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the issuance used to purchase the assets. The amount could be amortized with or without grace period and included in the periodic rentals or replicate a bullet repayment on maturity date.
An example of sukukal-ijarais as follows:
The Central bank of Bahrain issued a $250 millionsukukTrust Certificate through BMA International Sukuk Company. The Kingdom of Bahrain, acting through the ministry of finance and national economy (in such capacity, the head lessor), leased by way of head lease for a term of 100 years a certain land parcel to the issuer pursuant to the al-ijara head lease agreement, and (in such capacity, the sub-lessee), leased by way of sublease from the issuer the land parcel on the terms set out in anal-ijarasub-lease agreement for a period of five years. The sublease is subject to earlier termination if the trust is dissolved early.
Sukuk al-mudaraba
Mudarabameans an agreement between two parties according to which one of the two parties provides the capital (capital provider) for the other (mudarib) to work with on the condition that the profit is to be shared between them according to a pre-agreed ratio. These types ofsukuks play a vital role in the process of development financing, because these are related to the profitability of the projects.
The issuer of these certificates is the mudarib, the subscribers are the capital providers, and thesukuk proceeds are themudaraba capital. The certificate holders own the assets of mudarabaand the agreed upon share of the profits; losses, if any, are borne by capital providers only.
Mudaraba sukuk gives its owner the right to receive his capital at the time thesukukare surrendered, and an annual proportion of the profits as agreed.Mudarabasukukneither yield interest nor entitle owners to make claims for any definite annual interest. This shows thatmudaraba sukukis like shares with regard to varying returns, which are accrued according to the profits made by the project.
Mudarabasukukmust represent a common ownership and entitle their holder to shares in a specific project for which thesukukhave been issued to fund. Asukukholder is entitled to all rights, which have been determined by Shari’a upon his proportionate ownership of the mudarabaassets.
Steps involved in the structure:
(a) The sukukissuer enters into a mudarabaagreement with the project manager (mudarib) for construction/commissioning of a project;
(b) The SPV issuessukukto raise funds, the proceeds of which are given to themudarib;
(c) Themudaribundertakes the project and collects regular profit payments from the activity for onward distribution to investors; and
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(d) Upon completion, themudarib, in its capacity as obligator, purchases the assets of the project from the issuer.
An example ofsukuk al-mudarabais as follows:
Aldar Properties PJSC, an Abu Dhabi real estate development company, issued a 4.75-yearsukukconvertible into its ordinary shares. Proceeds from the transaction were used to fund Aldar’s ambitious real estate development programme with Aldar acting as the mudarib. The deal was enthusiastically received by investors and was heavily oversubscribed at the initial transaction size. The deal was increased from $1,300 million to $2,530 million, highlighting the substantial interest for the issue. The strong demand also allowed improved terms for Aldar; periodic profit distribution was set below the initial price guidance and conversion premium was set at the top end of the range. Aldar, in its corporate capacity, also provided an undertaking to purchase the assets of the mudaraba should the sukuk certificate holders not convert their holdings into Aldar’s shares by the maturity date (2011).
Aldar’s sukukconvertible broke many records. It was the:
• largest real estate convertible offering globally;
• largestsukukconvertible offering globally;
• longest-datedsukukconvertible from the Middle East;
• lowest funding rate of all precedent transactions; and
• secured highest conversion premium of all precedents.
Sukuk al-musharaka
Musharakameans a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business.
All providers of capital are entitled to participate in management but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by every partner strictly in proportion to respective capital contributions.
Sukuk al-musharakaare certificates of equal value issued with the aim of using the proceeds for establishing a new project, developing an existing one or financing acquisition of a business activity on the basis of a partnership contract. The certificate holders become the beneficial owners of the assets of the partnership as per their respective shares. Normally the party issuing thesukukacts as the managing partner, with the sukukissuing vehicle on behalf of the sukukholders as silent partner. Thesemusharakacertificates can be treated as negotiable instruments and can be bought and sold in the secondary market.
Steps involved in the structure:
(a) The corporate and SPV enter into amusharakaarrangement for a fixed
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period and an agreed profit-sharing ratio. The corporate (asmusharik) contributes land or other physical assets to themusharaka;
(b) The SPV (asmusharik) contributes cash, that is thesukukissue proceeds received from the investors to themusharaka;
(c) Themusharakaappoints the corporate as a managing partner to develop the land (or other physical assets) with the cash injected into the musharakawith a view to earning a return on the developed assets. In return, the corporate will get a specified profit share. It is also usual to provide an incentive to the managing partner should the returns exceed a target return;
(d) Thesukukholders share of profits are distributed to them on periodic basis; and
(e) The corporate irrevocably undertakes to buy at a pre-agreed price the musharaka shares of the SPV or the assets of the musharaka on maturity. The arrangements could also provide for the corporate to purchase the shares of the SPV on say semi-annual basis so that at the end of the fixed period, the SPV would no longer have any shares in the musharaka. This would provide for an amortizing sukuk issuance that redeemed the sukuk certificate over a period of time.
An example of sukuk al-musharakais as follows:
Emirates, Dubai’s national airline, issued a $550 million sukuktransaction for seven years. The deal was a structured on a musharaka basis. The musharaka, or joint venture, was set up to develop a new engineering centre and a new headquarters building on land situated near Dubai’s airport which was ultimately leased to Emirates. Profit, in the form of lease returns, generated from themusharakawere used to pay the periodic distribution on the trust certificates. Emirates then purchased the leased assets on maturity of the transaction.