Part 4: Structuring Sukuk Programmes & Recommendations

In the final part, Hani Abbas Helmy, Head of Sharia Review, for Dubai Islamic Bank, provides recommendations in structuring sukuk programmes and the role of the Shari’a supervisor in the process.

Sukuk programmes cover a number of series issuances on same/similar terms and conditions. Where instead of having the whole Sukuk documentation and process repeated, the Issuer establishes the programme and issues a series issuance based on the Sukuk programme. Subsequently it will issue a Sukuk series issuance the same way it issued the first series issuance, where (i) a supplemental Prospectus is issued and (ii) the Underlying Sukuk Transaction is executed by (a) executing a template supplemental agreement for every master agreement, carrying the needed variables and incorporating the terms and conditions of the relevant master agreement, as if stipulated therein and (b) by issuing a supplementary unilateral undertaking incorporating the terms and conditions of a master undertaking/promise by the relevant party along with the relevant variables.

These Sukuk programmes come with specific benefits such as:

(1) lower cost of issuance for subsequent drawdowns / tranches;

(2) faster subsequent issuances (as the documents are the same and the legal and regulatory approvals are in place), and

(3) varying each subsequent Sukuk series issuance tranche in terms of

(a) underlying Assets,

(b) Sukuk expected profit rate, relevant benchmark and/or index,

(c) Call and Put options,

(d) currency denomination, etc.

As the Sharia Reviewer reviews these documents he will notice reference to the supplemental documents for all variables. For example, in a stand-alone Ijara Sukuk, providing for the purchase of the Ijara Asset and its price reads “the Purchaser hereby purchases the Asset located on AAA for a purchase price of USD 100 million.” Whereas under the Sukuk programme it reads “the Purchaser hereby purchases the Asset specified in the supplemental purchase agreement for a purchase price specified in the supplemental purchase agreement.” Hence at the programme documentation level, the Sharia Reviewer does not know what is being sold and for what price. In later series issuances the variables are assessed in conjunction with the master documents for Sharia Compliance.

 

The Hybrid Sukuk

This is basically a Sukuk issuance that has two or more Underlying Sukuk Transactions. For example, it might have 60% of its Sukuk proceeds invested in an Ijara transaction and 40% in a Murabaha transaction. In this case the devised methodology herein runs quite the same. However, the Sharia Reviewer (i) bears in mind the impact on the overall structure and potential balancing restrictions that may be required for tradability purposes; and (ii) reviews the two sets of documents for each different Underlying Sukuk Transactions, as if reviewing two distinct bilateral transactions at any IFI.

 

The Hybrid Sukuk Programme

A Hybrid Sukuk Programme is where each series issuance is a Hybrid Sukuk having two or more Underlying Sukuk Transactions. The Sharia Reviewer reviewing a Hybrid Sukuk Programme follows the devised methodology bearing in mind what is advised under both the relevant sections “The Sukuk Programme” and “The Hybrid Sukuk”.

 

Recommendations

This series of articles recommends the following:

  1. Both the Sukuk Standards of AAOIFI and DFM Sukuk to be expanded with a section to cover the Sukuk Features covered in Part 1, along with the relevant Sharia rules and guidelines, with reference to Sukuk Classes.
  2. The Sharia Reviewer first acquaints himself with the Sukuk Features covered in Part 1 and then starts his first Sharia review of a Sukuk issuance.
  3. The Sharia Reviewer to adopt the Methodology in Part 3 as a guided methodical approach in his first few Sukuk Sharia Reviews.
  4. Sharia Reviewers prioritize structure related review of Sukuk issuances and provide comments related thereto ahead of documentation review.
  5. The Sharia Reviewer attains clarity of the core Sharia structure of the Underlying Sukuk Transaction and then reviews in that context.
  6. The Sharia Reviewer, while raising Sharia concerns on the documentation of a Sukuk issuance, provides the optimal potential Sharia remedies with no compromise on legal defensibility and the commercial profile, facilitating an overall timely, favorable outcome.
  7. The Supervisor to use the Methodology in Part 3 as a grooming tool to involve more employees in the Sharia Department or in a Sharia consultancy firm, as well as interns to conduct Sharia Review of Sukuk issuance.
  8. The Supervisor (of the Sharia Reviewer) deploys this methodology in order to have better visibility and track the Sukuk Sharia Review process. This is very important in the first few encounters of the supervised Sharia Reviewer as it shows the Supervisor (a) where grooming is required and (b) how the Sharia Reviewer’s skills are progressing and developing.

 

Conclusion

This Sukuk Sharia Review Methodology is a simplistic approach tackling the initial Sharia Review of a Sukuk issuance and aids in simplifying the process for practicing Sharia Reviewers and opening new doors for Sharia Auditors and other professionals in typical Sharia Departments and Sharia consultancy firms to explore Sukuk Sharia review. This Methodology also applies to Sukuk Programmes, Hybrid Sukuk or even Hybrid Sukuk Programmes. This also helps Managers/Supervisors manage enhancing their team members’ skills, talents and expertise. Further ahead, this will build better readiness and improved TATs for the relevant institution.

 

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