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

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

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!