Clifford Chance and HSBC Bank Middle East have collaborated to create an innovative sukuk structure that utilizes Mudaraba and Wakala arrangements compliant with recent changes to UAE law. Mourant Ozannes and Maples and Calder also advised on the US$5bn sukuk issuance program as well as on a separate US$500m issue, also under the program.
This deal is the first sukuk hybrid structure which uses both the Mudaraba and Wakala concepts in the same structure. Mudaraba is typically used for the purposes of real estate assets and Wakala for non-real estate assets. The cash flows under the Mudaraba and Wakala are collectively used for the purpose of paying coupon to investors and repaying principal on maturity.
According to Clifford Chance head of Islamic finance and lead partner on the deal Qudeer Latif, some of the most challenging aspects of the deal focus on the amendments to real estate laws in the UAE – with respect to foreign ownership and ownership registration. “The structure therefore had to be amended to take into account these changes in an economically neutral manner so as to ensure the transaction did not expose the issuer to additional costs,” Latif told ALB.
The changes in Wakala rules have made future deals, particularly for financial institution issuers with Islamic assets on their balance sheets easier, Latif said. These structures can now be used by both Islamic financial institutions and conventional financial institutions which have Islamic assets. “We expect this structure to be adopted by financial institutions going forward, particularly in jurisdictions which have foreign ownership laws for real estate,” he said.
Trends in the sukuk market noted by market observers reflect Latif’s sentiments. “The sukuk market has been growing since the turn of the year – primarily because of the growing liquidity in the region but also because of the fact that there was not that many issuances in 2010. There is a pent-up demand from investors,” Latif said. He holds the view that this upswing trend will continue across 2011 and expects to see at least two to three more high profile sukuk transactions come to market before this summer.
Regulatory challenges these changes bring include creating hurdles in using the traditional ijara structure for sukuk issuances based on UAE real estate. “This new hybrid structure hels to address those concerns in a manner which is acceptable for issuers, investors and Shari’a scholars,” Latif said.
Mourant Ozannes advised HBME as to Jersey law and Maples and Calder provided Cayman Islands law advice to the Trustee. Clifford Chance provided both English law and UAE law legal advice.
The US $500 million Sukuk issuance co-lead managers were Abu Dhabi Islamic Bank PJSC, Al Hilal Bank PJSC, CIMB Bank (L) Limited, Liquidity Management House for Investment CO. K.S.C.C, Qatar Islamic Bank SAQ and HSBC.
The issuance trust certificates are due in 2016 and will produce a profit rate of 3.575% per annum payable on a semi-annual basis.ALB
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