$ US 150 million First Global Sukuk: Kumpulan Guthrie Bhd

Transcription

1 $ US 150 million First Global Sukuk: Kumpulan Guthrie Bhd Case Writer: Brian Kettell This case describes the Serial Islamic Lease Sukuk by First Global Sukuk.It is intended to be used as the basis for class discussion. Answers are not provided. It is expected that the course leader will guide participants accordingly.. Case Abstract An Islamic bond (sukuk) has economic characteristics similar to those of a conventional bond, but is structured so as to be compliant with Shari a law enabling it to be sold to Islamic investors who are prohibited by Shari a law from investing in conventional debt securities. The US$150 million Islamic Lease Sukuk was part of a US$395 million Serial Islamic Sukuk issuance that Bank Islam (Labuan) Limited was mandated to arrange by Kumpulan Guthrie Berhad (Guthrie). In December 2000, Guthrie was granted a RM1.5 billion (US$400 million) Alljarah Muntahiah Bittamleek by a consortium of banks. The original facility was raised to refinance Guthrie s acquisition of a palm oil plantation in the Republic of Indonesia. Those who take riba (usury or interest) will not stand but as stands the one whom the demon has driven crazy by his touch. Qur an Sura 2:

2 1 Ijarah Corporate Sukuk: Kumpulan Guthrie Bhd Kumpulan Guthrie Berhad has its origins in a firm established in 1821 and was converted to a public company under the Companies Act, 1965 on 2 nd September, Guthrie s shares have been listed and traded on the KLSE since 25 th August, The Serial Islamic Lease Sukuk issuance by First Global Sukuk in partnership with various Malaysian subsidiaries of Kumpulan Guthrie provides an interesting case study of an alternative structure for ijarah sukuk. The arrangement implemented different series of sukuk (similar to conventional securitization tranches) as well as call and put options. Furthermore, the fact that the seller is a corporate rather than government meant that there were numerous varying risk considerations. First Global Sukuk is an SPV incorporated in Labuan, Malaysia specifically for the purpose of this particular sukuk. On December 24, 2001 Guthrie issued trust certificates in two series (Series A and Series B) with a total value of US $ 150 million. Series A comprised of US $ 50 million of certificates due in 2004, and the remaining US $ 100 million were incorporated in Series B due in The distinctions between Series A and Series B sukuk are in the land parcels, the different sellers (various subsidiaries of Guthrie), the semi-annual returns, ownership interests and the terms to maturity. First Global Sukuk Country Issuer Type Value Maturity Malaysia Kumplan Guthrie Bhd Ijarah Sukuk US$ 150 Million 2006 Differences between Guthrie sukuk Series A and Series B Series A Series B Denominations $500,000 $500,000 Due Dates December 2004 December 2006 Sellers Kumpulan Jerai Sdn Bhd Kumpulan Linggi Sdn Bhd and Kumpulan Kamuning Sdn Bhd Semi Annual Returns Ownership Interest LIBOR + 1.5% per annum for the principal amount of Series A sukuk held by investor 1.0% undivided ownership interest in Series A Trust Assets LIBOR + 2.0% per annum for the principal amount of Series B sukuk held by investor 0.5% undivided ownership interest in Series B Trust Assets The arrangement has provisions for Guthrie and its subsidiaries to be able to issue further sukuk on other land parcels. Distributions on such further issuances will be derived from Guthrie s payments under the relevant lease agreements with the SPV. Additional trusts will have to be created for this additional certificate but it has been estimated that the total value of future issuances would not exceed US $ 245 million. The lease arrangements also have stipulations involving the utilisation of call and put options. The put option allows the SPV, on behalf of the holders of the trust certificates, to require Guthrie to purchase the beneficial interest in the related land parcels. The purchase price is equal to the principal amount on such series of sukuk plus the aggregate periodic distribution

3 2 amount payable on the sukuk on the date of such redemption. This option can be exercised on the periodic distribution date immediately following the occurrence of a dissolution event and on any scheduled dissolution date. Conversely, the lease agreements also afford Guthrie a call option whereby Guthrie can require the SPC to sell the beneficial interests in the land parcels back to it on the related scheduled dissolution date at the associated dissolution distribution amount. See Figure 1. Given that Guthrie is a commercial enterprise operating in a region with a history of economic vulnerability, its financial statements and returns projections are subject to considerable scrutiny. There are several covenants that the company has agreed to under the terms of the arrangement and these include: To maintain a Gearing Ratio (the proportion of the company s total capital that is borrowed) of not more than 1.5. To maintain a Debt Service Coverage Ratio of not less than 1.5. The Debt Service Coverage Ratio is defined as the ratio of Net Operating Income to Total Debt Service. This would indicate whether the property is generating enough income to pay its debt commitments. Not to declare or pay any dividend on its shares as long as the debt service coverage ratio is less than 1.5 and the amount deposited in any reserve account is less than the amount required to be deposited. The trust certificates were rated internationally as BBB+ by MARC International Ltd and are listed on the Labuan International Financial Exchange (Malaysia). The advisors to the issuance included Bank Islam Ltd (Shari a structuring and Lead Arranger), ABN Amro (Financial and Global Coordinator), Aseambankers Malaysia Berhad (Co-Arranger) and Shamil Bank of Bahrain (Middle East Coordinator).

4 3 Figure 1. First Global Sukuk Sukuk Proceeds of Sukuk issue paid directly to Acquisition Facility Financiers to fund Acquisition Facility Call Option Semi-annual distributions derived from Lease Payments 8 Semi-annual Lease Payments Trustee Sukuk are issued, each of which represents an undivided ownership interest in the Trust Assets 5 Convey to Trustee for the benefit of Sukukholders (i) beneficial interest in Land Parcels and (ii) all rights under Lease Agreements 4 Lease beneficial interest in Land Parcels to Guthrie SPV 3 Transfer beneficial interest in t he Land Parcels to the SPV 1 Acquire beneficial interest in Land Parcels via Acquisition Facility Call Option Guthrie Transfer beneficial interest in Land Parcels back to the Seller 2 Seller Acquisition Facility Financiers Summary of the Offering Parties SPV SPV Ownership/ Administration of the SPV Sellers First Global Sukuk Inc., a bankruptcy remote, special purpose company incorporated in Labuan under the Offshore Companies Act, The SPV has been incorporated solely for the purpose of participating in the transactions contemplated in the Transaction Documents. The issued share capital of the SPV is US$2.00 divided into two ordinary shares of par value US$1.00 each. Pursuant to the SPV Administration Agreement, the SPV s ordinary shares are owned by BIMB International Islamic Trust (Labuan) Sdn Bhd as SPV Administrator. Kumpulan Jerai Sdn Bhd (the Series A Seller ), Kumpulan Linggi Sdn Bhd and Kumpulan Kamuning Sdn Bhd (together, the Series B Sellers ), each a subsidiary of Kumpulan Guthrie Berhad. The Series A Seller will declare itself a bare trustee, for the benefit of the SPV, over all its rights, title and interests in the Series A land Parcels pursuant to the Series A Purchase Agreement and each of the Series B Sellers will declare itself a bare trustee, for the benefit of the SPV, over all its rights, title and interests in the Series B Land Parcels pursuant to the Series B Purchase Agreements and will convey to the SPV the beneficial

5 4 interest in such Land Parcels pursuant to the relevant Purchase Agreement. Guthrie Initial Purchasers Trustee Kumpulan Guthrie Berhad has its origins in a firm established in 1821 and was converted to a public company under the Companies Act, 1965 on 2 nd September, Guthrie s shares have been listed and traded on the KLSE since 25 th August, Guthrie will lease from the SPV (i) the Series A Land Parcels on the terms set out in the Series A Lease Agreement for a period of three years commencing on the Closing Date and terminating, with the acquisition of the Series A Land Parcels from the SPV, on the Series A Scheduled Dissolution Date, and (ii) the Series B Land Parcels on the terms set out in the Series B Land Parcels on the terms set out in the Series B Lease Agreement for a period of five years commencing on the Closing Date and terminating, with the acquisition of the Series B Land Parcels from the SPV, on the Series B Scheduled Dissolution Date, and will operate and maintain the Land Parcels in the ordinary course of its business. Bank Islam (L) Ltd, Maybank International (L) Ltd, Shamil Bank of Bahrain EC, Bumiputra Commerce Bank (L) Ltd, AMMB International (L) Ltd, ABN AMRO Bank NV, Labuan Branch, Bank Muamalat Malaysia Berhad, Labuan Offshore Branch, and RHB Bank (L) Limited as initial purchasers under the Certificate Purchase Agreement, pursuant to which they have each agreed to purchase the aggregate principal amount of the Sukuk. Bank Islam (L) Ltd, a company incorporated in Labuan under the Offshore Companies Act, 1990 and licensed under the Offshore Banking Act, 1990, in its capacity as trustee on behalf of the Sukukholders in respect of the Trusts in accordance with the Trust Agreements. Summary of Certificates Sukuk Issue Price Rate of Return on Trust Assets Issue Price Rate of Return on Trust Assets US$50,000,000 Trust Certificates due 2004, Series A and US$100,000,000 Trust Certificates due 2006, Series B. 100 per cent of the aggregate principal amount of the Sukuk. Each holder of a Series A Suk kun will receive on each Periodic Distribution Date, out of the Series A Trust Assets, a return equal to 1.5 per cent per annum above LIBOR for the principal amount of Series A Sukuk held by such holder for each Profit Accumulation Period. 100 per cent of the aggregate principal amount of the Sukuk. Each holder of a Series A Suk kun will receive on each Periodic Distribution Date, out of the Series A Trust Assets, a return equal to 1.5 per cent per annum above LIBOR for the principal amount of Series A Sukuk held by such holder for each Profit Accumulation Period. Each holder of a Series B Suk kun will receive on each Periodic

6 5 Distribution Date, out of the Series B Trust Assets, a return equal to 2.0 per cent per annum above LIBOR for the principal amount of Series B Sukuk held by such holder for each Profit Accumulation Period. Scheduled Dissolution of the Trust Under each Lease Agreement, the SPV will have the option (the Put Option ), which it will assign to the Trustee for the benefit of the holders of the related Series of Sukuk pursuant to the related Trust Agreement, to require Guthrie to purchase the beneficial interest in the related Land Parcels at a price equal to the principal amount of such Series of Sukuk plus the aggregate Periodic Distribution Amount payable on the Sukuk on the date of such redemption. (a) (b) on the Periodic Distribution Date immediately following the occurrence of a Dissolution Event; and on the Scheduled Dissolution Date in respect of such Series of Certificates; and Under each Lease Agreement, Guthrie will have the option (the Call Option ) to require the SPV or, after the assignment to the Trustee of the PSV s interests in such Lease Agreement pursuant to the relevant Trust Agreement, the Trustee to sell the beneficial interest in the relevant Land Parcels to it on the related Scheduled Dissolution Date at the related Dissolution Distribution Amount. Forms and Denomination The Sukuk (or Certificates) will be issued in bearer form, serially numbered and in denominations of US$500,000 each. Title to the Certificates will pass by delivery. Each Series of Certificates will be represented by a Global Certificate which will be deposited on the Closing Date with the Depository. Status Limited Recourse Each Series A Suk kun represents an undivided 1.0% ownership interest in the Series A Trust Assets and will rank pari passu, without any preference, with the other Series A Sukuk. Each Series B Suk kun represents an undivided 0.5% ownership interest in the Series B Trust Assets and will rank pari passu, without any preference, with the other Series B Sukuk. Each Suk kun represents solely an undivided ownership interest in the relevant Trust Assets. Holders of Series A Sukuk will have no recourse to the Series B Trust Assets. Likewise, holders of Series B Sukuk will have no recourse to the Series A Trust Assets. Creditors of the SPV and the Trustee (in any capacity other than as trustee in respect of the Sukuk), including, in particular, holders of certificates relating to other trusts, will have no recourse to the Trust Assets. Proceeds of the Trust Assets are the sole source of payments on the Sukuk. The Sukuk do not represent an interest in or obligation of any of the SPV, the Trustee, Guthrie or any of their affiliates. Accordingly, Sukukholders will have no recourse to any assets of the SPV, the

7 6 Trustee (including, in particular other assets comprised in other trusts), Guthrie (to the extent it fulfils all of its obligations under the related Lease Agreements) or any of their affiliates in respect of any shortfall in the expected amounts from the Trust Assets. Negative Pledge Guthrie s Covenants So long as any of the Sukuk remains outstanding, the SPV has undertaken that it will not create or have outstanding any Security Interest upon, or with respect to, any of its present or future business, undertaking, assets or revenues (including any uncalled capital). Under the terms of each Lease Agreement, Guthrie will agree, among other things: (a) to maintain a Gearing Ratio of not more than 1.5; (b) (c) to maintain a Debt Service Coverage Ratio of not less than 1.5; and not to declare or pay any dividend on its shares for so long as: (i) the Debt Service Coverage Ratio is less than 1.5; Provided that Guthrie shall, notwithstanding the above, be allowed to declare and pay an annual gross dividend of 5.0 per cent. Use of Proceeds Listing Rating Governing Law The net proceeds of the issue of the Sukuk will be applied by the Trustee to acquire from the SPV the relevant Trust Assets. Such proceeds will be used by the SPV to purchase the beneficial interests in the Land Parcels from the Sellers pursuant to the Purchase Agreements. The Sellers will lend such proceeds to Guthrie to be used to refinance a portion of the financing facilities totalling RM1.5 billion entered into by Guthrie and its subsidiaries to fund its Indonesian acquisition and operations. Application has been made to LFX to list the Sukuk on LFX. The Sukuk have been given an international rating of BBB+is by MARC International Ltd. The letters is denote Islamic Sukuk, asset-based instruments. Each of the Trust Agreements, the Certificate Purchase Agreement, the Transaction Administration Agreement and the Sukuk will be governed by, and construed in accordance with, New York law. The Lease Agreements and the Purchase Agreements will be governed by Malaysian law. Investment Considerations Considerations relating to Guthrie and its Business

8 7 Credit Risk Proceeds of the Trust Assets are the sole source of payments on the Sukuk and such proceeds are derived ultimately from Lease Payments made by Guthrie under the Lease Agreements. Accordingly, payment due on the Sukuk will be directly related to Guthrie s creditworthiness and financial condition. A prospective purchaser of Sukuk should have such knowledge and experience in financial and business matters and expertise in assessing such credit risk that it is capable of evaluating the merits, risks and suitability of investing in the Sukuk including the credit risk associated with Guthrie and the Trust Assets. In particular, each prospective purchaser of Sukuk should note the investment considerations set out below in respect of Guthrie and the Group. Financial and Economic Factors Affecting Malaysia and Indonesia Malaysia remains one of Guthrie s more important markets, with 15% of Malaysia s production consumed domestically and remaining 85% exported in the form of refined palm oil products. No assurances can be made as to future growth rates of Malaysia or the palm oil export markets as this may be affected by (among others): (i) adverse developments in the economies of countries to which Malaysia exports; (ii) changes in inflation and interest rates; (iii) taxation; (iv) the Malaysian Government s budget deficit/surplus and (v) political and social developments affecting Malaysia. The Federation of Malaysia currently maintains long-term investment grade foreign currency ratings of Baa2 and BBB with a Stable outlook by both S&P and Moody s respectively. In November 2000, Guthrie decided to venture into Indonesia through the Share Acquisition. The long-term business and growth prospects in Indonesia will be dependent on the political stability and economic policies of the country. At the present time there is uncertainty as to the political and economic stability of Indonesia. S&P and Moody s current long-term foreign currency rating for Indonesia are CCC+ and Caa1 with a Stable outlook. Foreign Exchange Exposure and Exchange Controls Changes in exchange rates influence Guthrie s results of operations. Guthrie s crude palm oil sales are based on the traded crude palm oil price, which is quoted in US dollars. As of the date hereof, the US dollar is pegged against the Ringgit at a rate of RM3.80 to US$1.00. This acts as a natural hedge for Guthrie s US dollar indebtedness. Due to this peg, any rise in the crude palm oil price in US dollars will be earnings positive to Guthrie as this will be similarly be reflected in a matching rise in Guthrie s operating income. There can be no assurance that the Ringgit peg will continue nor, if it is removed, that the impact thereof will not have a negative effect on Guthrie and its financial conditions and prospects. Malaysia has in place limited currency controls for the purposes of economic stability. These apply primarily in respect of short-term equity investments. In respect of external borrowing, Malaysian residents are required to obtain the permission of the Malaysian Controller of Foreign Exchange (the FX Controller ) before they can obtain credit facilities, including financial guarantees from non-residents, in foreign currency equivalent to more than RM10.0 million in aggregate. Permission has generally been given for all foreign loans raised on reasonable terms to finance productive activity in Malaysia and for foreign exchange income generating investments overseas. Guthrie has obtained the permission of the FX Controller for the remittance of the RM1.5 billion raised earlier for the payment of the Acquired Shares. The FX Controller has asked that Guthrie re-finance this sum via a US dollar financing. It is anticipated therefore, that the FX Controller will provide the requisite approvals for Guthrie to remit the lease payments under the Lease Agreements to the Trusts in order for the Trusts in turn to meet its payment obligations incurred under the Sukuk.

9 8 Currently, there are no restrictions on the repatriation of profits, capital derived from investments in Indonesia and on the transfer of funds abroad. There are also no restrictions on foreign exchange operations, specifically including the purchase and sale of foreign exchange and transfers and all other types of international settlements. However, there can be no assurance that there will be no restrictions on the repatriation of profits, capital derived from investments in Indonesia and on the transfer of funds abroad in the future. Competition The demand for crude palm oil is dependent upon the world-wide traded prices for competing oils, such as soya, rapeseed, sunflower seed and other such substitutes for palm oil. As such, good soya harvests will normally lower the price and impact demand levels for palm oil. Similarly, palm kernel oil demand is closely tied to that for coconut oil, as they are close substitutes. The demand for these lauric oils is driven by non-food uses where they have an environmental advantage over mineral oil. Aside from world-wide demand, supply and price of oils and fats, there are a number of other factors affecting the movement of palm oil prices (some of which are interrelated and unpredictable), which could cause price volatility in the world vegetable oils market. These include: (i) important and export tariff barriers; (ii) agricultural policies imposed by importing and exporting countries; and (iii) weather and other agricultural influences. Environmental Issues Guthrie and its operations are required to comply with various environmental laws relating to water, air, noise pollution and the disposal of waste materials. Although Guthrie believes that it is in compliance in all material respects to these environmental laws, some risks of environmental costs and liabilities is inherent in its operations and there can be no assurance that material costs and liabilities will not be incurred in the future in this regard. Compliance with environmental laws and regulations may add extra costs to the development and replanting of oil palm. Accounting Standards Guthrie prepares its financial statements using generally accepted accounting principles in Malaysia issued by the Malaysian Accounting Standards Board which differ in certain respects from international accounting standards. As a result, Guthrie s financial statements and results of operations may differ from those of companies in other countries. Considerations relating to the Sukuk Limited Recourse Each Suk kun represents solely an undivided ownership interest in the relevant Trust Assets. Holders of Series A Sukuk will have no recourse to the Series B Trust Assets. Likewise, holders of Series B Sukuk will have no recourse to the Series A Trust Assets. Creditors of the SPV and the Trustee (in any capacity other than as trustee in respect of the Sukuk), including, in particular, holders of certificates relating to other trusts, will have no recourse to the Trust Assets. Proceeds of the Trust Assets are the sole source of payments on the Sukuk. The Sukuk do not represent an interest in or obligation of any of the SPV, the Trustee, Guthrie or any of their affiliates. Accordingly, Sukukholders will have no recourse to any assets of the SPV, the Trustee (including, in particular other assets comprised in other trusts), Guthrie (to the extent it satisfies all of its obligations under the related Lease Agreements) or any of their affiliates in respect of any shortfall in the expected amounts from the Trust Assets. Interest in the Land Parcels

10 9 The issue of the Sukuk and the related transactions involve the transfer of the beneficial interest in the Land Parcels by the Sellers to the SPV. Such transfer of only the beneficial interest in (and not the legal title to) the Land Parcels is (i) to facilitate the issue of the Sukuk and (ii) does not and is not intended to convey ownership in the Land Parcels to the SPV within the meaning of the National Land Code 1965 of Malaysia. Consequently, the Trustee also would only acquire a beneficial interest in the Land Parcels. By virtue of Part Thirty-Three (A) of the National Land Code 1965, a foreigner or a foreign company may acquire land only after having obtained the approval of the relevant State Authority. Limited Liquidity No secondary market for the Sukuk currently exists and, in the event that a secondary market in the Sukuk does develop, whether as a result of the Initial Purchasers offering to buy such Sukuk or otherwise, there can be no assurance that it will continue. Accordingly, the purchase of a Suk kun is suitable only for investors who can bear the risks associated with a lack of liquidity in the Sukuk and the financial and other risks associated with an investment in the Sukuk. Provision of Information None of the Trustee, the Initial Purchasers or any of their affiliates makes any representation as to the credit quality of Guthrie or the Trust Assets. Any of such persons, whether by virtue of the types of relationships described herein or otherwise, may have acquired, or during the term of any Sukuk may acquire, non-public information with respect to Guthrie or the Trust Assets. None of such persons is under any obligation to make such information directly available to any Sukukholder.

11 10 Restrictions on Malaysian Residents Acquiring Sukuk Residents of Malaysia are not permitted to purchase the Certificates without first having had and obtained all the necessary approvals from all relevant regulatory authorities, including but not limited to all the necessary approvals from Bank Negara Malaysia. The onus of obtaining such approvals is on the residents concerned and none of the Trustee, the Initial Purchasers, the SPV or Guthrie accepts any responsibility for the purchase of any Sukuk by the residents as aforesaid without the necessary approvals being in place. Malaysian residents are advised to seek independent professional advice as may be necessary before making any such purchase. Rating It is a condition of the issuance of the Sukuk that the Sukuk be assigned, on issue, an international rating of BBB+is by MARC International Ltd for timely payment on the Sukuk. The rating will address the likelihood of the receipt by Sukukholders of the distributions to which they are entitled under the Conditions which is a function of Guthrie s ability to make payments under the Lease Agreements. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time. There is no assurance that a rating will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by the relevant rating agency if in its judgment circumstances in the future so warrant. The rating of the Sukuk will be based, inter alia, on the structure of the issue. The Leases (Ijarah) First Global Sukuk Inc, a special purpose company incorporated in Labuan, Malaysia under the Offshore Companies Act, 1990 (the SPV ), will enter into (i) a purchase agreement with Kumpulan Jerai Sdn Bhd, as subsidiary of Guthrie (the Series A Seller ) in respect of the Series A Land Parcels (the Series A Purchase Agreement ) and (ii) three purchase agreements (each a Series B Purchase Agreement ) with each of Kumpulan Jerai Sdn Bhd, Kumpulan Linggi Sdn Bhd and Kumpulan Kamuning Sdn Bhd, each a subsidiary of Guthrie (together, the Series B Sellers ) in respect of the Series B Land Parcels. Pursuant to the Series A Purchase Agreement, the Series A Seller will declare itself a bare trustee of its interests in the Series A Land Parcels for the benefit of the SPV and convey the beneficial interest in the Series A Land Parcels to the SPV. Thereafter the SPV will lease its beneficial interest in the Series A Land Parcels to Guthrie pursuant to an agreement (the Series A Lease Agreement ). Pursuant to the Series B Purchase Agreement, the Series B Sellers will declare themselves bare trustee of their respective interests in the Series B Land Parcels for the benefit of the SPV and convey the beneficial interest in the Series B Land Parcels to the SPV. Thereafter the SPV will lease its beneficial interest in the Series B Land Parcels to Guthrie pursuant to an agreement (the Series B Lease Agreement ). Pursuant to each Lease Agreement, the SPV and Guthrie will enter into several six-month leases, with the first such lease beginning on the Closing Date and the last such lease terminating on the Scheduled Dissolution Date of the related Series of Certificates. The term of lease shall refer to the period from the commencement of the first such six-month lease to the termination of the last such six-month lease. The lease term under the Series A Lease Agreement is for a period of three years, commencing on the Closing Date and terminating on the Series A Scheduled Dissolution Date. The lease term under the Series B Lease Agreement is for a period of five years, commencing on the Closing Date and terminating on the Series B Scheduled Dissolution Date.

12 11 The SPV will, pursuant to the Trust Agreements, convey to the Trustee its beneficial interest in the Land Parcels and assign to the Trustee all its rights, title, interest and benefit, present and future, in, to and under the Purchase Agreements and the Lease Agreements. Under the Shariah principle of Al-Ijarah Al-Muntahiyah Bit-Tamlik, at the end of the relevant lease terms, Guthrie will purchase the beneficial interest in the relevant Land Parcels from the Trustee. Under each Lease Agreement, Guthrie, as lessee in respect of the relevant Land Parcels, will be responsible for all costs and expenses associated with, among others, the use, lease and registration of the Land Parcels. The SPV, as lessor in respect of the Land Parcels, will retain responsibility for the maintenance of the Land Parcels. Pursuant to the Service Agency Agreements, the SPV will appoint Guthrie as its service agent for the purposes of providing adequate maintenance (including conducing periodic inspections of the Land Parcels on the SPV s behalf and keeping the Land Parcels in optimal condition) in respect of the Land Parcels and for the purpose of procuring and maintaining adequate insurance against loss and damage to the Land Parcels. The SPV will be named in all insurance policies as the beneficiary or loss payee. The SPV s rights, title, interest and benefit, present and future, in, to and under such insurance policies will be assigned to the Trustee (as part of the Trust Assets) pursuant to the Trust Agreements. In exchange for its rights in respect of the Land Parcels pursuant to the Lease Agreements, Guthrie will be obliged to make Lease Payments. Such payments will be equivalent to the aggregate amounts payable on the Certificates on the forthcoming Periodic Distribution Date. The Series A Lease Payments and the Series B Lease Payments will be made by Guthrie on each Periodic Distribution Date. Under each Lease Agreement: (a) the SPV will have the option (the Put Option ), which it will assign to the Trustee for the benefit of the holders of the Series of Sukuk related to such Lease Agreement pursuant to the related Trust Agreement, to require Guthrie to purchase the beneficial interest in the related Land Parcels at a price equal to the principal amount of such Series of Sukuk plus the aggregate Periodic Distribution Amount payable on the Sukuk on the date of such redemption: (i) (ii) on the Unscheduled Dissolution Date in respect of such Series of Sukuk; and on the Scheduled Dissolution Date in respect of such Series of Sukuk; and (b) Guthrie has the option (the Call Option ) to require the SPV or, after the assignment to the Trustee of the SPV s interests in such Lease Agreement pursuant to the relevant Trust Agreement, the Trustee to sell the beneficial interest in the relevant Land Parcels to it on the related Scheduled Dissolution Date at the related Dissolution Distribution Amount.

13 12 First Global Sukuk: Case Study questions Following the recent string of successful Sukuk issues, and the fact that they are a relatively new concept in corporate finance, your employer, an Investment Bank, has selected your group to make presentations to the Board regarding the key issues involved. Your group must consider the following questions and you must present your findings to the whole class. Please be ready to explain any technical concepts to the class. You will be expected to defend your answers. Remember that time is money and that your responses must be succinct and not overly descriptive. In other words get to the point!! 1. Describe the exact nature of the First Global Sukuk 2. What Islamic modes of finance underpin the First Global Sukuk? 3. Describe how these modes of finance work and the exact relationship they have with the First Global Sukuk 4. In analysing the investment considerations involved describe the nature of the following risks (i) (ii) (iii) (iv) (v) (vi) credit risk financial and economic risks foreign exchange risk business risk environmental risk accounting considerations 5. Describe any particular considerations relating to the sukuk that you feel should be drawn attention to. 6. Describe in detail the Ijarah leasing arrangements. 7. What Sharia Board requirements were put in place? 8. Are issues of corporate governance relevant to this issue? 9. What was innovative about this issue? 10. How was the issue rated and by whom? 11. What lessons can be learnt for the issue of future sukuk? How do the critical factors for First Global Sukuk compare with those for the other Sukuk discussed?

14 13 Identify the following parties in the First Global Sukuk: SPV Sellers Guthrie Initial Purchasers Trustee Identify and explain the following elements of the Sukuk Certificates: Form and Denomination Issue price Rate of return on Trust Assets Scheduled Dissolution of the Trust Form and Denomination Status Trusts Limited Recourse Negative Pledge Guthrie s Covenants Use of Proceeds Listing Rating Offers of Sukuk Governing Law Demonstrate with a flow chart the nature of the underlying transactions