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

Real Estate Acquisition Transaction Structure Bank Syndication Debt -Rs. 150 m 1 Corporate House Equity – Rs. 121 m Equity + Debt Rs. 271 m Rentals Company 1 Purchase Company 2 Rented Office Building Company 3 Company 4

Making a Case for Securitization for A Real Estate Finance Company (REFC) 2 n 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. n Securitization is an open market selling of financial instrument backed by asset’s cash flow or asset value (mortgages). n A contractual arrangement whereby the REFC sells its mortgage receivables to a special purpose vehicle (SPV). n SPV issues debt instruments (bonds) to finance the purchase

Securitization Structure Typical Structure Mortgage Backed Securitization Normal REFC Business Operations Receivables Real Estate Finance Company Mortgages Extension of Loans For Real Estate Cash Proceeds Raised Via Issuance of Debt Securities Housing Mortgage Receivables SPV Key Issues To be Addressed 1. 2. 3. 4. 5. 6. Non-Recourse Element Accounting Clearance Legal Issues Market For Instrument Regulatory Aspects Security Mechanisms Debt Securities Cash Safeguarding Investors Interest Investors Trustee Private Placements Public Placements 3

Structure of SPV 4 n Originator: entity that generates receivables n Issuer of the securities: SPV (any form, usually trust, corporation, partnership, etc. ) n Advisor/Arranger: structures transaction; prepares documentation alongside legal, liaison with auditors n Underwriter: who places securities in the market

Structure of SPV…contd. 5 n Custodian: entity that holds receivables as agent and bailee for the trustee or trustees n Servicer: who collects receivables and transfers funds to accounts of trustees n Trustee: who deals with the administration— holds receivables; receives payment on receivables, makes payment to security holders n Rating agencies: JCR-VIS, PACRA. —helps in structuring; determine opinions needed, etc.

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

Summing Benefits for all Stakeholders n To owner/originator n n n To bondholders/investors n n 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 New Investment opportunities for diversification Direct participation in real estate market by small investors Building as collateral To Real Estate Market n n An active secondary capital market for institutional investment Alternative Financing Options 7

Conclusions 8 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: n Corporate Bonds are easily Tradable – Similarly, SUKUK being liquid real assets, are easily transferred and traded in the financial market. n 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: n n Sukuk have share holding in the underlying asset while Bonds are purely a debt instrument. Sukuk are limited to Sharia permissible ventures/products.

9 Recent Deals July 2003 International Housing Finance Limited Rs. 150 Million Mortgage Backed Bridge Financing August 2003 Crescent Ujala Limited Rs. 150 Million Debt Syndication Dec 2003 July 2003 Ittehad Chemicals Limited Rs. 250 Million Listed Term Finance Certificates Sept 2003 Fidelity Investment Bank Limited Rs. 400 Million Privately Placed Term Finance Certificates Jan 2004 Crescent Standard Crescent Steel & Allied Investment Bank Limited Products Limited Rs. 125 Million Lease Discounting Rs. 125 Million Syndication Lease Discounting Syndication May 2004 Indus Dyeing & Manufacturing Company Rs. 100 Million Commercial Paper Rs. 300 Million Privately Rs. Placed Term Finance Certificates Privately Placed Term Finance Certificates June 2004 Eden Developers Pvt Limited Rs. 500 Million Debt Syndication July 2003 National. July Police 2003 Foundation Security National Police Services Limited Foundation Security Services Limited Rs. 38 Million Lease Syndication Oct 2003 Grays Leasing Limited July 2003 Baluchistan Glass Limited Rs. 200 Million Debt Syndication Nov 2003 Sigma Leasing Limited July 2003 Brookes Pharmaceutical Limited ORIXSecuritization Transactions. Completed Rs. 100 Million Debt Syndication June 2004 Sept 2003 Orient Petroleum Inc June 2004 Rs. 1 Billion Telecard Limited First Oil & Gas Securitization Rs. 1 Billion Company First Oil & Gas Securitization Company Rs. 130 Million Privately Placed Term Finance Certificates Dec 2003 Orient Petroleum Inc Rs. 300 Million Privately Placed Term Finance Certificates June 2004 International Brands Pvt Limited Rs. 110 Million Debt Syndication Rs. 100 Million Debt Syndication March 2004 Sindh Abadgar Sugar Mills Limited Rs. 100 Million Debt Syndication June 2004 Big Bang Communications Pvt Limited Rs. 32 Million Debt Syndication Rs. 200 Million Debt Syndication May 2004 Al Zamin Leasing Modaraba Limited Rs. 50 Million Securitization April 2005 Orient Petroleum Inc Rs. 1. 2 Billion Naimat Basal oil & Gas Rs. 1. 2 Billion Securitization Company Naimat Basal oil & Gas Securitization Company Securitization Rs. 50 Million Lease Discounting Syndication June 2004 Al Noor Sugar Mills Limited Rs. 100 Million Debt Syndication Sept 2002 PILCORP Rs. 100 Million First Securitization Trust Rs. 100 Million Company First Securitization Trust Lease Receivables Company Securitization Lease Receivables Securitization

n Thank You!