2nd turin islamic economic forum (tief 2015)
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Islamic bonds and real-estate securitization.
The Italian perspective for
issuing a sukuk
Turin 19 october 2015
Enrico Giustiniani
Supervisor of Islamic Finance Working Group
AIAF - Italian Association of Financial Analysts Societies
2nd TURIN ISLAMIC ECONOMIC FORUM (TIEF 2015)
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AIAF - Associazione Italiana degli Analisti Finanziari (Italian Association of Financial Analysts Societies) was founded in 1971 as a non-profit association and in 1972 joined EFFAS (The European Federation of Financial Analysts Societies). The total AIAF members are now about 1.000. Objectives To support and develop the financial analysts' profession in Italy, to take care of its professional qualification and to promote the acknowledgment of its function. To promote the study and the analysis of the financial market in order to contribute to its development and efficiency, acting as a spokesman of the members' demands and opinions. Activities Training Course for the Financial Analysts' Education, certified by EFFAS. About 250 meetings, each year, with the Italian listed Companies for presentation and discussions on annual and mid-year reports, new quotations and special operations. a quarterly magazine was produced, called "Rivista AIAF". To all issues are enclosed technical supplements called "Quaderni AIAF", produced by the study's Commissions.
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European Islamic financial assets
Fonte: KFH Research (2014) in G.Brugnoni in quaderno AIAF/Sukuk 167/2015
sukuk
European islamic Investment funds
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first target: The research aims to highlight the benefits that Italian companies could already take looking at Islamic finance as a viable alternative to conventional financing. second target: To verify if there is, even now, a possibility: technical, legal with an ordinary taxation, that an Italian subject, be it a Local Government or a private-sector company, will issue a sukuk, or that it may have an underlying consisting from national activities.
Ijara (lease) is a contract according to which a party purchases and leases out equipment
required by the client for a rental fee. The duration of the rental and the fee are agreed in
advance and ownership of the asset remains with the lessor.
•The assets purchased by the SPV is funded by the issuance of sukuk (trust certificates)
which represents beneficial ownership in the assets and the lease
•Originator received cash proceeds
•SPV rents property to the Originator for specified period
•SPV collects rentals
•SPV passed the rentals to investors – periodic distribution/coupon
At maturity: SPV sells the property to the Originator at an agreed price, and Originator
pays cash to SPV
•SPV simultaneously pay investors cash for sukuk redemption much usufruct from it as
possible.
Sukuk al-Ijara
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A business relationship between a
private-sector company and a
government agency for the purpose
of completing a project that will serve
the public. Public-private
partnerships can be used to finance,
build and operate projects such as
public transportation networks, parks
and convention centers.
Private enterprise assumes the risks
associated with the project and its
realization (design, construction,
management and financing)
financing itself with structures of
project finance.
Among the funding formulas: the
"lease-back" and the "ongoing
leasing"
Public Private Partnerships (PPP)
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«lease-back» scheme
Luxemburg sukuk
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ISIN LU1113955196 €200,000,000 – (synthetic performance 0,436%) Certificates due 2019. Rating "AAA" . The cost 0.0775% on the total nominal. Arranger: BNP Paribas, HSBC, Banque Internationale à Luxembourg and Qinvest. Listed on the Luxembourg Stock Exchange (LuxSE) in the Euro MTF. - administrative process: http://www.mf.public.lu/actualites/2014/07/sukuk_QA_090714/index.html http://eli.legilux.public.lu/eli/etat/leg/loi/2014/07/12/n1/jo http://www.chd.lu/wps/portal/public/RoleEtendu?action=doDocpaDetails&id=6631
- Luxembourg will be the first jurisdiction in the Eurozone to securitize three government properties (the two towers of the Gate of Europe in Kirchberg and the Gutenberg building in Strassen), to back Sukuk worth EUR 200 million. Issuance by the SPV of a sukuk with an issue value equal to the purchase price of the property and a duration of 5 years; - First the above-mentioned buildings will be sold by the Luxembourg Government to an SPV having the legal form of a public limited liability company ("société anonyme"), - At the same time, the SPV will issue Sukuk with a limited term of five years for a value equal to the purchase price of these buildings (fixed at EUR 200 million). Sukuk represent a right against the SPV to the payment of a periodic distribution amount. - Secondly the SPV acting as a trustee on behalf of the Sukuk holders will let these buildings to the Luxembourg Government, who will then sublet them to the sitting tenants. Part of the rent paid will flow back to the holders of the Sukuk, causing them to receive a return generated by the performance of the underlying assets. This is in compliance with Sharia principles. Another part of the rent will be applied to pay for the costs related to the set-up and maintenance of the structure. - At maturity date, holders will recover the invested principal by reselling their Sukuk to the issuer, who will finance this transaction through the sale of the underlying assets. This means that after five years, the SPV will transfer the ownership of the underlying assets to the Luxembourg Government. This five-year period starts running at the date of the acquisition of the buildings by the SPV.
Fonte: A.Salvi, F. Petrucci, P.G. Conforti di Lorenzo in quaderno AIAF/Sukuk 167/2015
Investitore/Sottoscrittore
Pagamento
dei Sukuk
Pagamenti
periodici
dell’interes
se a tasso
fisso
(Proventi
dei canoni)
SPV
Property
management
Emissione Sukuk
Costruttore Contratto
PPP
Lo
cazio
ne
(lease-b
ack
)
Can
on
i Ente pubblico
Vendita beni
Opera
pubblica
Diagram of a potential Public sukuk
Public Sukuk: which steps?
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1 stage : preparatory
An urban project idea that could have an important international visibility and/or an
interest by Islamic customers;
- A rough draft and/or feasibility of use (or reuse) about asset identified to allow an
adequate return operation also through the tools of urban contracted: “Conference
services” and/or “Program agreements";
- A prior interest from one or more Institutional Islamic Investors.
2 stage : Contract negotiation stage
Technical advice (Legal/Administrative) about the establishment of any trust (the special
purpose vehicle - SPV) as part of the Local Government. The trust will issue the sukuk to
finance the transaction. The underwriters of sukuk may be (in whole or in part) also
members of the SPV;
- Verifying the purpose of “Patto di Stabilità” (Stability Pact) also taking into account that
the underlying transaction (sukuk) is not a “conventional bond” (debt).
- Level of financial feasibility of the operation;
- Identification of a lead manager for the transaction;
- Political decision of the Local government to proceed;
- Tables technical, financial and regulatory requirements;
Public Sukuk: which steps?
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3 stage: first Istitutional stage
- Approval by the executive local Government the preliminary project and its financing;
- Inclusion into the “Programma triennale delle opere pubbliche” («Three-year program of public
works) to be carried out during the following three years, attached to the budget;
- Approval the Program schedule by local Government;
- Administrative process for the realization of Public work.
4 stage: Contractual framework
- The SPV established, build (or by others) the Public work following the urban project or it rents
the property, in any case by getting the necessary funds to repay and reward (by the rents) the
capital obtained through sukuk.
Public sukuk: what benefits?
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- The tax exemption by almost all of the operations to be implemented (for the development of real
estate operations, acts, contracts, contributions and transfers of properties owned by Local
Government, including transactions securitization under Law number 410/2001, in favor of
foundations or securitization company, recognized associations are exempt from registration tax,
mortgage tax and all other indirect taxes, as well as any other tax or law. They are exempt from
income the interest accrued on the current accounts of the SPV and are exempt from VAT leases
in favor of local governments)
- The possible coincidence (appropriately partial) among members of the SPV and the
underwriters of sukuk may allow a discipline of repayment mutually satisfactory;
- The SPV is free in the allocation of Public work assigned;
Piemonte Region Palace
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An international project that could have been funded through a sukuk: the new building of the “Piemonte Region” in the district of “Nizza Millefonti” in Turin. Approved approximately 240 million euro to “ATI Coopsette” (spread Euribor + 1.485%) with the formula: "ongoing leasing." The works will be financed with the recovery of rent payable, the sale of urban rights and some buildings. The resources will help to pay the leasing (Art. 160bis Law 163/06) in twenty-year (determinazione 1355 Reg. Piemonte del 30.12.2010)
Required Documentation
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Document Parties Summary/Purpose
Sale and Purchase
Agreement
Originator (as Seller)
and Trustee (as
Purchaser)
From Trustee’s (and the Investors’) perspective, this is the document that gives
ownership of revenue-generating assets (i.e. the Assets).
From Originator’s perspective, this is the document under which it receives
funding.
Lease (Ijara)
Agreement
Trustee (as Lessor) and
Originator (as Lessee)
Trustee leases the Assets back to Originator in a manner that: gives Originator
possession and use of the
i. Assets so that its principal business can continue without interruption; and
through Rentals it generates a return for
ii. Trustee (and the Investors).
Service Agency
Agreement
Trustee (as Lessor /
Principal) and
Originator (as Servicing
Agent)
Allows Trustee to pass responsibility for major maintenance, insurance (or
takaful) and payment of taxes (i.e. an owner’s obligations) back to Originator. Any
reimbursement amounts or service charges payable to Servicing Agent are set off
against (i) a corresponding ‘supplementary rental’ under the Ijara or (ii) an
additional amount which is added to the Exercise Price (payable under the
Purchase Undertaking or the Sale Undertaking, as applicable).
Purchase Undertaking
(Wa’d)
Granted by Originator
(as Obligor) in favour of
Trustee
Allows Trustee to sell the Assets back to Originator if an event of default occurs
or at maturity, in return for which Originator is required to pay all outstanding
amounts (through an Exercise Price) so that Trustee can pay the Investors.
Sale Undertaking
(Wa’d)
Granted by Trustee in
favour of Originator (as
Obligor)
Allows Originator to buy the Assets back from Trustee in limited circumstances
(e.g. the occurrence of a tax event), in return for which Originator is required to
pay all outstanding amounts (through an Exercise Price) so that Trustee can pay
the Investors.
Substitution
Undertaking (Wa’d) -
OPTIONAL
Granted by Trustee in
favour of Originator (as
Obligor)
Allows Originator to substitute the Assets (which it may need to sell or
otherwise dispose of) for some other assets having at least the same value and
revenue-generating properties.
Sukuk and minibond
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DL 83/2012 “Sviluppo Italia” ("Italian Development") and DL 145/2013 “Destinazione Italia
("Destination Italy"). Hybrid bond: elasticity in remuneration and loan repayments
Fonte: di A. Tami in quaderno AIAF/Sukuk 167/2015
bond / mini bond Sukuk
Business propertyThey are a debt from the issuer to the
investorThe investor have a partial ownership of the property
Investment criteria
In general, the bonds can be used to finance
any activity , project , business or joint
venture compliant with local legislation
The activities on which it is based sukuk must be
Sharia compliant
share Each bond represents a portion of a debt Each sukuk is a portion of the underlying asset
Issue price
The market value of a bond is based on the
investment grade of the issuer (including the
rating)
The market value of the sukuk is based on the market
value of the underlying asset
Yield and investment
risks
The bond holders receive regular interest
payments programmed (often fixed-rate ). It
is also guaranteed at maturity the repayment
of the capital
The sukuk holders receive a share of profits from
below and accept a share of any loss. There is no
guaranteed return of the capital at maturity
Costs
Bondholders don't support the costs related
to asset management , project , business or
joint ventures. The performance of the
underlying assets does not affect the
performance of investors (unless default
issuer)
sukuk holders support the costs related to the asset
management. Higher costs and unexpected costs may
imply lower profits for investors.
Sukuk e minibond
15 Fonte: di A. Tami in quaderno AIAF/Sukuk 167/2015
Mini bond sukuk
Feasibility and subsistence requirements idem
Identification of sources of financing idem
Preparing development plan, business plan
and investent grade (rating)idem
issuing procedure - Bond issuing procedure - Sukuk
Best type bond Costitution SPV
Check specific Islamic criteria
Finding maturity bond Finding maturity sukuk
Processing prospectus, rules and
application formidem
Road Shows and subscribers search idem
Dematerialization and Listing on the Italian
Stock ExchangeFinding a specific market
performance analysis
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Fonte: elaborazione di M.Mariani - A. Caragnano in quaderno AIAF/Sukuk 167/2015
CAGR 5A CAGR 3A CAGR 1A
S&P U.S. Aggregate Bond Index 3,58% 2,15% 3,24%
Dow Jones Sukuk Total Return
Index (ex-Reinvestment)5,19% 4,33% 4,49%
The sukuk are an instrument of financial diversification with a competitive yield. The potential subscriber "looking" is willing to give up some of its efficiency in order to meet its religious precepts similar to investors in financial "ethical“ instruments.
Sukuk are a great alternative to raise funds not only for the Italian
companies, in search of funding diversification sources but also, and
above all, a viable alternative for the local Government authorities in
view of the project finance and securitization of real estate.
The evolution of the Italian legislation sought to promote the use of
hybrid financial instruments by companies, but despite that has not yet
taken a position on the development of Islamic finance in Italy. Sukuk is
to be considered, because of its peculiarity of not being a standardized
instrument, an alternative already viable, both as part of those
businesses oriented towards markets where the dominant religion is
Islam, and for those local Government authorities that, in the operations
of public-private partnerships can, through projects of international
importance, access to a financial channel alternative and qualified.
Conclusions
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- Enrico Giustiniani coordinatore del gruppo finanza Islamica - AIAF
- Giorgio Carlo Brugnoni Credit Analyst presso Cassa Depositi e Prestiti
- Alessandra Caragnano, cultore della materia in Finanza Aziendale presso
l’Università Lum Jean Monnet
- Raffaele Didonato, statistico, membro della European Financial Management
Association e della Faculty of Actuaries Students' Society
- Paolo Gaspare Conforti Di Lorenzo Avvocato, Studio Legale Delfino e Associati
Willkie Farr & Gallagher LLP
- Lorenzo Lentini, Avvocato, CONSOB
- Massimo Mariani, Professore associato di Finanza Aziendale e Finanza Immobiliare
- Claudio Palandra ingegnere matematico. ALM ed asset allocation strategica per
PosteVita e PosteAssicura
- Fabrizio Petrucci avvocato cassazionista, partner Studio Delfino e Associati Willkie
Farr & Gallagher LLP
- Antonio Salvi Preside della Facoltà di economia dell’Università LUM “Jean Monnet”.
Professore Ordinario di finanza aziendale
- Alessandra Tami professore Associato di Bilancio presso la Scuola di Economia e
Statistica dell’Università degli Studi di Milano – Bicocca
AIAF - Islamic Finance Working Group
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