Corporate Bonds for Real Estate
with Sukuk Features
Presented By:
Naim Farooqui
Managing Director
ORIX Investment Bank Pakistan Limited
International Islamic Finance and
Investment Symposium 2006
December 7, 2006
Real Estate Acquisition
Transaction Structure
Bank Syndication
Debt -Rs. 150 m
1
Corporate House
Equity – Rs. 121 m
Equity + Debt
Rs. 271 m
Rentals
Company 1
Purchase
Company 2
Rented
Office Building
Company 3
Company 4
Making a Case for Securitization for
A Real Estate Finance Company (REFC)
2

Securitization is a process for institutions to turn their
locked up assets i.e. mortgages in the instant case,
which are illiquid and lumpy, into tradable securities
such as bonds.

Securitization is an open market selling of financial
instrument backed by asset’s cash flow or asset value
(mortgages).

A contractual arrangement whereby the REFC sells its
mortgage receivables to a special purpose vehicle
(SPV).

SPV issues debt instruments (bonds) to finance the
purchase
Securitization Structure
Typical Structure
Mortgage Backed
Securitization
Normal REFC Business
Operations
Receivables
Real Estate
Finance Company
Mortgages
Extension of Loans
For Real Estate
Cash Proceeds Raised
Via Issuance of Debt
Securities
Housing Mortgage
Receivables
SPV
Key Issues To be Addressed
1.
2.
3.
4.
5.
6.
Non-Recourse Element
Accounting Clearance
Legal Issues
Market For Instrument
Regulatory Aspects
Security Mechanisms
Debt
Securities
Cash
Safeguarding Investors
Interest
Investors
Trustee
Private Placements
Public Placements
3
Structure of SPV

Originator: entity that generates receivables

Issuer of the securities: SPV (any form, usually
trust, corporation, partnership, etc.)

Advisor/Arranger: structures transaction; prepares
documentation alongside legal, liaison with
auditors

Underwriter: who places securities in the market
4
Structure of SPV…contd.

Custodian: entity that holds receivables as agent
and bailee for the trustee or trustees

Servicer: who collects receivables and transfers
funds to accounts of trustees

Trustee: who deals with the administration—
holds receivables; receives payment on
receivables, makes payment to security holders

Rating agencies: JCR-VIS, PACRA.—helps in
structuring; determine opinions needed, etc.
5
6
General Benefits of Securitization

Why Securitize?

Lower-cost financing


Equity saving




Liquidity crunches?
Leverage restrictions
Reduction of assets – create liquidity to
the company
Matched funding / funding
strategy
Earnings

Originator capitalizes the future cash flow
Summing Benefits for all
Stakeholders

To owner/originator






To bondholders/investors




Alternative financing instruments
Improve liquidity in the balance sheet
Reinvestment and freeing up the low-yield assets
Transfer the interest rate risks to SPV
Reducing corporate gearing
New Investment opportunities for diversification
Direct participation in real estate market by small investors
Building as collateral
To Real Estate Market


An active secondary capital market for institutional
investment
Alternative Financing Options
7
Conclusions
8
Similarities of SUKUK with the proposed structure
The proposed structure though based on conventional
model can easily be converted into a Shariah Compliant
Sukuk Bond. It has the following characteristics which
are important elements of Sukuks:

Corporate Bonds are easily Tradable – Similarly, SUKUK
being liquid real assets, are easily transferred and traded in the
financial market.

Corporate Bonds can be Rated – Credit rating increase the
credibility of financial instruments. SUKUK are easily analyzed by
international and regional rating agencies which facilitates their
marketability.
Differences in Main features:


Sukuk have share holding in the underlying asset while Bonds
are purely a debt instrument.
Sukuk are limited to Sharia permissible ventures/products.