P S Structure type Wakala Issuesize USD 400,000,000 Issue Date 7-Jan-12 Maturity date 7-Feb-17 Return 5.85% Fix or Variable Fixed Return frequency Semi Annual Pricing =Spread over mid-swaps, 482bp Book Runners Standard Chartered, HSBC, Dubai Islamic Bank , Abu Dhabi Islamic Bank Listing London ISIN RegS XS0742399198 14 AAOIFI Shari‘ah standard no. 17, 2010, Investment Sukuk, page 312. 38 expansion plans worth US $ 2 billion for malls and shopping centers in Lebanon, Egypt and Syria, alongside plans for a hypermarket in Erbil, Kurdistan. The issue was priced based on investor meetings held in the UAE, Kuala Lumpur and London. Abu Dhabi Islamic Bank, Dubai Islamic Bank, HSBC Bank Plc and Standard Chartered Bank were joint lead managers and book runners for the transaction. The Sukuk was 4 times oversubscribed with more than 140 orders from a well-diversifed investor group. The fnal distribution of the certifcates was well-balanced with investors from Middle East (54 per cent), Europe (32 per cent) and Asia (14 per cent). Banks accounted for 52 per cent, fund managers 42 per cent, and private banks the balance ofering of 6 per cent. Fitch Ratings assigned MAF Sukuk series of certifcates under the US $ 1 billion trust certifcate issuance program a rating of ‘BBB’. The ratings were assigned to the program and not to the certifcates issued under the program. The rating is driven solely by MAF Holding’s (the Guarantor) Issuer Default Rating (IDR) and senior unsecured rating. Fitch assigned MAF Holding a Long-term IDR of ‘BBB’, with a Stable Outlook. The principal transaction documents include Purchase Agreement, Lease Agreement, Management Agreement, Purchase Undertaking and Sale Undertaking. Sukuk Structure and Transaction Flows 1. SPV: The Sukuk was issued through a Special Purpose Vehicle (SPV) incorporated in the Cayman Islands, MAF Sukuk Limited. 2. Trustee: MAF Sukuk Limited was the issuer and the trustee for the certifcates. 3. Use of Sukuk Proceeds: On the issue date, MAF Sukuk Ltd. (the Issuer and the Trustee) will use the proceeds to purchase from MAF Properties (the Obligor) a portfolio of Wakalah Assets termed as the Wakalah Portfolio. Initially the Master Purchase Agreement was entered into between MAF Sukuk Ltd. (as Trustee and as Purchaser) and MAF Properties (as Seller). Subsequently, a Supplemental Purchase Contract between the same parties will be entered into on the issue date of each series. Pursuant to the Purchase Agreement, the Seller will sell the Wakalah Portfolio to the Purchaser. The Wakalah Portfolio will include the following assets: (i) Income generating real estate related assets or Shari’ah compliant tangible assets which are either externally leased to third parties immediately prior to the issue date or which will become leased assets on the issue date (ii) Self-use assets which are non-income generating assets. If such assets form a part of the Wakalah 14% 54% 32% Geographic Distributon of MAF Sukuk Investors Asia Middle East Europe 39 portfolio, these shall be leased by the MAF Sukuk Ltd. (the Lessor) to MAF Properties (the Lessee) pursuant to a Master Lease Agreement. At the onset of the transaction, the Master Lease Agreement will be entered into between MAF Properties (as Lessee) and MAF Sukuk Ltd. (as Trustee and as Lessor). Subsequently, a Supplemental Lease Contract between the same parties will be entered into on the issue date of each Series or whenever a self-use asset forms a part of the Wakalah Portfolio. Self-use assets may include the following: a. real estate related asset which, immediately prior to the Issue Date, is either a plot of land to be developed in accordance with a development plan or is used by MAF Properties for its own account; and b. Other Shari‘ah compliant tangible assets which, immediately prior to the Issue Date, are used by MAF Properties for its own account 4. Management of Assets: The Management Agreement will be entered into between MAF Sukuk Ltd. (as Trustee) and MAF Properties (as Managing Agent of each Wakalah Portfolio). Pursuant to the Management Agreement, the Trustee will appoint the Managing Agent to manage the Wakalah Portfolio applicable to each series. The Managing Agent will manage the Wakalah Portfolio in accordance with the Wakalah Investment Plan set out in the Schedule to the Management Agreement. Amongst the key responsibilities of the Managing Agent will be to ensure that on the issue date of a series, but not necessarily thereafter, the Wakalah Portfolio entirely comprises tangible assets. It will also strive to ensure that, at all times following each issue date, at least 70 percent of the Wakalah Portfolio Value is derived from tangible assets. Furthermore, it will carry out all major maintenance and structural repair in respect of the tangible assets on behalf of the Trustee. 5. Periodic Distribution Payments: Prior to each periodic distribution date, the Managing Agent will pay to the Trustee an amount refecting returns generated (including all rental payable under a Lease Agreement) by the relevant Wakalah Portfolio during the relevant distribution period. In the event that the revenues from the Wakalah Portfolio to be paid by the Managing Agent on any Wakalah distribution date are greater than the required amount, the excess amount shall be retained by the Managing Agent as a reserve and credited to a separate book entry ledger account. If in any distribution period the revenues from Wakalah Portfolio are less than the required amount, the shortfall will be met through transfer of funds from the reserve account. If the shortfall still remains, the Managing Agent may either provide Shari‘ah compliant funding to the Trustee itself or procure the same from a third party. 6. Dissolution Payments: On each scheduled dissolution date, the Trustee will have the right under the Purchase Undertaking to require MAF Properties to purchase all of the Trustee’s rights, title, interests, benefts and entitlements in, to and under the relevant Wakalah Portfolio. The Purchase Undertaking was executed as a deed by MAF Properties in favor of MAF Sukuk Ltd (as Trustee). The Sale Undertaking was executed as a deed by MAF Sukuk Ltd. (as Trustee) in favor of MAF Properties. Pursuant to the Sale Undertaking, MAF Properties will be able to oblige the Trustee to sell all of its rights, title, interests, benefts and entitlements in, to and under the relevant Wakalah Portfolio at the exercise price. The exercise prices shall be an amount equal to the aggregate of: a) the aggregate outstanding face amount of the certifcates of the relevant series on the relevant dissolution date; b) an amount equal to all accrued and unpaid periodic distribution amounts (if any) relating to the certifcates of the relevant series; and c) the sum of any outstanding (i) amounts repayable in respect of any liquidity facility and (ii) any amounts of management liabilities. The exercise price payable by MAF Properties, together with any principal revenues in respect of the relevant Wakalah Assets then held by the Managing Agent and payable to the Trustee under the Management Agreement, are intended to fund the fnal dissolution amount payable by the Trustee under the relevant certifcates. Wakalah principal revenue comprises amounts in the nature of sale, capital or principal payments. 40 7. Guarantor: MAF is the guarantor of certain obligations of MAF Properties, due to the structure of the Sukuk, including the following: 1) MAF Properties’ obligations under the documentation rank pari passu with its other unsecured obligations; 2) MAF Properties’ undertaking to purchase the Sukuk assets on the scheduled or any earlier dissolution dates from MAF Sukuk Ltd.; and 3) on any periodic distribution date, if the returns generated from the Sukuk assets are insufcient to cover the periodic distribution payments due, MAF Properties’ undertaking to pay further amounts to the SPV to remedy such shortfall. MAF’s obligations under the guarantee rank pari passu with all its other unsecured obligations. Sukuk Structure and Diagram Diagram Explanation (i) MAF Sukuk Ltd. (as the Issuer and the Trustee) will use the proceeds to purchase from MAF Properties (as the Obligor) a portfolio of Wakalah assets, pursuant to a Purchase Agreement. (ii) Under a Management Agreement, MAF Sukuk will appoint MAF Properties (as Managing Agent of each Wakalah Portfolio) to manage the Wakalah Portfolio. (iii) The Wakalah Portfolio will include a) income generating real estate related assets or Shari‘ah compliant tangible assets and b) self-use assets which are non-income generating assets. The latter shall be leased by the MAF Sukuk Ltd. (the Lessor) to MAF Properties (the Lessee) through a Lease Agreement. (iv) The Managing Agent will pay to the Trustee an amount refecting returns generated by the Wakalah Portfolio during the distribution period. In the event that the revenues from the Wakalah Portfolio are greater than the required amount, the excess amount shall be retained by the Managing Agent as a reserve. If the revenues are less than the required amount, the shortfall will be met through transfer of funds from the reserve account. If the shortfall still remains, the Managing Agent may either provide Shari‘ah compliant funding to the Trustee itself or procure the same from a third party. MAF Properties as seller of Wakala Assets Wakala Assets Return on WakalaAssets Master Purchase Agreement and Supplemental Purchase Contracts Master Lease Agreement and Supplemental Lease Contracts MAF Properties as Lessee of Self-Use Assets Master Trust Deed and Supplemental Trust Deeds Source: MAF Sukuk Base Prospectus Purchase Undertaking/ Sale Undertaking MAF Sukuk Ltd. as Issuer and Trustee Rentals Proceeds Guarantee to Trustee of certain of MAF Properties’ obligations (pursuant to Master Trust Deed) Execise Price/Cancellation of Certificates Periodic Distribution Amounts and Dissolution Amounts Certificates Proceeds Investors Management Agreement MAF Properties as managing agent MAF Properties as purchaser MAF Holding as Guarantor 41 (v) On each scheduled dissolution date, through a Purchase Undertaking, Trustee will have the right to require MAF Properties to purchase all of its interests in the Wakalah Portfolio. Conclusion It is no surprise the majority of the Sukuk was taken up by Middle East investors as MAF is well recognised corporate name that people can associate with its quality Mall across the region , “City Centre”. Furthermore the rate of return too was very attractive at 5.85% and this lead to good demand from investors from Europe with a respectable 32%. MAF Wakala structure stands well to the asset management role of managing the Real Estate portfolio with high percentage income is generated from the leased asset to third parties. References (1) MAF Website: http://www.majidalfuttaim.com/ (2) Zawya: http://www.zawya.com/story/ZAWYA20120201141857/ 42 3.4 SAUDI ELECTRICITY COMPANY (SEC) AL IJARAH BASED SUKUK 2012 Abstract This case study intends to examine and analyse the dual tranche Al Ijarah based structured Sukuk worth US $ 1.75 billion issued in April 2012 by Saudi Electricity Company (SEC) the largest utility company in the Middle East. In order to analyse the data collected through the documentation method for this study, the inductive and comparative methods are applied. This study confrms that the issuance of this dual tranche Sukuk by the SEC Company has been positive for the growth and further development of the Sukuk market and the Islamic Capital Market across the globe. Sukuk Summary Background Saudi Electricity Company (SEC) is the largest utility company in the Middle East and a dominant vertically integrated utility in the Kingdom of Saudi Arabia, where it served more than 6.3 million customers as of December 2011. The company owns 46 major plants with a total capacity of 42,012 megawatts (MWs), which represents the vast majority of Saudi Arabia’s total generation capacity. Sukuk Al Ijarah These are Certifcates of equal value that are issued either by the owner of an existing asset or a fnancial interme- diary acting on the owner’s behalf, with the purpose of leasing or subleasing this asset and receiving the rental from the revenue of subscription. Thus, the holders of the certifcates become owners of the usufruct of the asset 15 . SEC Dual Tranche Sukuk Al Ijarah SEC company has successfully issued dual tranche Sukuk Al Ijarah in April 2012 with a total amount of US $ 1.75bil- lion. The Sukuk comprised a US $500 million tranche with a fve year maturity and a US $ 1.25 billion one with a 10 year maturity at proft rates of 2.665 per cent and 4.211 per cent respectively. SPV Saudi Electricity Global Structure type Ijara Issue Size USD 1,250,000,000 Issue Date 3-Apr-12 Maturity date 3-Apr-22 Return 4.211 Fix or Variable Fixed Return frequency Semi Annual Pricing =Spread over mid-swaps, 200.8 bp Book Runners Deutsche Bank , HSBC Listing London stock Exchange ISIN RegS XS00767862914 SPV Saudi Electricity Global Structure type Ijara Issue Size USD 500,000,000 Issue Date 3-Apr-12 Maturity date 3-Apr-17 Return 2.665 Fix or Variable Fixed Return frequency Semi Annual Pricing =Spread over mid-swaps, 163.bp Book Runners Deutsche Bank . HSBC Listing London Stock Exchange ISIN RegS XS0764883806 15 AAOIFI Shari‘ah standard no. 17, 2010, Investment Sukuk, page 312. 43 It is the frst international Sukuk issuance by the SEC Company and the largest issuance from Saudi Arabia in the global debt capital markets. The objective of the Sukuk issuance is to secure long term fnancing from a diversifed investor base and use its proceeds to fund the aggressive capital expenditure program as the company plans to boost its capacity to at least 80,000 MW by 2020. The Sukuk was extremely well received globally by inventors after a widespread road show covering major markets in Asia, Middle East and Europe. The Sukuk has generated a large order book with over 440 investors placing orders in excess of US $17.5 billion. Moody’s assigned an A1 rating to the Sukuk which is in line with the long-term issuer rating of SEC. The rating is mainly supported by the low business risk profle of SEC. The company enjoys a dominant position in Saudi Arabia as the integrated and exclusive electricity provider, either directly or through independent power purchasers in which it owns a stake. Furthermore, the regulatory environment in the country remains highly supportive. Deutsche Bank and HSBC are the Joint Lead Managers while the Co-Manager is Mitsubishi UFJ Securities. The principal transaction documents consist of Purchase Agreement, Ijarah Agreement, Servicing Agency Agreement, Substitution Undertaking, Purchase Undertaking and Sale Undertaking. Sukuk Structure and Transaction Flows 1. SPV: The Sukuk was issued through a Special Purpose Vehicle (SPV) under the name of Saudi Electricity Global Sukuk Company (“SEGSC”) incorporated in the Cayman Islands. 2. Trustee: The Company (SEGSC) will act as the trustee for and on behalf of the certifcate holders. 3. Use of Sukuk Proceeds: Pursuant to the relevant Purchase Agreement, the Trustee (in its capacity as the Purchaser) will use the issue price to purchase from SEC (in its capacity as the Seller) the relevant power generation assets (the “Ijarah Assets”) with an economic life substantially beyond the relevant scheduled dissolution date. The Ijarah Assets may be substituted in accordance with the relevant Substitution Undertaking for any assets, the identity of which shall be determined by SEC under the condition that the value of the substitute assets is equal to or greater than the value of the assets being substituted. The Trustee (in its capacity as the Lessor) will lease the relevant Ijarah Assets to SEC (in its capacity as the Lessee) pursuant to the relevant Ijarah Agreement. 4. Periodic Distribution Payments: The Lessee will pay rental payments in respect of the relevant Ijarah Assets which are intended to be sufcient to fund the periodic distribution amounts due under the relevant series of certifcates on each periodic distribution date. Payment obligations under the various documents -- especially under the Ijarah Agreement and the Purchase Undertaking -- will be direct, unconditional, unsecured and general obligations of SEC and rank at least pari passu with all other unsecured, unsubordinated and general obligations of the company. 5. Dissolution Payments: 5.1 Pursuant to the Purchase Undertaking in respect of each Series, the Trustee may, on the relevant scheduled dissolution date, or prior thereto following the occurrence of a dissolution event or a change of control, exercise its rights under the relevant Purchase Undertaking and require SEC to purchase the relevant Ijarah Assets as well as repay any unpaid and accrued periodic distribution amount. 5.2 Pursuant to the Sale Undertaking in respect of each Series, SEC may, following the occurrence of a Tax Event, exercise its rights under the relevant Sale Undertaking to require the Trustee to sell to SEC the relevant Ijarah Assets. Tax Event is referred to as the event when Trustee will become obliged to pay additional amounts as provided due to any change in, or amendment to, the laws or regulations of a relevant jurisdiction. 5.3 Pursuant to the Sale Undertaking in respect of each Series, SEC may also, in the event that SEC wishes to cancel any certifcate of the relevant series purchased in accordance with the stipulated conditions, 44 exercise its rights to require the Trustee to transfer the relevant Ijarah Assets to SEC as identifed by it. In each case, the consideration payable by SEC upon such exercise of a Purchase Undertaking or a Sale Undertaking, as appropriate, shall be the relevant Exercise Price. Sukuk Structure and Diagram Soucrce: SEC Sukik Base Prospectus Diagram Explanation (i) SEGSC (as the Issuer/Trustee/Purchaser) will purchase power generation assets (Ijarah Assets) from SEC (as Seller/Lessee/Servicing Agent) pursuant to a Purchase Agreement. (ii) SEGSC (as the Lessor) will lease the relevant Ijarah Assets to SEC (as the Lessee) pursuant through an Ijarah Agreement. (iii) SEC will pay rental payments which are intended to be sufcient to fund the periodic distribution amounts to SEGSC. (iv) The Trustee may, on the dissolution date, or prior thereto following the occurrence of a dissolution event, exercise its rights under the relevant Purchase Undertaking and require SEC to purchase the relevant Ijarah Assets as well as repay any unpaid and accrued periodic distribution amount. (v) SEC may also, in the event that it wishes to cancel any certifcate, exercise its rights under the Sale Undertaking, to require the Trustee to transfer the relevant Ijarah Assets to it. (vi) The consideration payable by SEC upon, exercise of a Purchase Undertaking or a Sale Undertaking, shall be the relevant Exercise Price. Conclusion Rarity of Quality Saudi issuer like, Saudi Electric Company ensured a good as investors piled on with an oversub- scription of 10 Times. Another rarity being the long dated Sukuk which took the limelight and raised $ 1.25 Billion with such ease, considering the sweet spot for GCC investors histmrically has been less than 10 years. Extension of the Maturities past 5 year is a healty development for both , the investors community and for the corporates. References (1) SEC Sukuk Base Prospectus 45 3.5 PROJEK LEBUHRAYA USAHASAMA BERHAD (PLUS BERHAD) MUSHARAKAH BASED SUKUK 2012 Abstract Projek Lebuhraya Usahasama Berhad (PLUS Berhad) a company that provides expressway operation services in Malaysia issued Sukuk Al Musharakah structure based Sukuk worth Malaysian Ringgit (MYR) 30.6 billion (US $ 9.7 billion) in January 2012. It is the largest global Sukuk and Malaysia’s single largest bond issuance to-date, following the privatization exercise. This Sukuk provides an excellent case study for long term Shari‘ah compliant fund raising exercise using readily available infrastructure assets which generate stable returns. It is a case of matching long- term and stable revenue streams against long-term fnancing obligations. Background Projek Lebuhraya Usahasama Bhd is a wholly owned subsidiary of Plus Malaysia Sdn. Bhd. (Plus Malaysia), which is a jointly-owned special purpose company of UEM Group Berhad and the Employees Provident Fund (EPF). Plus Malaysia was set up to acquire the Malaysian business and undertakings including the assets and liabilities of PLUS Expressways Berhad, the largest provider of expressway operation services in Malaysia, under a privatization exercise. UEM Group is a wholly-owned subsidiary of Khazanah Nasional Berhad, an investment arm of the Government of Malaysia. PLUS Expressways Berhad is the largest toll road company in South East Asia and one of the largest in the world by market capitalization. It operates and maintains 973 kilometers of inter-urban toll expressways in Peninsular Malaysia, stretching from the border of Thailand in the north to the border of Singapore in the south, linking all major cities on the west coast of Peninsular Malaysia. Sukuk Al Musharakah Are certifcates of equal value issued with the aim of using the mobilized funds for establishing a new project, fnancing a business activity etc on the basis of any of partnership contract so that the certifcate holders become the owners of the project. (Musharakah Sukuk is an investment partnership between two or more entities which together provide the capital of the Musharakah and share in its profts and losses in pre-agreed ratios). Plus Berhad Musharakah Based Sukuk PLUS Berhad issued MYR 30.6 billion (US $9.7 billion) Musharakah based structured Sukuk on 12 January 2012. The Sukuk proceeds were utilized to part fnance the purchase of assets, liabilities, businesses, undertakings and rights of fve toll concessions – Projek Lebuhraya Utara-Selatan Berhad, Expressway Lingkaran Tengah Sdn Bhd, Konsortium Lebuhraya Butterworth-Kulim Sdn Bhd, Linkedua (Malaysia) Berhad and Penang Bridge Sdn Bhd. The proceeds were also used for capital expenditure, working capital and other general funding requirement. PLUS Berhad acquired all the assets and liabilities of the respective concession companies, through MYR 11 billion of government guaranteed (GG) and MYR 19.6 billion of non-government guaranteed AAA-rated (AAA) Sukuk issuances of varying tenors, sizes and expected returns and yields to maturity (YTMs). The issuances were distributed on a direct placement basis. The Sukuk repayment period ranges from 5 to 27 years. CIMB Investment Bank was the fnancial adviser, sole principal adviser, sole lead arranger and joint lead manager for the deal. AmInvestment Bank, Maybank and RHB Investment Bank were the other joint lead managers. The principal transaction documents consist of Musharakah Agreement(s), Management Agreement, Purchase Undertaking and Sale Agreement. Sukuk Structure and Transaction Flows 1. SPV: The Sukuk was issued by PLUS Berhad which is a wholly owned subsidiary of Plus Malaysia, a special purpose company set up to acquire business interests of PLUS Expressways Berhad, 46 2. Trustee: Mayban Trustees Berhad was the Trustee for the certifcates. 3. Use of Sukuk Proceeds: In respect of each issue of Sukuk Al Musharakah under the Sukuk Program, PLUS Berhad will identify its business comprising of rights under the respective toll-road concessions granted by the Government of Malaysia or part thereof which will be used as the underlying asset for that particular Musharakah transaction. Sukuk holders shall via the Trustee, from time to time, form a Musharakah amongst themselves, which is a partnership amongst the Sukuk holders, to invest in the underlying asset (“Musharakah Venture”) via the subscription of the Sukuk. There will be at least two Sukuk holders forming the Musharakah through a Musharakah Agreement at each issuance. The Sukuk Al Musharakah shall represent amongst others, undivided proportionate interest of the Sukuk holders in the Musharakah Venture. A declaration shall be made by Plus Berhad that it holds on trust, the underlying asset for the beneft of the Sukuk holders. PLUS Berhad shall receive Musharakah Capital arising from the subscription of the Sukuk. 4. Management of Musharakah Venture: Pursuant to the Management Agreement to be entered into between PLUS Berhad and the Trustee (acting on behalf of the Sukuk holders), the Trustee shall appoint PLUS Berhad as the manager of the Musharakah Venture. 5. Periodic Distribution Payments: The expected return of the Sukuk holders from the Musharakah Venture shall be the yield for the Sukuk Al Musharakah up to the maturity date of the Sukuk Al Musharakah or the date of declaration of an event of default/dissolution event, whichever is the earlier. In respect of Sukuk Al Musharakah with periodic distribution, income from the Musharakah Venture of up to an amount equal to a certain percentage of the face value of the Sukuk Al Musharakah per annum, (“Expected Periodic Distribution”) shall be distributed periodically in the form of periodic distribution to the Sukuk holders. The periodic distribution shall be made semi-annually or on such period to be determined prior to each issuance. In the event of any shortfall between the periodic distribution and the Expected Periodic Distribution for such relevant period, PLUS Berhad shall make top-up payments to compensate for the shortfall. The top-up payments will be set-of against the Exercise Price defned under dissolution payments. Any income in excess of the Expected Periodic Distribution shall be retained by PLUS Berhad as an incentive fee. In respect of Sukuk Al Musharakah without periodic distribution, income from the Musharakah Venture of up to the Expected Return shall be distributed on a one-of basis upon the maturity date of the Sukuk Al Musharakah or the Dissolution Date, whichever is the earlier. In the event of any shortfall between the One-of Distribution and the Expected Return for such relevant period, PLUS Berhad shall make top-up payment to make good the diference. The top-up payment will be set-of against the Exercise Price. Any income in excess of the Expected Return shall be retained by PLUS Berhad as an incentive fee. 6. Dissolution Payments: Pursuant to a Purchase Undertaking granted by PLUS Berhad (as “Obligor”) in favor of the Trustee (acting on behalf of the Sukuk holders), PLUS Berhad shall undertake to purchase the Sukukholders’ interest in the Musharakah Venture by entering into a Sale Agreement and pay the Exercise Price on either the maturity date of the Sukuk Al Musharakah or on the Dissolution Date, whichever is the earlier. PLUS Berhad shall be entitled to set-of the Exercise Price with any top-up payment(s) made. In the case of Sukuk Al Musharakah with periodic distribution, the Exercise Price for the Sukuk Al Musharakah shall be equivalent to the Musharakah Capital plus the Expected Return less total Periodic Distributions. In the case of Sukuk Al Musharakah without periodic distribution, the Exercise Price for the Sukuk Al Musharakah shall be equivalent to the Musharakah Capital plus the Expected Return less any One-of Distribution. 47 Sukuk Structure and Diagram Source: Plus Berhad Sukuk Information Memorandum Diagram Explanation (1) Sukuk holders through Mayban Trustees Berhad (as the Trustee) will form a Musharakah amongst themselves under a Musharakah Agreement, to invest in the underlying asset (“Musharakah Venture”) via the subscription of the Sukuk. (2) PLUS Berhad (as Issuer/Obligor) shall receive Musharakah Capital arising from the subscription of the Sukuk. (3) Trustee shall appoint PLUS Berhad as the Manager of the Musharakah Venture through a Management Agreement. (4) Income from Musharakah Venture shall be distributed as periodic distributions or one-of distribution to Sukuk holders as the case may be. In the event of any shortfall between the periodic/one-of distribution and the Expected Distribution, PLUS Berhad shall make top-up payments to compensate for the shortfall. The top-up payments will be set-of against the Exercise Price. Any income in excess of the Expected Return shall be retained by PLUS Berhad as an incentive fee. (5) PLUS Berhad (as “Obligor”) shall undertake to purchase the Sukuk holders’ interest in the Musharakah Venture pursuant to a Purchase Undertaking granted by it in favor of the Trustee (acting on behalf of the Sukuk holders). (6) The Exercise Price will be paid on either the maturity date of the Sukuk Al Musharakah or on the Dissolution Date, whichever is earlier. Conclusion The success of this sizeable PLUS issuance further reinforces the depth of the Malaysian Ringgit market and its ability to absorb and place such a large Sukuk with the investors. With number of Infrastructure developments taking place around the globe, potential issuers can take comfort based on the market acceptability with this type of Sukuk that allowed multi tranching, having maturities ranging from 5 years to 27 years. References Plus Berhad Sukuk Information Memorandum Sukukholders 2 Issues Sukuk 4. Purchase Undertaking 3. Appoints asManager 2. Proceeds PLUS Berhad (Issuer/Manager) Trustee (Acting on behalf of the investors) Musharakah Venture (Trucst Asset) 1 Identifies Business 2. Incests in venture 3 One-of Distribution/ Periodic Distributions 2. Musharakah Captial /Proceeds 48 CASE STUDIES & ARTICLES ON SUKUK ISSUANCES - INSTITUTIONS CONTRIBUTION 4.1 Government of Indonesia Sukuk Issuances (Sukuk Negara 16 ) INTRODUCTION In 2008, the House of Representatives (DPR) passed the law No. 19/2008 on StateShari ‘ah Securities (SBSN) which paved the way for the government to rise funding using aShari ‘ah compliant Sukuk Al-Ijarah for the frst time. The law 19/2008 on SovereignShari ‘ah Securities( Sukuk) • Regulate the governance of Sukuk Negara issuance by the Central Government • Legal basis of Sukuk Negara issuance: __ Provide mandate to the government for issuing Sukuk Negara __ Establishment of the Special Purpose Vehicle __ Utilize state-owned assets and government projects as underlying The Sukuk law opened up another alternative source of fnancing for the government and for local corporations to tap this new source of funding. However, Islamic fnancing is not alien to Indonesia, history of Islamic Capital Market in Indonesia is not new, as PT Indosat issued a Sukuk back in 2002 using a Mudarabah structure. Moverever, due to Legal ,Tax ,Shari ‘ah and infrastructure issues, active development for Sukuk market did not take of until 2009 when the Government of Indonesia issued its First Cross Border Global Sukuk, raising US $ 650myn. The issue was a success with demand exceeding 7 times the amount ofered. Local currency with the demand from local population forShari ‘ah Compliant products and the opening of Islamic “windows” to complement full fedge Islamic Bank,Shari ‘ah compliant T-Bill was introduced in 2011 which added avenue of fund raising to help the government budgetary requirements. Objectives OfShari ‘ah Compliant Financing OferingShari ‘ah compliant product to both the International market and to its population ( Most populace Muslim Nation) fts in well, since the Sukuk market is going from strength to strength with the demand outstripping supply, even with record global issuance. Enhancing the Islamic Finance Market with Government Sukuk and T Bills is helping develop the localShari ‘ah based investments and fnancing. While creating the Yield curves could lead to corporate Sukuk issuance using the government as a benchmark for pricing. Overall, the objectives allow the government to have more tools in helping fnance the government budget defcit:-- • Diversifying State Budget Financing Source • Developing Alternative Investment Instruments Chapter Four 16 Debt Management Ofce, Ministry of Finance, Republic of Indonesia. Information extracted from a presentation provided by Dahlan Siamat Directorate of Islamic Financing. 49 • Financing Government Infrastructure Projects through Sukuk • Broadening Investor Base • Maximizing Utilization of State Owned Assets • Enhancing Islamic Financial Market Legal certainty for investor: Ijarah Cash fows Based on the Sukuk Al Ijarah and the relevant purchase undertaking (Wa ‘ad ) to purchase the asset by the Government of Indonesia at maturity or upon an event of default , provides investors a Sovereign risk of the Government of Indonesia . As the lease rental payments and exercise of the purchase undertaking is being provided by the Government Fatwa and Shari ‘ah Endorsement To ensure its compliance with Islamic principles, Sukuk Negara issuance requires Fatwa andShari ‘ah Endorsement (Shari ‘ah Opinion) from NationalShari ‘ah Board – Indonesian Council of Ulama: • Fatwa No. 69/DSN-MUI/VI/2008 onShari ‘ah Sovereign Securities • Fatwa No. 70/DSN-MUI/VI/2008 onShari ‘ah Sovereign Securities Issuance Methods • Fatwa No. 71/DSN-MUI/VI/2008 on Sale and Lease Back • Fatwa No. 72/DSN-MUI/VI/2008 onShari ‘ah Sovereign Securities Ijarah Sale and Lease Back • Fatwa No. 76/DSN-MUI/VI/2008 onShari ‘ah Sovereign Securities Ijarah Asset to be Leased Sukuk being the latest product that is providing momentum in the IndonesianShari ‘ah compliant Capital Market, is currently driven by the government initiatives. However, it has the potential to be developed both, in the government as well as the corporate sector. As these development takes place , the market will need to explore other form of structures to cater for the likely demands generated by various institutional needs, ( eg Istisna, Mudarabah, Wakala etc) and developing Equity linked Sukuk ( Convertible, Exchangeable) Opportunities for Sukuk Negara Issuance Sukuk issuance by Indonesia has allowed the government to source alternative fnancing in balancing its budget defcit while diversifying its investor base. TheShari ‘ah compliant market is fast growing with demand outstripping supplies, this creates pricing tension, specially for Sovereign and quality issuers. Indonesia Sukuk has been one of the benefactors of the demand side which in turn provided fne pricing to GOI. Indonesian government has successfully tapped the international market since 2009, It has become a regular issuer in the domestic market from its frst launch in 2008 and then followed by the T-bills debut in 2011. This positive development is putting the foundation of a pricing curve that will allow its corporates to tap the international market using the government Global Sukuk as the benchmark. While the domestic curve will lead to developing the local fxed income market. 50 Milestone of Sukuk Negara Milestone of Sukuk Negara Indonesia contnues its effort in laying the foundaton for developing Sharia Compliant Market Source: bapepam.go.id 51 Sukuk Structure format refecting on tradability and issuance method by GOI Sukuk Negara - Issuance Program The strategy followed by the government of Indonesia tackles plugging the budget defcit through regular issuance of Sukuk in the International market, and developing domestic fxed income market through much more regular issuance program. Another initiative the GOI looks to implement is the Primary dealership for Sukuk which in turn would ofer secondary market liquidity, greater price transparency and widening investor’s base. Based on AAOIFI Shari’ah Standards No.17 Ijarah Sale & Lease Back Certficates of ownership in leased assets (3/1) Ijarah Al-Khadamat Ijarah Asset to be Leased Underlying asset State-Owmed Assets Coupon Fixed rate Tradable Bookbuilding, Aucton IFR, SNI, SR, SPN-S Certficates of ownership of described future services (3/2/4) Hajj Services Fixed rate Non-tradable Private placement SDHI Certficates of ownership of assets to be leased (3/1) Infrastructure Project Fixed rate Tradable Aucton PBS, SR Tradability Issuance method Series of Sukuk Negara 52 Aucton Domestc Market Internatonal Market Bookbuilding Bookbuilding Private Placement IFR, Islamic T-Bills, PBS. Conducted regularly 1-2 tmes a month based on annual calendar of issuance Aucton Partcipants Green Shoe Opton (GSO) Conducted regularly once a year (SR series) issuance Selling agents Issued annually (semester 2) USD denoninated (SNI series) 144A/Reg-S issue format Joint lead managers SDHI series (Hajj Fund Sukuk) Billateral agreement Market Development Policy And Strategy Product Development Recent Product Development: Project Financing Sukuk Debuted: Since 16th February 2012, GoI has frequently issued Project Based Sukuk (PBS Series) Structure: Ijarah Asset to be Leased, has been approved by NationalShari ‘ah Board (Fatwa No. 76/2010) Project fnance Sukuk policy is regarded as a positive move which serves in developing country’s infrastructure while providing additionalShari ‘ah compliant product to the market that ofers longer maturity. Benefts of Project Financing Sukuk • Diversifying State Budget Financing • Accelerating Infrastructure Development • Enhancing Islamic Financial Market • Enhancing Public Services, Empowerment of Local Industries and Government Investment • Improving transparency of Government activities Domestic Sukuk Issuance Corporate were the initial pioneers of Sukuk in the early 2000’s . However, by 2008 GOI had taken the initiative to enact some laws to facilitate Sharia fnancing. This has resulted in GOI taking the lead in issuing Sukuk on a regular basis, laying the frame work for issuance by corporates. Domestc Sukuk Issuance (2002 - 2012 ytd) Sukuk Negara vs. Corporate Sukuk Issuance billion IDR 45.000 40.000 35.000 30.000 25.000 20.000 15.000 10.000 5.000 0 Domestc Corporate Sukuk 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 June 18,2012 175 565 654 585 200 1.025 1.534 1.980 997 200 250 0 0 0 0 0 0 4.700 9.519 26.967 24.271 40.783 Domestc Sukuk Negara 53 Domestic Sukuk are an important tool for the Central Bank (BOI) policy in having Sukuk Negara as part of its monetary operation. Retail Sukuk provides for wider understanding and acceptability of Sharia compliant investments aswell as encouraging savings Sukuk Negara in Secondary Market It is no surprise that the Banks and Insurance companies taking up majority of the Sukuk ,as GOI ofers “risk free” return as well as duration investment to match their Asset and Liability . Also, encouraging to note that 18% of the market share of tradeable Sukuk are from individuals Retail investors. Types of Structure Ijara Asset to be Leased Fixed coupon 6.25% per annum, payable monthly 100% (At Par) IDR 1.000.000,00 Min IDR 5 mio, Max IDR 5 Bio. March 21, 2012 September 21, 2015 Tradable Government Projects Indonesian citizen investor Indonesia Stock Exchange (IDX) Periodic Distribution Price Unit Price Minimum Order Settlement Date Maturity Date Tradability Underlying Targeted Investor Listing MAJOR REASONS FOR THE ISSUANCE: Diversifying Sukuk Negara Instrument Developing an alternative sharia compliant investment instrument Enhancing the development of Islamic financial market Providign attractive and safe investment alternatives to individual investors Strengthening Indonesian capital market by encouraging the transformation from savings- oriented society. Broadengng the investor base of Islamic Government Securities in the domestic market. Summary of Terms and Conditions IDR Retail Sukuk Series SR004 Sukuk Negara in Secondary Market Sukuk Negara Ownerships Secondary Market Trading Notes: Onlycounted for IDR tradable Sukuk Negara. All figures are as of june 14 th , 2012. Central Bank 1% Insurance Company 24% conventional 29% Individual 18% Pension Founds 1% Mutual Founds 5% Non Resident 9% Others 5% Islamic Banks 6% Avarage Daily Trading-Goverment Islamic Securites 1,600 1,400 1,200 1,000 800 600 400 200 0 250 200 150 100 50 0 Volume(LHS) Frequency (RHS) 14.51 48.37 116.86 173.64 193.80 370.95 1431.77 512.64 216.17 388.79 54 Summary of International Global Sukuk The issue was well placed globally with Asian and Middle Eastern investors who took up 60% of the issue while another another 30% was shared by Europe 18% and Indonesia 12%. Further encouraging point is that 59% take up was by Funds , these type of investors are like to provide secondary market liquidity as they trade in and out on based on value . Conclusion The initiative and commitment by Indonesian goverment in promoting and developing Islamic Finance is quite evident with the foundation set for Sukuk and its issuance program. Expanding and creating Sukuk for retail investor is very encouraging , while the project based Sukuk is healthy in developing and upgrading the infrastructure that will beneft the country and its citizens. RoI Global Sukuk SNI18 Lowest coupon ever achieced by the Republic of Indonesia in the international capital markets. Lowest coupon ecer achieced in a 7-year US$ Sukuk and conventional transaction for an Asian issuer. First ever 7-year US$ Sukuk by a non-GCC sovereing issuer. Impressive prderbook consisting of US$6.5 billion orders from over 250 high quality institutional accounts from Asia, East and Islamic investors. - - - - - Republic of Indonesia Global Sukuk SNI18 Execution Highlights Perusahaan Penerbit SBSN Indonesia 2 (PPSI-2) English Law (Asset-related documents Under Indonesian Law) Issuer : Obligor : Currency/Format : Sturcture : Sukuk Asset : Size : Pricing/Settl.Date : Maturity Date : Tenor : Periodic Distributions : Price/Re-offer Spread : Listing : Govenning Law : ROI USD / 144A. Reg.s Ijarah Sale and Lease Back Land & Building USD 1,000 million 14 Nov 2011/21 Nov 20111 21 Nov 2018 7 Years 4.00% p/a., semi annually 100% / UST7 + 250 bps Singapore Stock Exchange Summary of Terms & Conditions Project-Based Sukuk (PBS004) Transaction Highlights Summary of terms & conditions - PBS004 is initially issued at Feb 16th 2012 through auction Reopened regularly on each Sukuk Negara auction (Scheduled twice amonth) - Galned enormous demand on each auction, with average IDR1. 3trillion. Current outstanding is IDR4.58traillion. - Average bid to cover ratio is about 1.81, reflects fair yield orrered by investores. - Attracted Islamic investores most, compared to other series, with average is 8.3% from total incoming bid. - Underlying asset is pool of projects such rehabilitation and construction of road, irrigation, drainage, and residential. Issuer (SPV) : Obligor : Structure : Underlying : Normal per Unit : Coupon : Payment : First Issue Date : Maturity Date : Issuance Methood Listing Tradability Perusahaan Penerbit SBSN Indonesia 2 (PPSI-2) Republic of Indonesia Ijarah Asset to be Leased Projects IDR 1 million 6.10% p.a. Paid semi-annually At Par (100%) Bullet payment at maturity 16 February 2012 15 February 2037 Auction Indonesia Stock Exchange Tradable 55 4.2 Republic of Turkey By Mr. Qudeer Latif, Robin Balmer and Lauren Djedid (Cliford Chance, Dubai) The debut international issuance of U.S.$1,500,000,000 lease certifcates by Hazine Müsteşarliği Varlik Kiralama anonim şirketi (the ‹Issuer›) on 26 September 2012 was a landmark issuance which has had a lasting impact on the European and Middle Eastern Islamic fnance market. The issuance was upsized from the originally intended U.S.$1 billion to U.S.$1.5 billion due to the signifcant demand received from the investor base and was ultimately fve times over-subscribed with the order book reaching a total value of U.S.$8 billion. This case study will inves- tigate the structure, the particular features of the transaction and the wide efect it has had in the European and International Sukuk market. The lease certifcates are listed on the Irish Stock Exchange U.S.$1,500,000,000 with a proft rate of 2.803 per cent. and are due to be redeemed on 26 March 2018. The ofering was made to investors outside of the U.S. pursuant to Regulation S and to certain sophisticated categories of investor (namely ‹Qualifed Institutional Buyers› and ‹Quali- fed Purchasers›) within the U.S. pursuant to Rule 144 A of the United States Securities Act of 1933. Investors in the United Arab Emirates, the Dubai International Financial Center, the United Kingdom, Malaysia, Saudi Arabia, Qatar and Singapore were also invited to participate in the ofering. Cliford Chance advised the joint lead managers, Citigroup Global Markets Limited, HSBC Bank plc and Liquidity Management House for Investment Company K.S.C.C. (the ‹Joint Lead Managers›) in relation to the lease cer- tifcate issuance. A further six Asian, Middle Eastern and European banks subscribed for the issuance and were named co-lead managers. The co-lead managers were Bank Islam Brunei DarusSalam, Barwa Bank, IS Investment, Islamic Development Bank, Kuveyt Turk and Sharjah Islamic Bank. The issuance was assigned a rating of BB by Standard & Poor’s and Ba1 by Moody’s Investors’ Service, consistent with the Republic of Turkey’s (the “Republic”) sovereign ratings. Structure and Cash Flows The lease certifcates were issued by way of a Sukuk al ijara structure. The Issuer is an asset leasing company wholly owned by the Republic and incorporated in accordance with the laws of the Republic solely for the purpose of issuing lease certifcates under Article 7/A of law number 4749. The objects of the Issuer are primarily to enter into the transactions contemplated by the transaction documents as well as future issuances of lease certifcates to the extent authorised by the Ministerial Decisions (defned below). Set out below is a simplifed structure diagram and description of the principal cash fows underlying the transac- tion. Structure Diagram Certificate holders Certificates Lease Certificate Assets Sale Price Sale Agreement Lease Agreement Substituted Lease Certificate Assets Substitution Undertaking Redemption Assets Redemption Undertaking Appointment as Servicing Agent Reimbursement of Servicing Costs (set- off against Supplemental Rental) Rental Payments Lease Certificate Assets Purchase Undertaking Sale of Lease Certificate Assets Assets The Republic (acting through the Treasury) as Seller The Republic as Leasee The Republic as Servicing Agent The Republic as Obligor A Cash Periodic Distribution Amounts Dissolution Amount Hazine Müstesarligi Varlik Kiralama Anonim Sirketi D E E F G C B Exercise Price 56 A. On the closing date of the Sukuk issuance, the Issuer issued the lease certifcates to the Certifcateholders. B. Pursuant to the terms of the Sale Agreement, the Republic (acting through the Treasury) sold all of its rights, titles, interests and benefts in and to the Lease Certifcate Assets to the Issuer in consideration for a sale price equal to the net Sukuk issuance proceeds. C. Pursuant to the terms of the Lease Agreement, the Issuer leased the Lease Certifcate Assets to the Re public for a term commencing on the closing date of the Sukuk issuance and ending on the scheduled dissolution date of the Sukuk issuance. D. Pursuant to the Lease Agreement, periodic rental payments are received by the Issuer from the Republic at regular intervals in respect of the Lease Certifcate Assets and used by the Issuer to pay the Periodic Distribution Amounts to Certifcateholders. Periodic Distribution Amounts will be paid to Certifcateholders pursuant to this transaction on 26 March and 26 September each year (or if such date is not a business day, the following business day) from 2013 until the scheduled dissolution date of the Sukuk issuance. E. The Certifcates may, in accordance with the Terms and Conditions of the Lease Certifcates, be re deemed prior to scheduled dissolution date of the Sukuk issuance upon the occurrence and continuation of certain dissolution events. In such case, the Republic will be required to purchase the Issuer’s interest, rights, benefts and entitlements in and to the Lease Certifcate Assets and pay the Exercise Price to the Issuer pursuant to the terms of the Purchase Undertaking. The Exercise Price payable by the Republic to the Issuer for such purpose is intended to fund the Dissolution Amount to Certifcateholders, payable by the Issuer under the Certifcates. F. The Republic will be entitled to purchase leasing certifcates throughout the term of the Sukuk in the open market or otherwise. The Issuer will grant a Redemption Undertaking in favour of the Republic ursuant to which the Republic will be able to require the Issuer to purchase and cancel the leasing certifcates in return for certain Lease Certifcate Assets equal in value to the leasing certifcates being redeemed. G. The Republic will be entitled to substitute the Lease Certifcate Assets, from time to time, pursuant to a Substitution Undertaking. The Republic may request the Issuer to transfer back a Lease Certifcate Asset for the consideration-in-kind transfer from the Republic to the Issuer of another real estate asset of com parable value. The structure was approved by the Islamic Finance Advisory Boards of each of the Joint Lead Managers, as well as Dar Al Sharia Legal and Financial Consultancy LLC. Underlying Assets The assets used as part of the structure were comprised of certain real estate assets owned by the Republic. Upon issuance, each lease certifcate evidences the entitlement of each Certifcateholder to a right to receive the economic beneft derived from the use of the underlying assets (the ‘Lease Certifcate Assets’). This is allocated on a pro rata basis in keeping with the proportion which the face value of such certifcate bears to the aggregate value of the outstanding lease certifcates. Each lease certifcate ranks pari passu, or equally without any prefer- ence, with the other lease certifcates. The Lease Certifcate Assets are, insured to the extent reasonable and commercially practicable by the Servic- ing Agent so long as the Certifcates are outstanding. The insurances are procured in a manner compliant with the principles of Islamic fnance to cover against a total loss of the assets, at their full reinstatement value. The obligation to insure may be delegated to the relevant government ministry which has been allocated the use of a specifc asset from the Lease Certifcate Assets, detailed below. It was not a requirement that the insurances for the Lease Certifcate Assets be entered into with third parties and the Republic was permitted to self-insure the Lease Certifcate Assets. The composition of the Lease Certifcate Assets may change over the life of the Certifcates and they may be sub- stituted by other assets pursuant to the terms of the Substitution Undertaking. Upon substitution, the Republic is required to certify that the value of the new lease assets being substituted into the pool are of a greater or equal value to the assets being substituted. In addition, certain Turkish ministries and governmental departments have existing allocation rights over the Lease Certifcate Assets which remain unafected by the transactions entered into as part of the fnancing. 57 The sale of the Lease Certifcate Assets pursuant to the Sale Agreement and the resale of the Lease Certifcate As- sets pursuant to the Purchase Undertaking have been registered with the Title Deeds Ofce in the Republic. Limited Recourse The Certifcates are not secured and the Certifcateholders will have no direct recourse to the Lease Certifcate Assets under either Turkish Law or English Law. No payment of any amount whatsoever will be made under the Certifcates except to the extent that funds for that purpose are available from the Lease Certifcate Assets. Cer- tifcateholders, by subscribing for or acquiring certifcates, acknowledge that no recourse may be taken against the Issuer or the Representative (to the extent each of them fulfls all of its obligations under the transaction docu- ments to which it is a party) in respect of any shortfall in the expected amounts from the Lease Certifcate Assets to the extent that the Lease Certifcate Assets have been extinguished. Particular Issues As Turkish law does not recognise the concept of a trust, the Issuer does not act as trustee for the Certifcatehold- ers in relation to the Lease Certifcate Assets. Pursuant to the transaction documents, the Issuer confrms that it will hold the Lease Certifcate Assets in its own name and on its own behalf and for the account and beneft of the Certifcateholders. The income accruing to the Issuer from the Lease Certifcate Assets, together with any capital arising from disposal of such Lease Certifcate Assets, shall be for the beneft of, and shall be accounted by the Is- suer to, the Certifcateholders. The implication of Article 7/A of Law Number 4749 (as amended by Law No. 6327 of 13 June 2012, the ‘New Law’) on the transaction required consideration. The New Law was recently passed by the Republic of Turkey, and it was considered by the Cliford Chance Istanbul ofce in conjunction with Somay Hukuk Burosu. This Sukuk issuance of the Republic of Turkey was the frst ever issuance compliant with the principles enshrined in the New Law. In common with other sovereign issuances, the entry by the Issuer into the transaction was authorised through ministerial decisions dated 17 August 2012 and 17 September 2012 passed by the Deputy Prime Minister for Eco- nomic and Financial Afairs (the ‘Ministerial Decisions’). The Ministerial Decisions related to (i) the establishment of the Issuer (including the Articles of Association of the Issuer) and (ii) the economic terms of the issuance. Market Implications This issuance by the Republic is the frst ever to raise funds by way of Islamic compliant structures and of Sukuk in particular. This transaction should help to open up the Turkish and, by extension, both the Eastern European and other regional markets to the potential ofered by Sukuk and increase momentum resulting in the announcement of further issuances. The decision of the Republic to execute its inaugural Islamic bond issuance is generally seen as a positive step in encouraging wider use of Islamic fnance alternatives and, in particular, Sukuk as methods of fnancing by Turkish corporate and fnancial institutions. Recent developments in Turkey have included a number of other Participation Banks indicating their intention to issue leasing certifcates in the next 12 months. Any future issuances originating in Turkey will now have the beneft of the pricing and structural bench mark set by this transaction. Recent legislative changes intended to counter-act low issuance volumes in Turkey, such as an exemption from withholding tax on issuances of fve years or more have been partially successful in encouraging investment, but further reforms are needed to remove lasting obstacles, such as the adverse tax implications for structures based on assets other than real estate assets. The market is still in its infancy and further development will take some time, there having been only two other Sukuk transactions originating in Turkey to date; the 3-year U.S.$100 mil- lion Sukuk Al Ijara in 2010 and a 5-year U.S.$350 million Sukuk Al-Ijara ofering in November 2011 by Kuveyt Turk. Given the increasing familiarity of Islamic investors with Turkish Islamic debt and capital markets, and also Turkey’s strong economic growth rates being amongst the highest globally in 2011, the prognosis for coming years is posi- tive. Following the examples set by the Republic and Kuveyt Turk, analysts expect further US-dollar denominated and Turkish Lira-denominated issuances to come from utilities, state-owned enterprises and corporates in Turkey. 58 4.3 Abu Dhabi Islamic Bank PJSC Mudaraba-Based Tier 1 Capital Sukuk 2012 This case study has been prepared by Mohammed Dawood and Ali Taufeeq at HSBC, structuring adviser and joint bookrunner on the Sukuk transaction, and Richard O’Callaghan and Jack Nichols at Linklaters LLP, who acted as UAE and international legal counsel to the Managers. Abstract This case study intends to highlight the successful issuance of the Mudaraba-based Sukuk worth US $ 1 billion is- sued in November 2012 by Abu Dhabi Islamic Bank PJSC (“ADIB”), one of the leading Islamic banks in the Middle East in terms of assets and revenues, and the fourth largest Islamic bank globally by assets. The issuance of this Sukuk has been a successful step towards diversifying funding sources for Islamic fnancial institutions. Parties to the Sukuk transaction Background ADIB is one of the leading Islamic banks in the Middle East in terms of assets and revenues, which operates through a network of 73 retail branches in the United Arab Emirates as at 14 March 2013. ADIB has won a number of pres- tigious awards including Sheikh Khalifa Excellence Award - Gold category in 2012 and the Best Islamic Bank in the UAE by Global Finance in 2012 for three consecutive years. ADIB elected to issue a tier 1 Sukuk as it wanted to strengthen its tier 1 capital ratio relative to its regional peers. It intends to maintain above average capitalisation levels in the context of regulatory changes (the future imple- mentation of Basel III in the UAE), fnancial markets’ expectations of stronger balance sheets and ADIB’s own asset growth. The Sukuk transaction represents the frst ever Shariah compliant Tier 1 issue executed in the international capital markets and the frst ever Tier 1 instrument issued by a Middle East bank in the international capital markets. The Sukuk transaction was awarded Best Islamic Bond by International Financing Review for 2012 and UAE Deal of the Year by Islamic Finance News for 2012. Mudaraba Mudaraba is a joint venture between two or more parties where one party (the Mudareb) contributes its efort and management skills and the other party (the Rab-al-Maal) contributes capital. The parties may share profts but losses can only be borne by the capital provider. A mudaraba contract can be for any period of time, at the end of which the mudaraba is liquidated. The investor is not entitled to claim a fxed amount as proft, however, the per- centage of the actual proft payable to the investor (as Rab-al-Maal) may be stipulated in the fnancing agreement. Mudareb Abu Dhabi Islamic Bank PJSC Issuer ADIB Capital Invest 1 Ltd. Joint Lead Managers ADIB, HSBC, Morgan Stanley, National Bank of Abu Dhabi and Standard Chartered Bank Co-Lead Managers Barwa Bank and Sharjah Islamic Bank Delegate HSBC Corporate Trustee Company (UK) Limited Counsel to the Managers Linklaters LLP Counsel to the Mudareb Latham and Watkins LLP Counsel to the Issuer Maples and Calder 59 Accordingly there should be no guaranteed return for the investors with this type of fnancing. Sukuk Al Mudaraba Mudaraba Sukuk are certifcates issued with the aim of using the proceeds of issuance for investment in a business activity on the basis of a joint venture contract so that the certifcateholders obtain the right to receive certain pay- ments arising from an undivided ownership interest in the assets of a trust declared by the issuer of the certifcates (typically a special purpose vehicle) over the capital of the mudaraba and the issuer’s contractual rights against the Mudareb under the relevant documentation entered into in connection therewith. The issuer therefore acts as Rab-al-Maal and provides the capital, being the proceeds of the issue of the certifcates, and the relevant counter- party seeking to raise fnancing acts as Mudareb and provides its efort and management skills. ADIB Mudaraba-based Sukuk The ADIB Sukuk certifcates had a key anchor in private banks, which took 60 per cent. of the fnal allocation, fol- lowed by fund managers with 26 per cent. of the allocation and banks with 11 per cent. of the allocation. In terms of geography, Asian accounts were the largest recipient of the ADIB Sukuk certifcates, with 38 per cent. of the allocation. Middle East investors received 32 per cent. of the allocation, followed by Europe with 26 per cent. and US ofshore investors with 4 per cent. The proft rate payable on the certifcates was 6.375 per cent. per annum, representing one of the lowest rates payable for US dollar denominated tier 1 issues in the international capital markets. Final pricing was signifcantly lower than initial price thoughts and ofcial price guidance, as a result of overwhelming demand by investors – the fnal order book was 15 times oversubscribed and was the largest oversubscription seen in any Sukuk ofering globally. Furthermore, the Sukuk has traded up signifcantly in the secondary market in the period since its initial issue date. Structure Diagram Set out below is the structure diagram and brief explanation of the structure and principal cash fows to assist in understanding the transaction documents relating to such a structure. Proceeds of Certficates Mudaraba Capital Mudareb (ADIB) Issuer (special purpose vehicle) as Rab-al-Maal Certi�icate holders Declaraton of Mudaraba Agreement Dissoluton Mudaraba Capital and Mudaraba Profit Periodic Distributon Amounts, Dissoluton Distributon Amount and Mudaraba Premium (if applicable) Trust 60 Analysis of Structure and Cashfows (i) On the Issue Date, ADIB Capital Invest 1 Ltd. (a special purpose vehicle) will issue the Certifcates, and the Certifcate holders will pay the issue price in respect of the Certifcates to it (as Issuer/Trustee). (ii) ADIB Capital Invest 1 Ltd. will apply the proceeds of the issuance of the Certifcates to wards the capital of the Mudaraba pursuant to the Mudaraba Agreement (the “Mudaraba Capital”). (iii) ADIB (as Mudareb) will invest the Mudaraba Capital in the business activities of ADIB in accordance with an agreed Investment Plan prepared by the Mudareb. (iv) Unless a Non-Payment Event 17 or a Non-Payment Election 18 has occurred, prior to each Priodic Distri bution Date, the Mudareb shall distribute the proft generated by the Mudaraba to both the Issuer and the Mudareb in accordance with an agreed percentage split (90 per cent. to the Issuer (as Rab-al-Maal) and 10 per cent. to the Mudareb). Payments of Mudaraba Proft by ADIB (as Mudareb) are at the sole discretion of ADIB (as Mudareb) and may only be made in circumstances where ADIB will not be in breach of certain conditions as a result of making such payment. The Mudareb shall not have any obli gation to make any subsequent payment in respect of such unpaid proft (whether from its own cash resources, from the Mudaraba Reserve or otherwise). (v) The Issuer shall apply its share of the proft (if any) generated by the Mudaraba on each Periodic Distribu tion Date to pay the Periodic Distribution Amounts due to the Certifcate holders on such date. (vi) The Certifcates are perpetual securities in respect of which there is no fxed redemtion date. Accoringly the Mudaraba is a perpetual arrangement with no fxed end date. (vii) Subject to certain conditions, ADIB (as Mudareb) may at its option liquidate the Mudaraba in whole, but not in part, on the basis of an actual liquidation of the Mudaraba in the following circustances: (a) at its option on the First Call Date (being 16 October 2018) or any Periodic Distribution Date after the First Call Date; or (b) on any date on or after the Issue Date (whether or not a Periodic Distribution Date): A. upon the occurrence of a Tax Event (being circumstances where the Mudareb or the Issuer would be re quired to pay tax on amounts due under the Mudaraba Agreement or the Certifcates, as applicable, due to a change in law); or B. upon the occurrence of a Capital Event (being circumstances where ADIB is notifed in writing by the UAE Central Bank to the efect that the notional amount of the Certifcates which qualifes as regulatory capital would cease to qualify for inclusion in full in the consolidated Tier 1 capital of ADIB). (viii) Upon the occurrence of the circumstances set out in paragraph (vii) above, the Trustee shall (only upon the instructions of ADIB) redeem the Certifcates. Alternatively, upon the occurrence of a Tax Event or a Capital Event, ADIB (as Mudareb) may require the Trustee to make such variations to the terms of the Certifcates and the Mudraba Agreement as may be required to ensure that the Certifcates be come or, as appro priate, remain qualifying Tier 1 capital instruments. ADIB (as Mudareb) agrees in the transaction documents that such variation will not be materially prejudicial to the interests of Certif cateholders. Interesting features The mudaraba structure was chosen as a result of its inherent simplicity and it being structurally appropriate for a loss-absorbing tier 1 capital instrument to be issued by an Islamic Bank – the absence of a guaranteed return of 17 Non-Payment Event means the occurrence of certain specifed events (such as ADIB’s insolvency or the absence of sufcient distributable profts). 18 Non-Payment Election means that ADIB has elected in its absolute discretion not to make the relevant payment (this provision is required to be included in the documentation to ensure regulatory capital compliance). 61 proft satisfes both the principles of Shari‘ah and the Basel regime applicable to such instruments. Similarly, the absence of a purchase undertaking in the documentation did not cause any legal or credit concerns given the fact that the certifcates were perpetual instruments with no fxed maturity date. The position of holders of the certifcates on any such redemption was, however, protected by including certain conditions to liquidation of the mudaraba, including the relevant liquidation proceeds being sufcient to make payment in full of amounts oth- erwise due to certifcateholders on any such redemption of the certifcates (including, in the case of redemption following a Capital Event described above, a premium of 1 per cent. of the face amount of the certifcates). The frst call date was set at approximately six years after the issue date, to allow fexibility for a fungible issue of further Sukuk certifcates to be issued within a year after the issue date. Any additional certifcates issued during that period would thereby also be eligible for inclusion in ADIB’s tier 1 capital base (as a result of the Basel regime which requires the frst call date to be no more than fve years after the issue date). The inclusion of a “tap” feature is unusual in the context of typical Sukuk documentation and required detailed consideration of legal, commercial and Shari‘ah aspects for it to be viable. Conclusion This transaction represented the frst ever international Shari‘ah-compliant Tier 1 perpetual transaction. A key challenge faced on the transaction was to ensure that the Sukuk structure complied with the requirements of the Shari‘ah committees of ADIB and each of the joint lead managers, was in line with international market practice, and allowed for fexibility in anticipation of the implementation of Basel III rules in the United Arab Emirates in due course. This transaction was a very signifcant transaction for the capital markets in the United Arab Emirates and the wider region and marked an important step forward in the evolution of the regulatory capital markets and, more generally, the diversity of potential funding sources available to Islamic fnancial institutions. The success of this transaction has been refected in the interest of other fnancial institutions to consider the options available to raise regulatory capital in the Middle East. For example, Dubai Islamic Bank PJSC priced a US $1 billion Tier 1 capital Sukuk certifcate issuance on 13 March 2013, with the Sukuk structure following the ADIB Sukuk in many respects. 62 4.4 Article on Sukuk Heading Forward By – Al Hilal Bank, UAE With global issuance of Sukuk expanding for the fourth year in a row in 2012 by 64 per cent to about $138 bil- lion, the Sukuk market can expect another few strong years, said a recent report released by Standard & Poor’s (S&P). The Sukuk market can expect another few strong years after global issuance of Sukuk expanded for the fourth year in a row in 2012. The report “Investors Are Snapping Up Sukuk, Despite Questions About Creditworthi- ness” points out that there is little to hinder another strong performance by the Sukuk market in the next few years. The Sukuk market is believed to have the potential to grow and join the mainstream. New Sukuk issuance worldwide is expected to exceed $100 billion again this year. However, yields in the region have been declin- ing, and even fell under those on conventional debt. Sukuk comply with Sharia law, they do not technically pay interest; rather, they are structured to provide Sukuk holders a proft margin. Confdence and investor sentiment toward Islamic bonds have contributed to growth. Large infrastructure projects, particularly in Malaysia and the GCC, are likely to stoke issuance. S&P analysts expect the new issuance of Sukuk worldwide could top above $100 billion again this year. Sustained invest- ment spending and ample domestic liquidity are likely to support Sukuk issuance, especially in Malaysia, Saudi Arabia, Qatar, and the UAE. Investment spending could see high single-digit growth for 2013. The Sukuk market is believed to have the potential to grow and join the mainstream. Despite increased growth, the market for Sukuk, the Islamic equivalent of bonds, is still a small segment of the global fxed-income world. Sales of bonds that comply with Muslim tenets jumped 25 percent in 2012 as companies sold debt as part of government programs in Asia and the Middle East to build railways, ports and roads. Thailand and South Africa have also announced plans to issue Sukuk once legislation has been passed that will open up new markets for investors. 63 GCC Sukuk Index has given a 32% return over the past 3 years as can be seen from the chart below: whereas the conventional GCC Bond Index (below) has yielded exactly half that return only (16%) Global issuance expanded for the fourth year in a row in 2012, growing 64% to about $138bn, and we expect another strong few years. Overall sovereign issuers are expected to dominate the Sukuk market. “We believe that sovereign and sovereign-related issuance will continue to dominate, shape, and underpin the Sukuk market, as it has in the past several years. Sovereign Sukuk are generally the frst inroad into Sharia-compliant funding in any given country, enabling the gradual creation of reference prices over time, to which private-sector entities can benchmark themselves,” said Pruvost. Borrowing costs on Shariah-compliant debt have fallen 11.4 percentage points to 2.82 percent since the end of 2008 as central banks in Europe, the US and Japan pumped funds into their economies to spur growth. Demand will be driven by the rise in Islamic banking assets, which may reach $1.8 trillion in 2013, compared with $1.3 tril- lion in 2011, led by Saudi Arabia and Malaysia, Ernst & Young said in a recent report. 64 “Sukuk is an attractive channel to explore for those countries looking to expand funding sources,” Kuala Lumpur- based Alhami Mohd Abdan, Head of international fnance and capital markets at OCBC Al-Amin, a unit of Sin- gapore’s Oversea- Chinese Banking Corp., said in an interview. “Liquidity in the Islamic space is growing quite signifcantly,” he added. The biggest sales came out of Saudi Arabia and Qatar amid development programs of $373 billion and $130 bil- lion, respectively. Malaysia has embarked on a $444 billion spending spree over 10 years that helped spur Islamic bond oferings to an all-time high of 95 billion ringgit ($31 billion) in 2012. Saudi Electricity Co. sold $1.75 billion of notes due in 2017 and 2022 in March. The yield on the fve-year 2.665 percent securities has since dropped 55 basis points, or 0.55 percentage point, to 1.95 percent, according to the compiled data. Borrowing costs on global Shariah-compliant bonds fell 117 basis points in 2012 and the credit default swaps for regional countries are close to all time highs in March 2013, giving a huge impetus to Sukuk investments. Accord- ing to the E&Y World Islamic Banking Competitiveness Report for 2013, there will be a need for about US $ 220bn of Islamic assets (Sukuks or other solutions) in 2015 to fulfll the liquidity surpluses of this growing market assum- ing that all investors hold all existing Sukuks till maturity. The chart below highlights this huge opportunity: However, with the US $ yield curve beginning to steepen, and 10 year US $ Treasury yields already up 65bp from June 2012 to March 2013, there will be pressure on Sukuk performance going forward – especially if regional credit spreads start to widen. This is a big challenge for Islamic investors for whom a wide range of alternative solutions which are shariah compliant is not really available. Needless to add, this is also a big opportunity for solution providers to showcase investments across diferent asset classes which shall show long term growth in an interest rate rising environment. About Al Hilal Bank Al Hilal Bank was established in June 2008 with an authorized capital of AED 4 billion and is fully owned by the Abu Dhabi Investment Council, the investment arm of the Government of Abu Dhabi. The bank is Shariah compliant and operates through a network of 23 branches strategically located across the United Arab Emirates as well as 3 other branches in major cities of Kazakhstan. Al Hilal Bank aims to become the leading fnancial institution in the region and is committed to increase the growth of Islamic banking by providing new direction, new technologies and special services. Al Hilal Bank currently ofers 2 open ended mutual funds inclusive of the Global Sukuk Fund. The AHB GCC Equity Fund was the frst to be launched in 2011, and has delivered strong performance since inception despite highly volatile market conditions. The fund delivered a healthy double digit return of 13.23% in 2012 while return since inception is up 8.53% The Bank’s Flagship Global Sukuk Fund was launched in March 2012 with the 4.36% dividend. The positive performance of the fund amidst a low interest rate environment and global uncertainty refects the fund management expertise of Al Hilal Bank’s Investment Banking Group, the Fund Manager, and its Investment Advisor, CIMB-Principal Islamic Asset Management of Malaysia. 65 4.5 Article on Sukuk Secondary market overview (Q4 2012 – Q1 2013) By Mr. Ibrahim Bitar, Head of Sukuk Trading – Noor Islamic Bank In Q4 2012, High Beta Sukuk tightened as money went into the asset class driven by low rates, global quantitative easing, and on improving economic fundamentals. The European Central Bank’s actions in July removed tail risks of a renewed recession. The 5 year swap rate rose by 13 bps from exceedingly low levels while the JPM EMBI index tightened 40 bps. Low beta Qatar and Abu Dhabi Sukuk widened by about 20 bps while Dubai Inc tightened by about 65 bps. High Yield Sukuk tightened by 100 bps. Malaysia Dollar Sukuk tightened 25 bps in that period. GCC hard currency issuance was a low $2.5B. Strong economic rebound in Dubai led by the Trade and Tourism sectors, made Dubai Inc’s credit the star performer. As investors’ confdence in Dubai came back, many areas in Dubai’s residential real estate exceeded their 2008 peak prices. In Q1 2013, GCC Sukuk tightening decelerated as markets priced stronger economic growth especially follow- ing the Fed’s historical targeting of the unemployment rate combined with $85B of fxed income purchases per month. Equities rallied way outperforming other asset classes as money went into equity funds away from money markets and fxed income funds. US $ swap rates witnessed a steepening sellof while credit indices widened: Swap yields weakened by 20 bps, JPM’s EMBI widened 42 bps and CEEMEA SOVX widened 56 bps. Low beta Qatar and Abu Dhabi Sukuk widened about 2 bps while Dubai Inc tightened by about 25 bps. Malaysia Dollar Sukuk were about 5 bps wider in that period on concerns going into the elections in April. GCC Sukuk overall outper- formed other EM markets driven by strong local demand in spite of strong $5.75B GCC Sukuk issuance. Looking ahead to the rest of 2013, we are in the last innings of the easing cycle as stronger than expected growth is sparking talks to curtail QE. We expect overnight rates to rise in late 2015 but markets will anticipate that and take the 10 year yield to 2.40% by the end of 2013. As a result we continue to position in 2015 and shorter maturity Sukuk and in higher beta names. 4.6 FWU Group SUKUK The Islamic capital market continues to witness a signifcant development in terms of diversifcation of asset class- es and geographies, but to date, Sukuk remains the leading structure and has seen unprecedented growth within the last few years. Across Western Europe, Shariah compliant fnance has seen welcoming initiatives, and Sukuk instruments are in- creasingly attracting attention as a source of funding and diversifcation. It was in Germany that the frst Sukuk issuance took place in Europe. In 2004, a €100 million quasi government Sukuk, structured as Sukuk Ijarah, was issued in the federal state of Saxony-Anhalt in Germany. FUW GROUP’S SUKUK ISSUANCE: In November 2012 it was in Germany again that a pioneering initiative took place in the emerging Euro Sukuk market. FWU a Munich based fnancial group announced what is considered to be the frst issuance by a German corporate and the largest of its kind in Europe. The Euro55Million is based on the Islamic principle of Ijara or sale and lease-back. The underlying assets are a proprietary computer software system and associated Intellectual Property rights developed in-house by the FWU Group and used by its bank distribution partners in connection with their combined takaful operations. The FWU group has the full proprietary rights to this system. The Sukuk were issued through a Luxembourg SPV incorporated using a Dutch Stichting (foundation) structure - frst used in connection with the quasi-sovereign Sukuk issuance by Saxony-Anhalt. Other details of the structure include: FWU has been looking for a Sharia-compliant means by which it can refnance its Sharia-compliant factoring busi- ness globally. The company, however, is cautious to stress that it is hard to predict the wider impact of the FWU Sukuk, but it is noteworthy that it is the largest Sukuk issuance by a European corporate to date and, the FWU Sukuk is the frst of any signifcant size. 66 The issuance in dollar was intended to appeal to a broad range of investors. In the case of this Sukuk, investors were identifed in jurisdictions in the Middle East which use currencies that are pegged to the US $ which made a US $ issuance more practical. In addition, as FWU expands its operations into new geographical areas (often ones with US $ pegged currencies), the US dol- lar is an ever-more useful currency of fnance. This was a private placement to a group of institution- al investors in the Middle East FWU group Sukuk added a new innovation mark with the frst Sukuk ever to have intellectual prop- erty as underlying assets Date of Launch November 2012 Issue Size US$55Million Issue Type Sukuk Al Ijara Tenor 7 Years Matures in 2019 Currency US Dollar Governing Law English Law, Luxembourg Law Using a Dutch Sttching Structure Sharia Advisor Amanie Advisors LLC Pricing 7 Per Cent Per Annum Periodic Distributon Semi Annual Underlying Assets The Underlying assets are a proprietary computer sofware system and associated intellectual property rights developed n-house by the FWU Group and used by it and its bank distributon partners in connecton with their combined takaful operatons in the various geographies in which they operate 67 As indicated in the second edition of the IIFM’s Sukuk Report, the Sukuk market will continue its growing trend and Islamic jurisdictions will be leading that growth after a relatively large dip in the Sukuk issuances in mid 2008 to 2009. Once investor’s confdence is restored on Sukuk legal & restructuring issues coupled with direct support by a number of Islamic jurisdictions the Sukuk market regained confdence and the market took of again since 2011. As foreseen in the mentioned IIFM Report, the 2011 & 2012 were a record years of Sukuk issuances, which reached in 2011 US $ 92.4 billion and US $ 137.4 billion in 2012 respectively. These issuances include Sovereigns, Quasi Sovereigns & Corporates. Strong demand of Sukuk from the Islamic jurisdictions in the GCC countries including Bahrain as well as Malay- sia, Indonesia, Turkey, Pakistan, Sudan, Brunie, Islamic Development Bank etc. was the main force in driving the Sukuk market towards the rapid growth mentioned. These countries in particular including GCC have immensely engaged in the Sukuk issuances for both domestic and international markets. Moreover, several jurisdictions fol- lowed the strategy adopted by Bahrain (year 2001) and started regular issuances of Short Term as well as medium Skukuk to support the liquidity and investment requirements of Islamic Institutions based in its jurisdiction. The Financial crisis of 2008, which pressured developed market fnancial institutions into contraction and dele- veraging, also impacted momentarily impacted Sukuk issuances but in the last two years Sukuk issuances have attained new heights. Sukuk is now establishing a frm base as an alternative source of funding, not just for the Islamic jurisdictions market but with interest gathering from Europe, African continent and the CIS countries. We have witnessed many milestones biggest Sukuk issuances in such as Sukuk issued by PLUS - Malaysia, Government of Qatar, Sukuk issuances from Saudi Arabia, frst Intl Sukuk issuance with a Saudi Sovereign Guarantee, Debut International Sukuk by The Republic of Turkey, Debut Domestic Lira issuance by Republic of Turkey, frst Sukuk issuance from a fnancial institution in Kazakhstan , frst Tier 1 Perpetual Sukuk by Abu Dhabi Islamic Bank and several others. Continuous innovation together with more debut Sukuk issuances and refnancing of maturing Sukuk is likely to maintain the Sukuk volume trajectory upwards in 2013 and beyond, as countries and corporate look to take ad- vantage of extremely attractive low yields being priced by the market. Moreover, the trend of Sukuk issuances on fxed proft rate is continuing which is also helping the development of Sukuk secondary market. Another interesting trend or innovation is Sukuk issuances in non-local currency i.e. issuer based in UAE foating a Malaysian Ringgit Sukuk or Malaysian issuer Sukuk issuance in Chinese Yaun etc., This is also a positive develop- ment and will further contribute in the development of Sukuk market. The risk mitigation or hedging documen- tation and product standards are being published by IIFM and provide further confdence to investors in Sukuk. When putting the Global issues together from 2001 to Jan 2013, then the Sovereign and Quasi Sovereign takes almost 62% of all issuance to date. Between 2011 and Jan 2013, Qatar Sovereign came in as the top issuer of combined Domestic and International with US $ 13 Billion, Indonesia with US $7.7 Billion and Malaysia with US $ 5.5 Billions. The standing changes con- siderably with Malaysia taking a handsome lead with US $ 36 Billions, followed by Qatar US $ 15 Billion, Saudi US $ 13 Billions and UAE with US $ 11 Billions when including Quasi Sovereign and Corporate. The year 2012 was record year in terms of International Sukuk issuances and the year closed at US$ 20 billion Sukuk issuances as compare to previous 2007 pre-crisis record of US$13.80 billion. Currently outstanding International Sukuk fgure is approximately US$45 bio and it is expected that Q1 of 2013 will close with US$ 50 billion outstand- ing Sukuk market. There were several landmark Sukuk issuances from Malaysia, Qatar, Turkey, UAE, Saudi Arabia, Indonesia, Bahrain etc., this indicates that Sukuk market has fully emerged from the declining trend witnessed in 2008 & 2009 and further double digit growth prospects are intact for next coming years and existing Sukuk issuance pipeline is the confrmation of this prediction. 68 Conclusion As far as the domestic Sukuk market is concern, Malaysia has the lion’s share in terms of both volume and value. Malaysia remains as the largest domestic Sukuk issuer with 79.8% though the countries like Indonesia, Pakistan, Qatar and Saudi Arabia while Turkey has entered the market as new potential leader plus Yemen, Gambia etc., have also entered the Sukuk market at domestic level. Bahrain has also kept its presence felt in Sukuk issuances and has seen several landmark issuances and issuance volume has increased by almost 50%. Qatar has also issued landmark Sukuk issuances and it domestic Sukuk market is growing quite rapidly. The domestic Sukuk market in a number of jurisdictions is becoming active particularly Indonesia & Pakistan and central banks are providing avenues to Islamic banks and other investors to invest their surplus liquidity in govern- ment Sukuk programs designed to provide level playing feld to the Islamic institutions. The total outstanding Domestic Sukuk at Dec 2012 stood at US$ 191 billion and it is expected that 2013 will close with even higher fgure as sovereigns, quasi sovereign & corporates in jurisdictions like Malaysia, Indonesia, Turkey and several other countries including GCC are getting more active in Sukuk issuances. Malaysian Ringgit takes the frst spot mainly due to its strong and deep local fxed income market. Malaysian mar- ket attracted some GCC institutions, Supra national Agencies and Japanese institution to raise their funding needs in Malaysian Ringgit. These institutions took advantage of the fne pricing due to local demands and the attractive currency swap rates that achieved lower yield as well as to diversify its investors. However, US Dollars continue to be the favored currency for attracting international investors around the globe. We most likely to see developments of local currency Sukuk in the comings year as more OIC countries develop their domestic Sukuk market. This trend is taking shape with Indonesia, Turkey, Pakistan and the GCC countries is- suing local currency Sukuk. Sovereign or sovereign linked entities currently dominate issuance in these countries and this fow will continue, since the sovereign needs to fund its budget while also sets up the local benchmark curves as well as to fund huge infrastructure projects. Cross border Global Sukuk Maturities in 2013 is extremely light as the new issuance in 2008 was pretty much sub- dued following the onslaught of the fnancial crisis. Starting from 30th June to 31st Dec 2014 we will have 12 Sukuk maturing which could well provide some refnanc- ing opportunities. UAE ‘s three emirates tops the maturity with US $ 2.65 billion , followed by Malaysian Issuers with US $ 1.66 Billion and the other Billion + maturity coming out of Bahraini issuers. Almost 50% of the Domestic market is denominated in Malaysian Ringgits (US$ 6.6 Billion) the next to maturities are: UAE (US$ 2.6 Billion) and Indonesia (US $ 1.5Billion) of the US $ 22.32 Billion total domestic market maturities, Qatar Government heads the list with a US $ 9.1 billion followed by Malaysia’s government and other corporate totaling US $ 9 Billion equivalent. Two other big maturities are from relatively new Domestic issuers, Turkey US $ 900 myn and Indonesia US $ 800 myn. Short term Sukuk with maturity of 1 year or less are essential in the development of Islamic Inter-bank market and they play a key role in the liquidity management of the fnancial institutions. Malaysia remains the leader in domestic short term Sukuk issuances followed by Sudan, Bahrain, and Brunei. Indonesia is showing sign of playing a leading issuance role in this type of Sukuk and is a country to watch in coming years. The appetite for short term Sukuk is far greater than longer tenor Sukuk as evident by these issuers. The trend to- wards issuing shorter tenor Sukuk is increasing and is driven by sovereign issuers through central banks. Malaysian and some GCC corporate issuers are getting in this segment of the Sukuk market and are providing diversity and depth to the local markets which is essential in the development of money market. Bahrain has kept its leading role in Short Term Sukuk issuances and it regular issuances are always oversubscribed. The outlook for Short Term Sukuk is encouraging and it is expected this segment will continue its growth trend. Though Malaysia, Sudan & Bahrain leads the table of short term issuers, however; several countries such as Indo- nesia has also started regular issuance of short term Sukuk program which will greatly help the liquidity manage- ment requirement of Islamic institutions. Bahrain is the frst jurisdiction which started the regular issuance of Short Term Sukuk mostly in Bahraini Dinar and it continues to improve on its Sukuk issuance plan while Indonesia and Pakistan are the recent entrant in this Sukuk market segment. Asia will continue to dominate the Sukuk issuance in the short term due to its deep local currency fxed income 69 market with Malaysia and Indonesia being the driving force in that region. However, we are likely to see the GCC & Middle East pie get larger with a heavy future funding needs due to healthy pipeline of infrastructure projects coupled with greater participation from Corporates in issuing Sukuk. With the game plan in Europe changing due to the fnancial crisis & Basel III, and coupled with abundant liquidity in the Sukuk market, we may well witness European Corporates line up to take advantage of current favourable pricing. Finally, while more depth is created in the Sukuk market, the issuance of Non-Local Currency Sukuk by foreign issuers is a positive development and will contribute in the growth of the Sukuk market. We believe that these issuances have also highlighted the need of currency hedging which is one of the key contributions of IIFM to the Islamic Financial Services Industry. Hence, standards developed by IIFM will be extremely benefcial in the risk mitigation arising from such Sukuk issuances. Also in spite of all the signifcant progress in the Sukuk issuances we still believe that the Sukuk market is in need of more action and long term plan for a sustainable growth and progress which will satisfy the investor demand, because it will be difcult for the limited amount of Sukuk issuers based in Islamic countries to achieve that satis- faction. 70 71 Glossary Term Meaning Shari’ah Islamic Law A Shari’ah compliant product Product meets the requirements of Islamic law A Shari’ah board Is the commitee of Islamic scholars available to an Islamic financial insttuton for guidance and supervision in the development of Shari’ah compliant products A Shari’ah advisor Is an independent Islamic trained scholar that advises Islamic insttutons on the compliance of the products and services with the Islamic law Sukuk An ‘Arabic term for financial certficate, it can be seen as an Islamic equivalent of the conventonal bonds. It is defined as “Certficates of equal value representng undivided shares in ownership of tangible assets, usufructs and services or (in the ownership of) the assets of partcular projects or special investment actvity”. Bai al Salam Advance purchase.Advance payment for goods which are to be delivered at a specified future date. Under normal circumstances, a sale cannot be effected unless the goods are in existence at the tme of the bargain. However, this type of sale is an excepton, provided the goods are defined and the date of delivery is fixed. The objects of sale must be tangible goods that can be defined as to quantty, quality and workmanship. Istsna’a Advance purchase of goods or buildings.A contract of acquisiton of goods by specificaton or order, where the price is paid in advance, or progressively in accordance with the progress of a job. For instance, to purchase a yet to be constructed house, payments would be made to the builder according to the stage of work completed. Murabahah Cost-plus financing.A form of credit that enables customers to make a purchase without having to take out an interest-bearing loan. The bank buys an item and sells it to the customer on a deferred basis. The price includes a profit margin agreed by both partes. Repayment, usually in installments, is specified in the contract. Musharakah Joint venture, profit and loss sharing.An investment partnership in which all partners are enttled to a share in the profits of a project in a mutually agreed rato. Losses are shared in proporton to the amount invested. All partners to a Musharakah contribute funds and have the right to exercise executve powers in that project, similar to a conventonal partnership structure and the holding of votng stock in a limited company. Mudarabah Trust financing, profit sharing.An investment partnership, whereby the investor (the rab al maal) provides capital to the entrepreneur (the mudarib) in order to undertake a business or investment actvity. While profits are shared on a pre- agreed rato, losses are born by the investor alone. The mudarib loses only his share of the expected income. 72 Ijarah Leasing. A lease agreement whereby a bank or financier buys an item for a customer and then leases it to him over a specific period, thus earning profits for the bank by charging rental. The duraton of the lease and the fee are set in advance. During the period of the lease, the asset remains in the ownership of the lessor (the bank), but the lessee has the right to use it. Afer the expiry of the lease agreement, this right reverts back to the lessor. Salam Sukuk Are certficates of equal value issued with the aim of mobilizing salam capital (mobilizing funds) so that the goods to be delivered on the basis of salam come to be owned by the certficates holders. (Salamis a sale, whereby the seller undertakes to supply a specific commodity to the buyer at a future date in return for an advanced price paid in full on the spot. The price is in cash but the supply of the purchased good is deferred) Istsna’a Sukuk Are certficates of equal value issued with the aim of mobilizing funds to be employed for the producton of goods so that the goods produced come to be owned by the certficates holders. (This type of Sukuk has been used for the advance funding of real estate development, major industrial projects or large items of equipment such as: turbines, power plants, ships or aircraf (constructon/manufacturing financing) Murabahah Sukuk Are certficates of equal value issued for the purpose of financing the purchase of goods through murabaha so that the certficate holders become the owners of the murabaha commodity. (This is a pure sale contract based Sukuk which based on the cost plus profit mechanism) Musharakah Sukuk Are certficates of equal value issued with the aim of using the mobilized funds for establishing a new project, financing a business actvity etc on the basis of any of partnership contract so that the certficate holders become the owners of the project. (MusharakahSukuk is an investment partnership between two or more enttes which together provide the capital of the Musharakah and share in its profits and losses in pre-agreed ratos) Mudarabah Sukuk Are certficates that represent project or actvites managed on the basis of Mudarabah by appointng one of the partners or another person as the mudarib for the management of the operaton. (It is an investment partnership between two enttes whereby one entty is mainly a provider of capital and the other is mainly the manager) Al-Ijarah Sukuk An Islamic certificate for the buying and leasing of assets by the investors to the issuer and such Sukuk shall represent the undivided beneficial rights/ownership/interest in the asset held by the trustee on behalf of the investors References Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Shari‘ah Standards ADIB Website: http://www.adib.ae IIFM Sukuk Issuance Database (2001 – January 2013) Khazanah Nasional Berhad Website: http://www.khazanah.com.my Majid Al Futtaim Website: http://www.majidalfuttaim.com Ministry of Finance, Republic of Indonesia Plus Berhad Sukuk Information Memorandum Saudi Electricity Company Sukuk Base Prospectus ***** Internatonal Sukuk (for the purpose of this report) A Sukuk issued in hard currency such as USD Domestc Sukuk (for the purpose of this report) A Sukuk issued in local currency Global Sukuk (for the purpose of this report) Both internatonal and domestc Sukuk Convertble or exchangeable Sukuk Convertble or exchangeable Sukuk certficates are convertble into the issuer’s shares or exchangeable into a third party’s shares at an exchange rato which is determinable at the tme of exercise with respect to the going market price and a pre-specified formula. Hybrid Sukuk Hybrid Sukuk combine two or more forms of Islamic financing in their structure such as Istsna’a and Ijarah, Murabahah and Ijarah etc. Sovereign Sukuk Are Sukuk issued by a natonal government. The term usually refers to Sukuk issued in foreign currencies, while Sukuk issued by natonal governments in the country’s own currency are referred to as government Sukuk. Quasi-sovereign Sukuk Are Sukuk issued by a public sector entty that is like sovereign Sukuk. It may carry explicit or implicit government guarantee. Corporate Sukuk Is a Sukuk issued by a corporaton as opposed to those issued by the government. It is a major way for companies to raise funds in order to expand its business or for a specific project. 73