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

Deals of the Year 2007 Handbook
Derindere US$60 million Murabahah (continued...)
These funds were earmarked for use by Derindere mainly
for purchasing vehicles to add to its fl eet of vehicles for
sale or lease to Derindere’s customers.
Once the Murabahah proceeds were deposited into
the US dollar denominated blocked account, Derindere
would be free to move these funds into the euro and/or
new Turkish lira denominated blocked accounts in order
to fund the purchase of the relevant vehicles, subject to
compliance with a loan-to-value (LTV)-style covenant.
Under the LTV-style covenant, the outstanding principal
amount of the marked-up deferred price payable by Derindere
could not exceed a certain specifi ed percentage
of the value of vehicles pledged by Derindere as security
for its obligations under the fi nance documents.
For the purpose of determining compliance with the LTVstyle
covenant, the aggregate funds standing to the
credit of the blocked accounts were deducted from the
principal amount outstanding of the marked-up deferred
price.
The valuation of the secured vehicles for the purposes of
the LTV-style covenants would be based either on their
purchase price (for new vehicles) or by reference to the
relevant market values determined by the Association of
the Insurance and Reinsurance Companies of Turkey (in
the case of older vehicles).
The application of the LTV-style covenant was suspended
for a certain period during the initial period of the facility.
This was to enable Derindere to use the Murabahah
proceeds to purchase the relevant vehicles and pledge
them in favor of the security agent.
After making the initial vehicle purchases, the blocked
accounts gave Derindere the fl exibility to “drip feed” itself
the funds to purchase new vehicles as and when it
needed to update its fl eet without having to enter into
any further commodity Murabahah trades.
Derindere was free to choose when, and how much, it
could withdraw from the blocked accounts, as long as
it remained within the LTV-style covenant following the
withdrawal.
From the perspective of the fi nanciers, the blocked accounts
structure simplifi ed the administration of the facility
as the parties only needed to enter into a single Murabahah
trade.
It also meant that the profi t element of the marked-up deferred
price was determined in full following the fi rst (and
only) Murabahah trade.
The fi nanciers could start receiving payments of the profi t
element even if Derindere chose to delay withdrawing
monies from the blocked accounts to fund the purchase
of vehicles.
The structure also expanded Derindere’s options to remedy
any potential breach of the LTV-style covenant. In addition
to granting security over additional vehicles or prepaying
some of the marked-up deferred price instalments, Derindere
had the further option of depositing funds into the
blocked account.
For Derindere, this had two advantages:
(i) in contrast to a prepayment, a payment made into a
blocked account could be withdrawn again for use in
the future; and
(ii) in contrast to providing additional vehicle security, depositing
additional funds into the blocked accounts is
relatively straightforward and quick.
SECURITY PACKAGE AND PERSONAL
GUARANTEE
In addition to vehicle pledges and the blocked accounts,
the security package for the fi nancing included an assignment
of insurance proceeds in respect of the leased vehicles,
an assignment of the vehicle leases and a pledge
over a collection account. All of these were also governed
by Turkish law.
Derindere was obliged to ensure that payments under the
vehicle leases, any insurance proceeds and the proceeds
of any vehicles sold were paid into a designated collection
account with the security agent.
The payments into the collection account had to show a
specifi ed minimum monthly fl ow as proof of Derindere’s
ability to make upcoming scheduled payments of the
marked-up deferred sale price. Derindere’s payment obligations
under the fi nancing were guaranteed by one of its
principal shareholders.
CONCLUSION
The Derindere Islamic fi nancing demonstrated the growing
appetite of Islamic banks and fi nancial institutions to invest
in jurisdictions outside the traditional Islamic fi nance hubs of
the Arabian Gulf and Southeast Asia.
The transaction is likely to pave the way for future Islamic
fi nancings in the Turkish market, given the success of its
syndication.
This case study was
written by Atif Hanif
and Robert McCaw. Atif is a senior associate in the
banking department of Allen & Overy LLP, specializing
in Islamic fi nance, while McCaw is an associate in the
same department. Both are based in the London offi ce
of Allen & Overy LLP.
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