What is Sukuk-al-Ijara ( Sale and leaseback structure)

The sale and leaseback sukuk structure is the most widely used, as it has been tried, tested, and accepted by most Shariah scholars, both in the Gulf region and Asia. All sovereign sukuks issued to date have been based on the sale and leaseback structure. The documentation is fairly standard, with a broad consensus among Shariah scholars and Shariah Boards. 

The sukuk-al-ljara (sale and leaseback structure) has the following characteristics:                         

An SPV may be formed to purchase assets from the obligor.

The assets are then leased to the obligor against payment of periodic rentals. 

The SPV is usually incorporated in a tax-friendly jurisdiction, i.e., the Cayman Islands, Jersey, etc. 

It is usually an orphan SPV with a single share issued in favour of a charitable trust. 

The sukuk can be structured either as an amortising issue or as a bullet repayment at maturity. 

The payment obligations of the obligor are similar to any other full-recourse financing – i.e., the issue amount is reflected as a liability and the profit payments are expensed out through the income statement. 

The underlying assets in the Sukuk-al-Ijara structure have the following characteristics:                         

  • They are limited to fixed/real assets (such as land, office buildings, plants and machinery, etc.), where ownership remains with the obligor.  
  • They are limited to sale of existing assets – i.e., the underlying asset pool should be in existence at the time of sale.  
  • The underlying asset pool should consist of unencumbered assets with a market value at least equal to the sukuk issue amount. 
  • The underlying asset pool is used for structuring purposes only and is not to be construed as security. This implies that investors have no recourse to the underlying asset pool.

In case of a default or non-payment, the SPV will normally invoke the purchase undertaking, return the sukuk assets to the obligor, and make a claim of payment against the obligor. This claim ranks pari-passu with all senior, unsecured claims against the obligor. Therefore, the sukuk holder no longer has any recourse against the underlying assets but a direct recourse against the obligor. Essentially, the sukuk holder has the same claims as the other unsecured bondholders have on the obligor’s assets.

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December 9, 2009  Tags: sukuk  Posted in: Islamic Capital markets

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