Al Marai Hybrid Perpetual Sukuk. Al Marai Company. Mudarabah, Tawarruq. Type of Sukuk. Domicile. Saudi Arabia. Originator Business Activity

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Albert Carter
5 years ago
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Compliance Report Based On IdealRatings_SRB Score 81.87 / 0.

Activity Exchange Mudarabah, Tawarruq Saudi Arabia Food& Beverages - Non-Alcoholic Saudi SE This

1 Compliance Report Based On IdealRatings_SRB Score / 0.74 Al Marai Hybrid Perpetual Sukuk Al Marai Company Type of Sukuk Domicile Originator Business Activity Exchange Mudarabah, Tawarruq Saudi Arabia Food& Beverages - Non-Alcoholic Saudi SE This report has been prepared to determine the Shariah compliance status of the Sukuk based on the IdealRatings-SRB Shariah mandate as at

2 Research Analyst Commentary The new sukuk by Al Marai Company on roadshow this week, adopts a hybrid Equity-Debt structure very similar to many previous sukuk by Saudi originators. The sukuk is structured to invest 51% of the proceeds via a Mudarabah in the Business of Al Marai, representing an equity for the sukuk holders, while 49% of the proceeds are invested in a Murabaha agreement with Al Marai. Further, Al Marai shall on-sell the commodities to independent third parties for a full-spot price, which makes an accurate classification of the underlying transaction is Tawarruq not Murabaha. Despite that the structure resembles many other sukuk in the Saudi Market, the Sukuk has significant issues and clauses to highlight in both agreements; Mudarabah and Tawarruq and also on the aggregate level of the structuring. A major highlight is the appointment of a Shariah auditor after six months, to monitor the performance of the Mudareb under the Mudarabah agreement. Which has not been the case with any sukuk ever before. A step, we believe, is very significant for the development and confidence in sukuk compliance, and shall have positive effects, especially if periodic supervision reports are made public via the registrar (Tadwaul) all through the tenure of the sukuk. In the Mudarabah agreement, Al Marai is acting as the Mudareb on behalf of the sukukholders, and has in several clauses ensured that the sukukholders are liable for any loss in the capital invested. Although the Exercise price is pre-set at face value, yet it is emphasized that any loss in capital will be deducted from the Exercise price. And therefore, the sukukholders are subject to the risks of the Mudarabah, but on the other hand, are not entitled to benefit from any possible appreciation in the value of the equity/asset. Another significant difference is that, the Mudareb is only entitled to make up the shortfalls in the periodic distributions from the reserve account, and not from his own funds neither a Liquidity facility. and lastly, the issuer/mudareb is not allowed to use the funds in the reserve account for his own investment, as the case with many sukuk. On the Tawarruq level, the agreement is partially in line with AAOIFI s standard for Tawarruq. However, the offering circular does not articulate the nature of the underlying commodity, which is indeed, an important information for all Islamic Investors to exclude ribawi commodities; Gold, Silver and Currencies. And for some Shariah mandates; Food based commodities are also prohibited in deferred sale. The agreement does not also list if the sukukholders have the right to keep the commodity, or choose to sell it. Which has been emphasized by AAOIFI and prominent scholars as a must to exclude organized Tawarruq. The Structuring advisor has kept the equity-debt ratio at the minimum accepted Equity Threshold for trading. That is at 51%. While this is in line with AAOIFI standard for hybrid sukuk, it is far below the threshold as per other mandates, some at 66% and others at a 100% equity sukuk portfolio. For the later two, the sukuk is only valid, from a Shariah perspective, as an hold-to-maturity investment.

3 Sukuk Structure Diagram:

4 Shariah Boards approved the Sukuk: BNP Paribas 2007/ 2013 Nezam Mohamad Yaqoubi Mohamad Daud Bakar Abdul Sattar Abu Ghuddah HSBC Saudi Arabia Limited Shariah Committee Muhammad Ali Elgari Nezam Mohamad Yaqoubi Banque Saudi Fransi Shariah Committee 2012 Abdullah Bin Sulaiman Al-Manea Muhammad Ali Elgari Abdul Sattar Abu Ghuddah

5 Structure Screening Mudarabah: Pass / 0.70 Shariah Field Sukuk structure utilizes common Islamic investment modes Ref: Page 13 lines:29-43, Page 14 lines:1-7 Explicit Obligation to Shariah Ref: Page 28 all page Adequate disclosure of contractual conditions Ref: Page 73 all page, Page 74 all page, Page 25 lines:25-27, Page 71 lines:18-36, Page 13 lines:29-43, Page 14 lines:1-7, Page 75 lines:7-12, Page 43 lines:6-12 Disclosure of Loss conditions Ref: Page 25 lines:25-27 Shariah Board or Auditor monitors implementation Ref: Page 27 lines:46, Page 28 lines:1-3 Compliant use of proceeds by originator Ref: Page 26 lines:1-2, Page 13 lines:29-43, Page 14 lines:1-7 Adequate disclosure of Default conditions Ref: Page 73 all page, Page 74 all page Purchase undertaking agreement Ref: Page 39 lines:23-25 Sale undertaking agreement Ref: Page 71 lines:18-36 The Sukuk is approved by a Shariah Board Ref: Page 18 all page Limited recourse to issuer Ref: Page 43 lines:8-12 Exercise Price is a Market price or V Ref: Page 49 lines:6-12, Page 50 lines:25-29, Page 51 lines:11-14 Profit distributions from trust assets Ref: Page 43 all page Manager is obliged to make up profit shortfalls Manager seizes surplus profits Manager borrows from reserve account for his own interest In-Kind Asset Substitution Undertaking Sukuk holders have full rights of asset disposition Ref: Page 75 lines:7-12 Late payment charges donated Ref: Page 70 lines:11-16 Clear specification of the underlying asset Manager seizes surplus profits and makes up shortfalls Scope of Mudarabah is clear Ref: Page 14 lines:25-46, Page 15 all page, Page 44 lines:35-45 Mudarib is liable for capital loss and/or less profits Ref: Page 56 lines:23-26, Page 60 lines:16-19, Page 61 lines:33-38 No Debt in Mudaraba Capital Ref: Page 59 lines:35-44 Mudareb has free access to capital Ref: Page 59 lines:35-44, Page 60 all page Profit share is ratio of actual profits Ref: Page 60 lines:33-36 Value Compliance Weight No 2 ND No 2 ND No 5

6 Profits are of the same business activity Ref: Page 14 lines:25-46, Page 15 all page, Page 44 lines:35-45, Page 60 lines:33-36, Page 43 all page No profit unless capital is intact Ref: Page 60 lines:39-41, Page 61 lines:1-8, Page 15 lines:3-14 Rab ul mal will not manage operations Guarantee of capital or profits through compounded capacities Ref: Page 20 lines:43-45, Page 43 lines:15-17 Guarantor and Guaranteed correlation does not exceed 30% Ref: Page 20 lines:43-45, Page 43 lines:15-17 Manager guarantees only misconduct and negligence Ref: Page 76 lines:39-43 No profit allotment Ref: Page 60 lines:33-36 Mudareb commingles his funds with Mudarabah Ref: Page 60 lines:10 Profit share is set and clear Ref: Page 14 lines:25-46, Page 15 all page, Page 44 lines:35-45 No extra fees to Mudarib 1 1

7 Structure Screening Tawarruq: Pass / 0.66 Shariah Field Sukuk structure utilizes common Islamic investment modes Ref: Page 13 lines:29-43, Page 14 lines:1-7 Explicit Obligation to Shariah Ref: Page 28 all page Adequate disclosure of contractual conditions Ref: Page 73 all page, Page 74 all page, Page 25 lines:25-27, Page 71 lines:18-36, Page 13 lines:29-43, Page 14 lines:1-7, Page 75 lines:7-12, Page 43 lines:6-12 Disclosure of Loss conditions Ref: Page 25 lines:25-27 Shariah Board or Auditor monitors implementation Ref: Page 27 lines:46, Page 28 lines:1-3 Compliant use of proceeds by originator Ref: Page 26 lines:1-2, Page 13 lines:29-43, Page 14 lines:1-7 Adequate disclosure of Default conditions Ref: Page 73 all page, Page 74 all page Purchase undertaking agreement Ref: Page 39 lines:23-25 Sale undertaking agreement Ref: Page 71 lines:18-36 The Sukuk is approved by a Shariah Board Ref: Page 18 all page Limited recourse to issuer Ref: Page 43 lines:8-12 Exercise Price is a Market price or V Ref: Page 49 lines:6-12, Page 50 lines:25-29, Page 51 lines:11-14 Profit distributions from trust assets Ref: Page 43 all page Manager is obliged to make up profit shortfalls Manager seizes surplus profits Manager borrows from reserve account for his own interest In-Kind Asset Substitution Undertaking Sukuk holders have full rights of asset disposition Ref: Page 75 lines:7-12 Late payment charges donated Ref: Page 70 lines:11-16 Clear specification of the underlying asset Manager seizes surplus profits and makes up shortfalls Tawarruq commodities are not gold, silver nor currencies Ref: Page 50 all page Tawarruq commodities are distinct Adequate details on commodities purchased Purchaser receives commodities Ref: Page 43 lines:32-34 No Ban on receiving commodities Value Compliance Weight No 2 ND No 2 ND 5

8 Commodities are sold to a 3rd party Ref: Page 43 lines:32-34 Seller delegated to resell due to law Ref: Page 43 lines:32-40 Re-selling of purchased goods is by self or agent Ref: Page 43 lines:32-34 Tawarruq is applied to face liquidity shortage Ref: Page 78 all page Mustawriq is not a conventional bank Ref: Page 79 all page, Page 80 all page, Page 81 all page

9 DISCLAIMER This research is for our clients only. This research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The research reports are published at irregular intervals based on clients request or as appropriate in our analysts judgment. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction especially where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Copyright 2011 IdealRatings, Inc. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of IdealRatings, Inc.

Sukuk Structure Diagram:

Sukuk Structure Diagram: Analyst Commentary IFFIM is the First ever SRI Sukuk issued in the International and domestic Markets by the international Finance Facility for Immunization IFFIM. The IFFIM is one of the most important