HORIZON

NEWHORIZON Jumada-Al-Awwal to Rajab 1433
ANALYSIS
Restructuring Sukuk Transactions
By: Debashis Dey, Stuart Ure and Peter Wielgosz, Clifford Chance LLP
In contrast to conventional
bonds, which represent the
issuer’s contractual debt
obligations to bondholders,
sukuk represent an undivided
beneficial ownership interest in
an underlying tangible asset
and therefore a right to receive
a share of profits generated by
such an asset base, which can
be structured to produce a
fixed income return.
Overview
In the wake of the recent global financial
turbulence, the Eurozone debt crisis and the
resulting volatility in international capital
markets, issuers are actively looking at
reviewing their capital structures. Indeed,
many Gulf-based issuers are examining the
application of liability management
strategies and/or restructuring strategies in
the context of their existing sukuk
transactions. Some are asking whether it is
possible to achieve a waiver or amendment
through a consent solicitation if their
financial covenants are being stressed.
Questions such as ‘can we buy-in and cancel
debt at relatively depressed prices?’ or ‘can
we extend the maturity of an outstanding
series of debt securities, by exchanging it for
a new series of longer-dated instruments?’
are increasingly raised with legal and
financial advisers.
In the first part of this article, we
examine the challenges involved in a
liability management exercise for a sukuk
as compared to a conventional debt
issuance and explore some common
restructuring techniques. These techniques
form the building blocks for a possible
approach to restructuring a sukuk
transaction, which is set out in the second
part of the article. Acknowledging that the
challenges in each liability management
exercise for a sukuk will be different and
will depend on the specific underlying
Islamic structure, in the final section we
refer to recent market examples to
demonstrate that it is possible to implement
restructurings, which have the same
commercial effect for an obligor seeking to
manage its outstanding liability under a
sukuk transaction.
Common Debt Restructuring Techniques
An issuer seeking to restructure its
outstanding debt securities has several tools
for liability management at its disposal.
Without exploring the alternatives available
to it under applicable bankruptcy rules,
which lie outside the scope of this article,
the company may decide between a number
of strategies, the most common of which
involve a tender offer, exchange offer,
consent solicitation or any combination of
these. Although such options are available
to both issuers of conventional debt
securities and sukuk (the Shari’ah-compliant
alternative to conventional interest-bearing
fixed income securities), implementing one
or more of the above strategies becomes
significantly more complicated in the case of
restructuring sukuk transactions. The
reason for this added complexity lies in the
nature of sukuk as an asset-based security.
In contrast to conventional bonds, which
represent the issuer’s contractual debt
obligations to bondholders, sukuk represent
an undivided beneficial ownership interest
in an underlying tangible asset and therefore
a right to receive a share of profits
generated by such an asset base, which can
be structured to produce a fixed income
return. Furthermore, for a sukuk structure
to be Shari’ah-compliant, there must be a
direct link between the assets that underpin
the cash flows on the sukuk and the
ownership interest of the investors in such
assets. Typically, this link can be achieved
through the ‘sale’ and consequential transfer
of title of an asset to a newly formed special
purpose vehicle (SPV) that will hold such
assets on trust or as agent for the investors.
As a result of the inherent proprietary
nature of sukuk, the implementation of
some of the liability management strategies
outlined above is more complex and has
greater limitations than the application of
similar strategies to conventional debt
securities. The limitations of these strategies
as applicable to sukuk restructurings are
explored further below.