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Corporate Bonds for Real Estate Corporate Bonds for Real Estate with Sukuk Featureswith Sukuk Features
ORIX Investment Bank Pakistan LimitedORIX Investment Bank Pakistan Limited
International Islamic Finance and Investment Symposium 2006December 7, 2006
Presented By:Naim FarooquiManaging Director
Real Estate Acquisition Real Estate Acquisition Transaction StructureTransaction Structure
Bank SyndicationDebt -Rs. 150 m
Corporate HouseEquity – Rs. 121 m
Office Building
Equity + DebtRs. 271 m
Company 1
Company 2
Company 3
Company 4
PurchasePurchase
RentedRented
RentalsRentals
1
Securitization is a process for institutions to turn their Securitization is a process for institutions to turn their locked up assets i.e. mortgages in the instant case, locked up assets i.e. mortgages in the instant case, which are illiquid and lumpy, into tradable securities which are illiquid and lumpy, into tradable securities such as bonds.such as bonds.
Securitization is an open market selling of financial Securitization is an open market selling of financial instrument backed by asset’s cash flow or asset value instrument backed by asset’s cash flow or asset value (mortgages).(mortgages).
A contractual arrangement whereby the REFC sells its A contractual arrangement whereby the REFC sells its mortgage receivables to a special purpose vehicle mortgage receivables to a special purpose vehicle (SPV).(SPV).
SPV issues debt instruments (bonds) to finance the SPV issues debt instruments (bonds) to finance the purchase purchase
Making a Case for Securitization forMaking a Case for Securitization forA Real Estate Finance Company (REFC)A Real Estate Finance Company (REFC)
2
Securitization Structure
Real Estate Finance Company
Mortgages
Normal REFC Business Operations
Extension of Loans For Real Estate
Housing Mortgage Receivables
SPV
Cash Proceeds Raised Via Issuance of Debt
Securities
Investors
Debt SecuritiesCash
Receivables
Key Issues To be Addressed
1. Non-Recourse Element2. Accounting Clearance3. Legal Issues4. Market For Instrument5. Regulatory Aspects6. Security Mechanisms
Trustee
Safeguarding Investors Interest
Typical Structure Mortgage Backed
Securitization
3
Private Placements Public Placements
Originator: entity that generates receivables Originator: entity that generates receivables
Issuer of the securities: SPV (any form, usually Issuer of the securities: SPV (any form, usually trust, corporation, partnership, etc.)trust, corporation, partnership, etc.)
Advisor/Arranger: structures transaction; prepares Advisor/Arranger: structures transaction; prepares documentation alongside legal, liaison with documentation alongside legal, liaison with auditorsauditors
Underwriter: who places securities in the marketUnderwriter: who places securities in the market
Structure of SPVStructure of SPV 4
Custodian: entity that holds receivables as agent Custodian: entity that holds receivables as agent and bailee for the trustee or trustees and bailee for the trustee or trustees
Servicer: who collects receivables and transfers Servicer: who collects receivables and transfers funds to accounts of trustees funds to accounts of trustees
Trustee: who deals with the administration—Trustee: who deals with the administration—holds receivables; receives payment on holds receivables; receives payment on receivables, makes payment to security holdersreceivables, makes payment to security holders
Rating agencies: JCR-VIS, PACRA.—helps in Rating agencies: JCR-VIS, PACRA.—helps in structuring; determine opinions needed, etc.structuring; determine opinions needed, etc.
Structure of SPV…contd.Structure of SPV…contd.5
Why Securitize?Why Securitize? Lower-cost financingLower-cost financing
Liquidity crunches?Liquidity crunches? Equity savingEquity saving
Leverage restrictionsLeverage restrictions Reduction of assets – create liquidity to Reduction of assets – create liquidity to
the companythe company Matched funding / funding Matched funding / funding
strategystrategy EarningsEarnings
Originator capitalizes the future cash flowOriginator capitalizes the future cash flow
General Benefits of SecuritizationGeneral Benefits of Securitization6
To owner/originatorTo owner/originator Alternative financing instrumentsAlternative financing instruments Improve liquidity in the balance sheetImprove liquidity in the balance sheet Reinvestment and freeing up the low-yield assetsReinvestment and freeing up the low-yield assets Transfer the interest rate risks to SPVTransfer the interest rate risks to SPV Reducing corporate gearing Reducing corporate gearing
To bondholders/investorsTo bondholders/investors New Investment opportunities for diversificationNew Investment opportunities for diversification Direct participation in real estate market by small investorsDirect participation in real estate market by small investors Building as collateralBuilding as collateral
To Real Estate Market To Real Estate Market An active secondary capital market for institutional An active secondary capital market for institutional
investmentinvestment Alternative Financing OptionsAlternative Financing Options
Summing Benefits for all Summing Benefits for all StakeholdersStakeholders
7
Similarities of SUKUK with the proposed structureSimilarities of SUKUK with the proposed structureThe proposed structure though based on conventional The proposed structure though based on conventional model can easily be converted into a Shariah Compliant model can easily be converted into a Shariah Compliant Sukuk Bond. It has the following characteristics which Sukuk Bond. It has the following characteristics which are important elements of Sukuks:are important elements of Sukuks:
Corporate Bonds are easily Tradable – Corporate Bonds are easily Tradable – Similarly, SUKUK Similarly, SUKUK being liquid real assets, are easily transferred and traded in the being liquid real assets, are easily transferred and traded in the financial market.financial market.
Corporate Bonds can be Rated – Corporate Bonds can be Rated – Credit rating increase the Credit rating increase the credibility of financial instruments. SUKUK are easily analyzed by credibility of financial instruments. SUKUK are easily analyzed by international and regional rating agencies which facilitates their international and regional rating agencies which facilitates their marketability.marketability.
Differences in Main features:Differences in Main features:
Sukuk have share holding in the underlying asset while Bonds are Sukuk have share holding in the underlying asset while Bonds are purely a debt instrument.purely a debt instrument.
Sukuk are limited to Sharia permissible ventures/products.Sukuk are limited to Sharia permissible ventures/products.
ConclusionsConclusions 8
Recent Deals
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Rs. 150 Million
International Housing Finance Limited
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Rs. 130 Million
Oct 2003
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Rs. 100 Million
Nov 2003
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Orient Petroleum Inc
Privately Placed Term Finance Certificates
Rs. 300 Million
Dec 2003
Crescent Standard Investment Bank Limited
Rs. 125 Million
Lease Discounting Syndication
Dec 2003
Crescent Steel & Allied Products Limited
Jan 2004
Privately Placed Term Finance Certificates
Rs. 300 Million
Sindh Abadgar Sugar Mills Limited
March 2004
Rs. 100 Million
Debt Syndication
Al Zamin Leasing Modaraba Limited
Rs. 50 Million
Lease Discounting Syndication
May 2004
Indus Dyeing & Manufacturing Company
May 2004
Rs. 100 Million Rs. 500 Million
Eden Developers Pvt Limited
Debt Syndication
June 2004 June 2004
Rs. 110 Million
International Brands Pvt Limited
Debt Syndication
Big Bang Communications Pvt Limited
Rs. 32 Million
Debt Syndication
June 2004
Telecard Limited
Al Noor Sugar Mills Limited
June 2004
Rs. 100 Million
Debt Syndication
June 2004
Rs. 200 Million
Debt Syndication
Mortgage Backed Bridge Financing
Commercial Paper Debt Syndication
Orient Petroleum Inc
Rs. 1 Billion
Sept 2003
First Oil & Gas Securitization Company
Securitization
Orient Petroleum Inc
April 2005
Rs. 1.2 Billion
Naimat Basal oil & Gas Securitization Company
Securitization
PILCORP
Sept 2002
Rs. 100 Million
First Securitization Trust Company
Lease Receivables Securitization
ORIX Securitization Transactions Completed
July 2003
Rs. 150 Million
International Housing Finance Limited
Brookes Pharmaceutical Limited
July 2003
Ittehad Chemicals Limited
Rs. 250 Million
Listed Term Finance Certificates
July 2003
National Police Foundation Security
Services Limited
Rs. 38 Million
Lease Syndication
Baluchistan Glass Limited
Rs. 200 Million
Debt Syndication
July 2003
Debt Syndication
Rs. 100 Million
July 2003
Crescent Ujala Limited
Rs. 150 Million
August 2003
Fidelity Investment Bank Limited
Sept 2003
Rs. 400 Million
Privately Placed Term Finance Certificates
Grays Leasing Limited
Privately Placed Term Finance Certificates
Rs. 130 Million
Oct 2003
Debt Syndication
Rs. 100 Million
Nov 2003
Sigma Leasing Limited
Orient Petroleum Inc
Privately Placed Term Finance Certificates
Rs. 300 Million
Dec 2003
Crescent Standard Investment Bank Limited
Rs. 125 Million
Lease Discounting Syndication
Dec 2003
Crescent Steel & Allied Products Limited
Jan 2004
Privately Placed Term Finance Certificates
Rs. 300 Million
Sindh Abadgar Sugar Mills Limited
March 2004
Rs. 100 Million
Debt Syndication
Al Zamin Leasing Modaraba Limited
Rs. 50 Million
Lease Discounting Syndication
May 2004
Indus Dyeing & Manufacturing Company
May 2004
Rs. 100 Million Rs. 500 Million
Eden Developers Pvt Limited
Debt Syndication
June 2004 June 2004
Rs. 110 Million
International Brands Pvt Limited
Debt Syndication
Big Bang Communications Pvt Limited
Rs. 32 Million
Debt Syndication
June 2004
Telecard Limited
Al Noor Sugar Mills Limited
June 2004
Rs. 100 Million
Debt Syndication
June 2004
Rs. 200 Million
Debt Syndication
Mortgage Backed Bridge Financing
Commercial Paper Debt Syndication
Orient Petroleum Inc
Rs. 1 Billion
Sept 2003
First Oil & Gas Securitization Company
Securitization
Orient Petroleum Inc
April 2005
Rs. 1.2 Billion
Naimat Basal oil & Gas Securitization Company
Securitization
PILCORP
Sept 2002
Rs. 100 Million
First Securitization Trust Company
Lease Receivables Securitization
ORIX Securitization Transactions Completed
9
Thank You!Thank You!