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Corporate Bonds for Real Estate with Sukuk Features. Presented By: Naim Farooqui Managing Director. ORIX Investment Bank Pakistan Limited. International Islamic Finance and Investment Symposium 2006 December 7, 2006. 1. Bank Syndication Debt -Rs. 150 m. Corporate House

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corporate bonds for real estate with sukuk features

Corporate Bonds for Real Estate with Sukuk Features

Presented By:

Naim Farooqui

Managing Director

ORIX Investment Bank Pakistan Limited

International Islamic Finance and Investment Symposium 2006

December 7, 2006

slide2

1

Bank Syndication

Debt -Rs. 150 m

Corporate House

Equity – Rs. 121 m

Real Estate Acquisition

Transaction Structure

Equity + Debt

Rs. 271 m

Rentals

Company 1

Purchase

Company 2

Rented

Office Building

Company 3

Company 4

slide3

Making a Case for Securitization for

A Real Estate Finance Company (REFC)

2

  • Securitization is a process for institutions to turn their locked up assets i.e. mortgages in the instant case, which are illiquid and lumpy, into tradable securities such as bonds.
  • Securitization is an open market selling of financial instrument backed by asset’s cash flow or asset value (mortgages).
  • A contractual arrangement whereby the REFC sells its mortgage receivables to a special purpose vehicle (SPV).
  • SPV issues debt instruments (bonds) to finance the purchase
slide4

Normal REFC Business Operations

Securitization Structure

Receivables

3

Mortgages

Typical Structure Mortgage Backed Securitization

Real Estate

Finance Company

Extension of Loans For Real Estate

Cash Proceeds Raised Via Issuance of Debt Securities

Housing Mortgage Receivables

SPV

DebtSecurities

Safeguarding Investors Interest

Cash

  • Key Issues To be Addressed
  • Non-Recourse Element
  • Accounting Clearance
  • Legal Issues
  • Market For Instrument
  • Regulatory Aspects
  • Security Mechanisms

Investors

Trustee

Private Placements

Public Placements

slide5

Structure of SPV

4

  • Originator: entity that generates receivables
  • Issuer of the securities: SPV (any form, usually trust, corporation, partnership, etc.)
  • Advisor/Arranger: structures transaction; prepares documentation alongside legal, liaison with auditors
  • Underwriter: who places securities in the market
slide6

5

Structure of SPV…contd.

  • Custodian: entity that holds receivables as agent and bailee for the trustee or trustees
  • Servicer: who collects receivables and transfers funds to accounts of trustees
  • Trustee: who deals with the administration—holds receivables; receives payment on receivables, makes payment to security holders
  • Rating agencies: JCR-VIS, PACRA.—helps in structuring; determine opinions needed, etc.
slide7

6

General Benefits of Securitization

  • Why Securitize?
    • Lower-cost financing
      • Liquidity crunches?
    • Equity saving
      • Leverage restrictions
      • Reduction of assets – create liquidity to the company
    • Matched funding / funding strategy
    • Earnings
      • Originator capitalizes the future cash flow
slide8

Summing Benefits for all Stakeholders

7

  • To owner/originator
    • Alternative financing instruments
    • Improve liquidity in the balance sheet
    • Reinvestment and freeing up the low-yield assets
    • Transfer the interest rate risks to SPV
    • Reducing corporate gearing
  • To bondholders/investors
    • New Investment opportunities for diversification
    • Direct participation in real estate market by small investors
    • Building as collateral
  • To Real Estate Market
    • An active secondary capital market for institutional investment
    • Alternative Financing Options
slide9

8

Conclusions

Similarities of SUKUK with the proposed structure

The proposed structure though based on conventional model can easily be converted into a Shariah Compliant Sukuk Bond. It has the following characteristics which are important elements of Sukuks:

  • Corporate Bonds are easily Tradable – Similarly, SUKUK being liquid real assets, are easily transferred and traded in the financial market.
  • Corporate Bonds can be Rated – Credit rating increase the credibility of financial instruments. SUKUK are easily analyzed by international and regional rating agencies which facilitates their marketability.

Differences in Main features:

  • Sukuk have share holding in the underlying asset while Bonds are purely a debt instrument.
  • Sukuk are limited to Sharia permissible ventures/products.
slide10

9

Recent Deals

July 2003

July 2003

July 2003

July 2003

July 2003

National Police Foundation Security Services Limited

July 2003

July 2003

July 2003

July 2003

July 2003

ORIX Securitization Transactions Completed

Brookes Pharmaceutical Limited

Baluchistan Glass Limited

International HousingFinance Limited

Ittehad Chemicals Limited

National Police Foundation Security Services Limited

ORIX Securitization Transactions Completed

Brookes Pharmaceutical Limited

Baluchistan Glass Limited

International HousingFinance Limited

Ittehad Chemicals Limited

Rs. 250 Million

Rs. 200 Million

Rs. 100 Million

Rs. 150 Million

Rs. 38 Million

Rs. 250 Million

Rs. 200 Million

Rs. 100 Million

Rs. 150 Million

Rs. 38 Million

Sept 2003

Mortgage Backed Bridge Financing

Listed Term Finance Certificates

Lease Syndication

Debt Syndication

Debt Syndication

Sept 2003

Mortgage Backed Bridge Financing

Listed Term Finance Certificates

Lease Syndication

Orient Petroleum Inc

Debt Syndication

Debt Syndication

Orient Petroleum Inc

Sept 2003

August 2003

Nov 2003

Oct 2003

June 2004

Sept 2003

August 2003

Nov 2003

Oct 2003

June 2004

Fidelity Investment Bank Limited

Rs. 1 Billion

Crescent Ujala Limited

Grays Leasing Limited

Sigma Leasing Limited

Telecard Limited

First Oil & Gas Securitization Company

Fidelity Investment Bank Limited

Rs. 1 Billion

Crescent Ujala Limited

Grays Leasing Limited

Sigma Leasing Limited

Telecard Limited

Securitization

First Oil & Gas Securitization Company

Rs. 150 Million

Rs. 400 Million

Securitization

Rs. 100 Million

Rs. 130 Million

Rs. 200 Million

Rs. 150 Million

Rs. 400 Million

Rs. 100 Million

Rs. 130 Million

Rs. 200 Million

Privately Placed Term Finance Certificates

Privately Placed Term Finance Certificates

April 2005

Debt Syndication

Debt Syndication

Debt Syndication

Privately Placed Term Finance Certificates

Privately Placed Term Finance Certificates

April 2005

Debt Syndication

Debt Syndication

Debt Syndication

Orient Petroleum Inc

Dec 2003

Jan 2004

Dec 2003

March 2004

May 2004

Orient Petroleum Inc

Dec 2003

Jan 2004

Dec 2003

March 2004

May 2004

Crescent StandardInvestment Bank Limited

Crescent Steel & Allied Products Limited

Al Zamin LeasingModaraba Limited

Sindh Abadgar Sugar Mills Limited

Orient Petroleum Inc

Rs. 1.2 Billion

Crescent StandardInvestment Bank Limited

Crescent Steel & Allied Products Limited

Al Zamin LeasingModaraba Limited

Naimat Basal oil & Gas Securitization Company

Sindh Abadgar Sugar Mills Limited

Orient Petroleum Inc

Rs. 1.2 Billion

Naimat Basal oil & Gas Securitization Company

Securitization

Rs. 100 Million

Rs. 300 Million

Rs. 125 Million

Rs. 300 Million

Rs. 50 Million

Securitization

Rs. 100 Million

Lease Discounting Syndication

Rs. 300 Million

Rs. 125 Million

Rs. 300 Million

Rs. 50 Million

Privately Placed Term Finance Certificates

Privately Placed Term Finance Certificates

Lease Discounting Syndication

Sept 2002

Lease Discounting Syndication

Debt Syndication

Privately Placed Term Finance Certificates

Privately Placed Term Finance Certificates

Lease Discounting Syndication

Sept 2002

Debt Syndication

PILCORP

June 2004

June 2004

June 2004

May 2004

June 2004

PILCORP

June 2004

June 2004

June 2004

May 2004

June 2004

Indus Dyeing & Manufacturing Company

Al Noor Sugar Mills Limited

Rs. 100 Million

Big Bang Communications Pvt Limited

Eden Developers Pvt Limited

International Brands

Pvt Limited

First Securitization Trust Company

Indus Dyeing & Manufacturing Company

Al Noor Sugar Mills Limited

Rs. 100 Million

Big Bang Communications Pvt Limited

Eden Developers Pvt Limited

International Brands

Pvt Limited

First Securitization Trust Company

Lease Receivables Securitization

Rs. 32 Million

Rs. 110 Million

Rs. 100 Million

Lease Receivables Securitization

Rs. 500 Million

Rs. 100 Million

Rs. 32 Million

Rs. 110 Million

Rs. 100 Million

Rs. 500 Million

Rs. 100 Million

Commercial Paper

Debt Syndication

Debt Syndication

Debt Syndication

Debt Syndication

Commercial Paper

Debt Syndication

Debt Syndication

Debt Syndication

Debt Syndication