Shariah Compliant Securitisation Presentation to Derivatives and Structured Products Working Group - PowerPoint PPT Presentation

Loading...

PPT – Shariah Compliant Securitisation Presentation to Derivatives and Structured Products Working Group PowerPoint presentation | free to download - id: 3b5d94-Y2EzZ



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Shariah Compliant Securitisation Presentation to Derivatives and Structured Products Working Group

Description:

Shariah Compliant Securitisation Presentation to Derivatives and Structured Products Working Group Jonathan Lawrence (London) and Remsen Kinne (San Francisco) – PowerPoint PPT presentation

Number of Views:103
Avg rating:3.0/5.0
Slides: 33
Provided by: klgatesCo
Learn more at: http://www.klgates.com
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Shariah Compliant Securitisation Presentation to Derivatives and Structured Products Working Group


1
Shariah Compliant Securitisation Presentation
to Derivatives and Structured Products Working
Group
  • Jonathan Lawrence (London) and Remsen Kinne (San
    Francisco)
  • Thursday 4 February 2010

2
What is Shariah?
  • O you who believe! Stand out firmly for Allah,
    as witness to fair dealing, and let not the
    hatred of others to you make you swerve towards
    inequality and depart from justice.
  • Quran 58
  • In the business context, Shariah is a means of
    conducting business through a distinct set of
    rules designed to facilitate fairness.
  • High correlation between Shariah compliant
    investing and socially responsible investing

3
Where are Shariah rules codified?
  • Interpretations of the Quran from various
    Islamic schools of thought
  • Accounting and Auditing Organization for Islamic
    Financial Institutions (AAOIFI)
  • The fact remains Shariah mandates are not always
    consistently applied from Scholar to Scholar.
    Information is asymmetric, and Shariah Advisers
    and lawyers skilled in the area become useful to
    work through the counter-intuitive results

4
Shariah terms
  • Halal that which is permitted or compliant
  • Haram that which is not permitted
  • Riba charging of interest or unjustified
    increase
  • Gharar the taking of unreasonable risk
    preventable uncertainty
  • Maisir betting gambling reliance on chance or
    speculation, rather than effort

5
Industry prohibitions
  • Gambling
  • Pork production or consumption
  • Adult Entertainment
  • Banking and finance
  • Alcohol production or consumption
  • Weapons production
  • Tobacco production or use

6
Riba
  • The charging of sums for borrowed money (i.e.
    interest) is forbidden
  • But the pledging of Halal assets, the guarantying
    of obligations and the leasing of property under
    what we might consider a finance lease (or ijara)
    is permissible
  • Murabaha is the selling of a commodity at an
    agreed upon mark-up, and is used in Shariah as a
    fixed income investment substitute.

7
Shariah Finance Themes
  • Connection to underlying assets
  • Commercial risk taking and sharing by all parties
    (including financier)
  • Entrepreneurship
  • Returns linked to actual investment outcomes
  • Sharing profit and loss
  • Specific credit particpation in identified
    business risks
  • Satisfaction of commercial and Islamic law

8
Islamic securitisation
  • Transforms bilateral risk sharing between
    borrowers and lenders into market-based
    refinancing of one or more underlying Islamic
    finance transactions
  • Scholar verification process (i) type of assets
    and (ii) transaction structure including credit
    enhancement and ownership conveyance

9
Conditions
  • Real purpose behind fund raising type of asset
    identified and not consumable
  • Investor pay-off from profitable ventures only
  • Collateral assets must not be debt, cash or haram
  • No interest generation
  • Investors hold unconditional, unsecured payment
    obligation (no guaranteed promissory note)
  • Ownership element

10
Conditions (continued)
  • Investor contribution proceeds not invested in
    short term cash instruments or interest bearing
    debt
  • Underlying assets not used for speculative
    purposes and low turnover
  • Takaful insurance
  • Credit enhancement and/or liquidity support in
    permissible form

11
Sukuk
  • Most popular ABS structure within Islamic
    finance, legitimised in February 1988
  • Financial instruments / trust certificates
    representing undivided ownership share in
    underlying asset or interest held by issuer
  • Most sponsored by sovereign and quasi-sovereign
    issuers in Islamic countries
  • Right to share in profits and asset realisations
  • Bought and sold in secondary market and used in
    conjunction with other structures

12
Sukuk al Ijara
CERTIFICATE HOLDERS
Issue proceeds
Return
Issues Sukuk
Sells assets
Leases assets
SELLER
SPV ISSUER
LESSEE
Purchase price (issue proceeds)
Rent
13
Sukuk al Musharaka
CERTIFICATE HOLDERS
Return
Issues Sukuk
Issue proceeds
ORIGINATOR
SPV ISSUER
Share in profit and losses
Share in profits and losses
Contribution in kind (at least 30)
Cash contribution
VENTURE
14
Credit enhancement
  • Permitted, providing underlying assets not
    recharacterised
  • Types
  • First-loss accounts
  • Non-interest bearing liquidity facilities
  • Over-collateralisation
  • Tranching

15
Rating Criteria and Risk
  • Same criteria as conventional product
  • Lack of same historical data
  • Concerns over legal regimes / lack of rules in
    jurisdictions in which underlying assets located
  • Thinner secondary trading market
  • Regulatory risk on failure of Shariah compliance

16
Challenges
  • Limited enabling legislation
  • Restrictions on foreign ownership of assets and
    enterprises
  • Limited enabling infrastructure e.g. SPVs, trusts
  • Reference assets meeting Shariah criteria
  • Historically no strong funding / balance sheet
    rationale

17
East Cameron Gas Sukuk case
  • East Cameron Partners (Originator)
  • Musharaka sukuk
  • July 2006
  • Fund Originators purchase of lenders net
    profits interest in and further development of
    Louisiana offshore natural gas properties

18
  • Issuer East Cameron Gas Co.(Cayman)
  • Amount 165.67 million
  • Expected return 11.25
  • Maturity 13 years
  • Rating CCC
  • Distribution Regulation S/Regulation D
  • Listing N/A
  • Governing law U.S./Louisiana

19
  • Securitized asset Right to oil and gas
    overriding royalty interest (ORRI)
  • Repayment From proceeds of Originators sales
    to offtakers (quarterly)
  • Offtake split 11 Originator/90 Purchaser
    (Issuers Louisiana SPV subsidiary)
  • Closing reserves 53 million aggregate to
    Issuer and Originator reserve accounts

20
  • True sale of ORRI (RE under Louisiana law) to
    Purchaser by Originator
  • Over-collateral/projected pre-maturity full
    payout from ORRI funding to Purchaser
  • Gas offtake contract price collar
  • Sukuk secured by assets of Issuer (ORRI and
    secured accounts)

21
  • Key Shariah compliance features
  • Lawful underlying asset oil and gas
  • Acquisition of physical asset by Purchaser -- RE
  • Risk sharing -- through Issuer/Purchaser funding
    agreement
  • True commercial value of collar customary,
    well-established pricing mechanisms
  • Fatwa by Shariah advisors

22
  • Reserve shortfall enforcement event (rating
    downgrade to CC)
  • Originator filed Chapter 11 October 2008
  • U.S. Bankruptcy Court W. D. Louisiana
  • True sale ruling
  • DIP financing by Sukuk investors

23
GE Capital Sukuk case
  • Sukuk Aircraft Leasing, Inc. (Servicing Agent)
  • Ijara sukuk variation
  • December 2009
  • Fund purchase price for Issuers purchase of
    portfolios of aircraft leases and beneficial
    ownership interests in leased aircraft from LLCs
    wholly-owned by Servicing Agent (Originators)
  • Servicing Agent is wholly-owned by General
    Electric Capital Corporation (GE Capital)

24
  • Issuer GE Capital Sukuk Ltd (Bermuda)
  • Amount 500 million
  • Return 3.875
  • Maturity 5 years
  • Rating AA-
  • Distribution Regulation S
  • Listing LSE, NASDAQ Dubai, Bursa Malaysia
  • Governing law England and Wales (except
    Guarantee governed by New York law)

25
  • Securitized asset Aircraft leases and beneficial
    ownership interests in leased aircraft
  • Repayment 1 From Sharia compliant lease
    payments (semi-annually to maturity)
  • Repayment 2 Proceeds of Originators
    repurchase of aircraft and leases (at maturity)
  • Closing reserves 50 million to Issuer reserve
    account for maturity/early termination

26
  • GE Capital unsecured Guarantee
  • Insurance undertaking (Servicing Agent)
  • Reserve accounts reverse commodity murabaha
    transactions (Issuer/Servicing Agent)

27
  • Key Shariah compliance features
  • Strip non-compliant portion of lease payments
    donate to charity
  • No Sukuk holder interest in non-compliant
    insurance proceeds Servicing Agent loss payee
  • Risk sharing Issuer formed as trust, Sukuk
    certificates evidence holders trust interests
  • Risk sharing unsecured payments to Sukuk
    holders and unsecured guarantee
  • No Issuer rights to receive interest judgment
    interest waiver
  • Review by Shariah advisors (Citi Islamic
    Investment Bank, Goldman Sachs International)

28
  • We intend to be regular issuers in the sukuk
    market and are heartened by the support we have
    seen in this first transaction.
  • quote attributed to GE senior vice president and
    treasurer

29
Shariah finance challenges
  • Scholars and schools of thought
  • Lack of standardisation / certainty
  • Often unrated, rating agencies require government
    guarantees
  • Transaction costs
  • Asset ownership by financier involves potential
    liability e.g. environmental, warranty claims
  • Insurance / takaful
  • Tax treatment

30
Islamic securitisation
  • Conclusion
  • Any questions?

31
Further resources
  • www.aaoifi.com Accounting and Auditing
    Organization for Islamic Financial Institutions
  • www.islamic-finance.com
  • www.securities.com/ifis Islamic Financial
    Information Services (subscription required)
  • www.shariahcap.com Shariah Capital
  • www.sii.org.uk/web5/infopool.nsf/html/qintifq
    Securities Investment Institute Islamic
    Finance Qualification

32
Disclaimer
  • This webinar and these slides are for
    informational purposes only and do not contain or
    convey legal advice. The information herein
    should not be used or relied upon in regard to
    any particular facts or circumstances without
    first consulting with a lawyer.
About PowerShow.com