RAKIA Sukuk (continued...) - Islamic Finance News

Deals of the Year 2007 Handbook
Kuala Lumpur Sentral Sukuk Musharakah (continued...)
with eligible investors (the investors) invited to provide capital
contribution through subscription of the Sukuk. In this respect,
interests of the investors in the Musharakah venture
are represented by KLS in its capacity as agent (wakeel)
and initial trustee for the investors.
The Musharakah venture is a business venture entered into
between KLS and the investors (through the issuer). The
Musharakah venture involves the acquisition of part of the
project lands from KLS and the sale of all the project lands
(those purchased from KLS and those contributed by KLS to
the Musharakah venture).
This arrangement is effected via the Shariah approved
fi nancing concept of Musharakah whereby the investors
and KLS will provide their respective capital required to
the Musharakah venture. Contribution in kind from KLS is
in respect of such part of the project lands while capital
contribution from the investors will be utilized by the Musharakah
venture to purchase the project lands based on
the market price as valued by CH Williams Talhar & Wong
(the valuers).
The respective stakes of Kuala Lumpur Sentral and the investors
in the Musharakah venture are based on their respective
capital contribution (Musharakah Capital) of 26%
and 74%, respectively.
Simultaneously with the execution of the Musharakah
agreement, KLS as agent of the investors will issue Sukuk to
the investors (in such capacity, Sukuk holders). The Sukuk
represent the investors’ undivided proportionate interest in
the Musharakah venture. The Sukuk holders will be entitled
to the proceeds of the Musharakah venture. The term “issuer”
refers to KLS in its capacity as the agent (wakeel) of
the investors and issuer of the Sukuk.
The issuer shall declare a trust (declaration of trust) in favor
of the Sukuk holders over all of the issuer’s interest in
the Musharakah venture (including not limited to the issuer’s
rights under all agreements relating to the Musharakah
venture) (Sukuk assets). The trust deed for the Sukuk will provide
that the Sukuk holders appoint the trustee as the trustee
of each Sukuk holder for the purposes of holding and
administering the Sukuk assets.
KLS will be appointed as the project manager (project manager)
for the Musharakah venture pursuant to a management
agreement. As project manager, KLS is responsible
for, among others, managing the sale of the project lands,
opening and maintaining the bank accounts designated
for the Musharakah venture and procuring the payment
of all income, damages, compensation or any other sums
received by it from the Musharakah venture to be paid into
a revenue account, and shall undertake to pay all transaction
expenses incurred/to be incurred in relation to the
Musharakah venture.
Distributable profi ts generated by the Musharakah venture
shall be calculated and distributed at the end of every
six-month interval commencing from the issue date of the
Sukuk (distributable profi t determination date).
KLS will then use its portion of the distributable profi ts and/or
repayment proceeds of its advances to the Musharakah
venture to purchase the Sukuk holders’ share in the Musharakah
venture in accordance with a six-monthly schedule
(each installment payable by KLS is referred to as a share
installment). Such obligation of KLS will be evidenced by a
deed of undertaking to be executed by KLS in favor of the
issuer and trustee (purchase undertaking).
If losses are incurred, they shall be allocated in accordance
with the outstanding capital contribution ratio, which
is on a diminishing basis pursuant to the share installment
schedule. Nevertheless, any losses incurred by the Musharakah
venture do not remove KLS’s obligation to pay the
share installments.
THE SUKUK
The Sukuk was issued in seven series with tenor ranging from
one to seven years. KLS had assigned all its rights under
the project lands valued at more than the Sukuk nominal
value. The Sukuk was further enhanced by the POC, hence
providing certainty in the price and take-up source of the
project lands even if there were a downturn in the real
property market.
CONTRIBUTORY FACTORS TO THE SUCCESS
OF THE ISSUANCE
i. Internationally compliant Sukuk issuance, of which the
Sukuk represented ownership of tangible assets comprising
vacant lands within the KL Sentral Development
(KL Sentral Lands) and any proceeds therefrom
which are channeled to designated accounts for the
Sukuk holders;
ii. The structure was approved by the Shariah Committee
of Kuwait Finance House in Kuwait, which was
considered to be more stringent than others in terms
of Shariah requirement; and
iii. The Sukuk was structured such that there was a
ready buyer for the land, a fi nancial institution willing
to share the risk in property development. The third
party buyer had undertaken to the Sukuk holders
(via trustee) to purchase the KL Sentral Lands at an
agreed price, ensuring certain protection to the
value of the Sukuk.
This case study was
written by the Islamic
capital market department
of Kuwait Finance
House (Malaysia). Enquiries may be sent to nora.
mohdsalim@kfh.com.my
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