From PLI s Course Handbook Islamic Financing: A Comparative Analysis of Sukuk and Conventional Bonds and Securitizations #15105

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1 From PLI s Course Handbook Islamic Financing: A Comparative Analysis of Sukuk and Conventional Bonds and Securitizations # SECURITIZATION GLOSSARY Submitted by: Mark Adelson Nomura Securities International, Inc. Copyright 2002 Nomura Fixed Income Research

2 Islamic and Conventional Bonds Andrew Metcalf Partner King & Spalding LLP 1185 Avenue of the Americas New York, New York Telephone: PLI Hot Topic Briefing July 9, 2007

3 Comparison of Islamic and Conventional Bonds Similarities Periodic income stream payments Periodic payments can be based on fixed or floating rate Tradeable instruments (subject to certain restrictions for sukuk) Effectively based on the credit of an entity, despite asset-backed structure of sukuk Subject to rating and credit enhancement 2 Confidential

4 Comparison of Islamic and Conventional Bonds Differences (Distinct Attributes of Islamic Bonds) Sukuk must be based on underlying assets (cannot, strictly speaking, be a general obligation of issuer); payments must be derived from these assets Business of issuer must be Shari ah-compliant Sukuk represents an undivided beneficial ownership interest in underlying assets; conventional bond is a debt obligation for future payment Payment elements cannot be based on interest 3 Confidential

5 Comparison of Islamic Bonds and Asset Securitization Both Islamic bonds and asset securitizations based on cash generated by underlying assets Both represent an undivided beneficial ownership interest in underlying assets Issuer of both Islamic bonds and asset securitization sukuk must be Shari ah-compliant Both use special purpose vehicles as part of their structures, though not required for Islamic bonds Asset securitizations subject to more rigid requirements, making them more difficult to structure; guarantees of Islamic bonds remove much structuring uncertainty 4 Confidential

6 Two Illustrative Sukuk Structures Ijara Structure: Sukuk based upon ijara (lease) rentals Murabaha Structure: Sukuk based upon murabaha payments 5 Confidential

7 Principal Parties Sponsor Issuer: Usually a newly-established special purpose vehicle Guarantor: To date, guarantors have tended to be sovereigns Investors: Islamic institutions and high net worth individuals desiring a Shari ah-compliant bond investment Agent Sukuk Registrar, Paying Agent & Custodian 6 Confidential

8 Ijara Backed Sukuk Using the proceeds from the issuance of the sukuk, the Issuer acquires from the Master Lessee or third party and leases the to the Master Lessee. The rent payments under the lease (ijara) are the basis for the sukuk payments. The residual interest in the can be transferred from the Issuer to the Master Lessee for a nominal payment or a fair market value payment. 7 Confidential

9 Principal Parties Master Lessee Agent/Paying Agent Islamic Investors Supply of Goods Supply Payments for Goods Agent Sukuk Administration Issuer (Master Lessor) [Alternative Owner if Sponsor cannot own the Issuer] [Sole Shareholder] Corporate Services Company (GSS) Sponsor/ Guarantor 8 Confidential

10 Sukuk Issuance and Purchase Master Lessee Purchase Purchase Price Agent/ Paying Agent Islamic Investors Supply of Goods Supply Payments for Goods Agent Sukuk Administration Issuer (Master Lessor) Sukuk Issuance Proceeds of Issuance Guarantee of Payment [Sole Shareholder] The Issuer agrees to purchase the pursuant to the Purchase. The Sukuk is then issued and the proceeds are paid to the Issuer and by the Issuer to the Master Lessee in payment of the purchase price for the. The guarantee of payment is also shown. Sponsor/ Guarantor 9 Confidential

11 Lease and Sukuk Payment Islamic Investors 10 Confidential Purchase Price Purchase Rent Payments Lease Managing Contractor Supply of Goods Supply Payments for Goods Guarantee of Payment Master Lessee Agent/ Paying Agent Issuer (Master Lessor) [Sole Shareholder] Sponsor/ Guarantor Periodic Yield and Final Payment Proceeds of Issuance Sukuk Issuance Agent Sukuk Administration The Issuer leases the to the Master Lessee pursuant to the Lease. The Managing Contractor address Shari ah leasing issues and responsibilities. Rentals on the Lease are paid to the Issuer who then pays them to the holders of the Sukuk.

12 Residual Purchase Payment Islamic Investors 11 Confidential Sukuk Issuance Proceeds of Issuance Agent Sukuk Administration Purchase Price Purchase Rent Payments Lease Managing Contractor Supply of Goods Supply Payments for Goods Guarantee of Payment Master Lessee Agent/ Paying Agent Issuer (Master Lessor) [Sole Shareholder] Sponsor/ Guarantor Periodic Yield and Final Payment Residual Purchase Payment Master Lessee can purchase the at the end of the lease term for a nominal amount or for fair market value.

13 Murabaha Backed Sukuk Using the proceeds from the issuance of the sukuk, the Issuer acquires from the Vendor and sells the to the on an installment sale basis. The enters into a murabaha arrangement whereby it requests the Issuer to purchase the from the Vendor and sell that on an installment sale basis to the. The specifies the type and nature of the, or the precise, to be purchased. The installment payments under the purchase agreement (murabaha) are the basis for the sukuk payments. 12 Confidential

14 Principal Parties Islamic Investors 13 Confidential Supply of Goods Supply Payments for Goods Sukuk Administration Goods Agent/ Paying Agent Issuer Vendor [Sole Shareholder] Sponsor/ Guarantor Agent

15 Sukuk Issuance and Purchase Agent/ Paying Agent Islamic Investors Supply of Goods Supply Payments for Goods Purchase Request Murabaha Purchase The Issuer agrees to purchase the pursuant to the Murabaha Purchase and submits a Request for purchase. Agent Issuer Sukuk Administration Sukuk Issuance Proceeds of Issuance Guarantee of Payment The guarantee of payment is also shown. Goods The Sukuk is then issued and the proceeds are paid to the Issuer and by the Issuer to the Vendor in payment of the purchase price for the. Purchase Purchase Price Vendor [Sole Shareholder] Sponsor/ Guarantor 14 Confidential

16 Murabaha Payments and Sukuk Payments Purchase Request Agent/ Paying Agent Islamic Investors Sukuk Issuance Proceeds of Issuance Murabaha Purchase Purchase Supply of Goods Supply Payments for Goods Guarantee of Payment Sukuk Payments Sukuk Administration Murabaha Installment Payments Issuer Goods Murabaha installment purchase payments are paid by the to the Issuer, who pays such payments on to the holders of the Sukuk. Vendor [Sole Shareholder] Purchase Price Agent Sponsor/ Guarantor 15 Confidential

17 Overall Transaction Islamic Investors 16 Confidential Purchase Request Proceeds of Issuance Sukuk Issuance Murabaha Purchase Supply of Goods Supply Payments for Goods Purchase Agent Sukuk Administration Guarantee of Payment Goods Agent/ Paying Agent Murabaha Installment Payments [Sole Shareholder] Purchase Price Vendor Sponsor/ Guarantor Sukuk Payments Issuer

18 Common Structural Features Shari ah Compliant: Will be approved by the Shari ah supervisory board of Agent or a sub-placement agent appointed by Agent. Capital Protection Guaranteed: Guarantor will guarantee the Issuer s obligations to make payments to the Investors on the sukuk at maturity. Target Yield Tenor Supply : Master Lessee will supply goods to /Goods, and /Goods will make payments to the Master Lessee/ in respect of those goods. These payments will be made to an account with Paying Agent, to the extent that the payments relate to the rent or payments payable under the Lease or Murabaha Purchase. Rent or Murabaha Payment Account: The Lease or Murabaha Purchase will provide that all rent payments or payments in respect of the murabaha agreement will be paid into a payment account opened in the name of the Issuer with Paying Agent. Paying Agent will make payments in respect of the Sukuk from the Rent Account or Murabaha Payment Account. Tax Matters: If necessary, the Issuer and the Master Lessee/ will enter into the a Tax Matters that will characterize the lease transaction as a financing transaction or murabaha transaction with ownership of the in the Master Lessee/. 17 Confidential

Islamic Financing Products and Concepts, Current Market Trends and Opportunities. Nadim Khan, Partner, Herbert Smith LLP July 2010

Islamic Financing Products and Concepts, Current Market Trends and Opportunities Nadim Khan, Partner, Herbert Smith LLP July 2010 1 Overview Introduction to Islamic Finance The Key Products The Compliance