Corporate Bonds and Sukuk Issues
Developing the Market in Maldives
Rabel Akhund
7 May 2008
Male
Corporate Bonds

Bond is a debt instrument.
 Issuer of bonds obliged to pay holders of the bonds interest
and principal on specified repayment dates.
 Bond markets are a core sector of any capital market.
 Conventionally, there are two ways of raising finance.
(a) Equities
(b) Debt
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Corporate Bonds
Bonds
are tradable debt securities. In that way different from
bank financing.
Issuers can use bonds for both general purposes and specific
projects and assets.
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Corporate Bonds for Investors
For
investors bonds are an important savings product.
Offer investors higher return than a cash deposit but lower risk
than equities.
Predicatable cashflows make it a suitable investment for
pension funds and insurance companies.
Returns on bonds vary, they can be zero coupon, fixed rated
or benchmarked to a floating interest rate.
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Corporate Bonds for Issuers
Maturities
can also differ. Will depend on nature and
objectives of the Issuer.
Government bonds usually have 30 year maturities.
Corporate bonds can have maturities of 5-10 years. Short
term bonds are not being considered here.
Presence of covenants affect the risk profile of bonds.
Negative covenants restrict future actions of issuer, e.g.,
future debt issues by Issuer and future dividend payments by
Issuer.
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Types of Bonds
Government
Bonds
Investment grade Corporate Bonds
High yield (more risky) Corporate Bonds
Asset backed Bonds (Project Specific)
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Historical Background - Sukuks



Need for liquidity and good liquidity management
Different periods between maturities of assets and deposits – resulting in
either surplus of non performing cash or a shortage of cash to fund
investments
Lack of:
active interbank and secondary market (mostly primary market trading)
– acceptable Shariah compliant instruments
– acceptable regulatory conditions
– limited available agency credit ratings
– unsophisticated market
– limited information flow
The need for a more sophisticated capital, financial and insurance market.
–
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Sukuks – Legal Meaning


All this changed with the development of the Sukuks.
Definitions:
a) “Participation Securities, coupons, investment certificates”
b) “Certificates of equal value, representing an undivided beneficial
ownership in the underlying assets”
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Types of Sukuks

MUDARABA SUKUK
A mudaraba is a partnership for profit between capital employed on one
hand and work on the other. Mudarib/Rabbul-Mal

IJARA SUKUK
An ijara is essentially an Islamic leasing transaction which can be used as a
financing tool.

DEVELOPMENT SUKUK (ISTISNA)
Istisna is defined as a contract of sale of specified goods to be manufactured
with an obligation on the manufacturer to deliver them upon completion. Like
turnkey projects.

MUSHRAKA SUKUK
Musharaka is a form of partnership whereby each party contributes assets or
capital with a view to establishing a project or to share in an existing one.
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Ijara (Leasing) Sukuk
–
Can be used for long term infrastructure projects by the
mobilisation of short term deposits i.e. securitisation of
Government tangible assets
–
Possible use in project financings, e.g. development of a Tourist
Resort.
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Typical Project Financing Structure
CONTRACTING AUTHORITY
SPONSOR
Security
FINANCING
BANKS
PROJECT COMPANY
Debt Finance
Agreement
Contractor
Direct
Agreement
Sub Contractor
Hard PM
SPONSOR
Services
(and other)
Direct
Agreements
SPONSOR
Sub Contractor
Sub Contractor
Sub Contractor
Soft PM
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Ijara (Leasing) Sukuk – Case Study for a
Project Financing of a Tourist Resort.
–
Works as follows:





sale of tangible assets to a special purpose restricted Mudaraba (SPV)
assets are then leased to the interested parties through a Ijara lease
the MUDARABA participation SUKUK will be issued and sold to
public/investors with a guarantee of payments (usually from Government or
international bank)
required security will be given to SUKUK holders
MUDARABA managed (on behalf of SUKUK holders) by MUDARIB
MUDARIB signs and executes all relevant contracts
– ensures Shariah compliance
– transparency and efficient operation
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Leasing Sukuk - Tourist Resort
SUKUK Holders
Periodic rentals and capital
amount payments
Sukuk proceeds
Periodic rentals and capital
amount payments
Seller
Assets/Hotel (Beds)
Sold
Sukuk proceeds
MUDARIB
MUDARABA (SPV)
Lessee
(Project Operator)
Project Assets
IJARA Lease
For a fixed period of time and service agency
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Legal Requirements for Bonds and
Sukuks

Laws must allow the concept of trust. Important for
Sukuks and Bonds.
 Contract law must recognise debt obligations and
repayment obligations.
 Property laws must recognise the concept of security
interests.
Insolvency laws must give priority to security holders in
the event of the insolvency of Issuers.
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Market Requirements for Corporate
Bonds and Sukuks.
A
sufficient number of investors.
A sufficient number of issuers.
Investment professionals and other professional advisers available to
advise on structures, e.g. lawyers and accountants.
The need for a secondary trading market to provide liquidity.
Listing rules similar to your stock exchange listing rules.
Effective legal documentation.
Credit rating.
Transparent dealings.
Adequate investor protection
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Enforcement
The
need for a suitable enforcement regime.
Protection of creditors’ rights.
Enforcement of judgments in a timely and efficient
manner.
Possibility of foreign arbitration.
Consider sovereign guarantee for sukuk issues.
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Debt outstanding versus stock market
capitalisation (in billions of Euros) 2004
2500
2000
International
Debt
Government
Debt
Corporate Debt
1500
1000
Stock Market
Capitalisation
500
0
Germany
Italy
UK
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RABEL AKHUND
Taylor Wessing
Carmelite
50 Victoria Embankment
Blackfriars
London
EC4Y 0DX
Tel: 0207 300 7000
Fax: 0207 300 7100
Direct Dial: 0207 300 7096
E-mail: r.akhund@taylorwessing.com
Web: www.taylorwessing.com
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