Tabreed Sukuk Case-Study

Posted on 1st April 2016 by ,

In the Tabreed sukuk, an istisna’a and ijarah structure was used to fund the construction of a cooling    plant.  The SPV (Tabreed 06 Financing) first issued the sukuk and raised US$200 million.  The issuer (on behalf of the investors) then entered into an istisnaá agreement with Tabreed, whereby Tabreed agreed to construct and deliver the cooling plant. In other words, the SPV is buying the cooling plants from Tabreed.  The payment to Tabreed was done in installments.

Under the istisnaá agreement, Tabreed was required to pay a security amount (US$1.25 million) on each payment date (two days before the periodic distribution date) to secure its obligation under the istisnaá agreement.  This means as long as the plant is under construction, Tabreed will pay this security amount.  In addition, upon completion and delivery of the plant at each stage, the SPV will lease it to Tabreed, for which Tabreed will make lease payments.  This security amount and the lease payment will be used to fund the periodic distribution to the sukuk holders. 

Besides the istisnaá and ijarah agreements, Tabreed also provided a purchase undertaking to the issuer (SPV) agreeing to purchase the following: The portion of cooling plant that has been constructed and delivered to the SPV if a default occurs during the construction (istisnaá) stage, at a price corresponding to the value thereof; The cooling plant at the price of the outstanding principal value of the sukuk if default occurs after the completion and during the leasing (ijarah) stage; The cooling plant at the price of outstanding principal value of the sukuk at maturity.

The amount obtained from the execution of this purchase undertaking will be used to redeem the sukuk.  Since this deal involved assets under construction, it still faced restrictions for secondary trading.  Recall that the sukuk was issued for US$200 million.  On the issuance date, the SPV paid US $40 million to Tabreed for the partially completed cooling plant (which was also the first installment under the istisna’a agreement).  In order for the sukuk to be tradable, the Shariáh board required that at least one third of the sukuk be in the form of tangible assets.

US$40 million (which was in the form of a partially completed plant) represented only about 20% of the sukuk.  To achieve the one-third benchmark, an additional tangible asset was introduced in the asset pool.  To facilitate this, Tabreed first bought palladium worth US$26 million from either HSBC or a third party broker.  Tabreed then sold this to the SPV for US$26 million.

With this palladium and the US$40 million partially completed plant, the total tangible asset that backed the sukuk was exactly one third.  This allowed the sukuk holders to freely trade the sukuk in the secondary market.  The remaining cash (US$144 million) was kept in a permitted investment account (Islamic capital protected deposits).  The SPV also obtained a purchase undertaking from HSBC that on the first distribution date (On 20 January 2007), which also coincides with the delivery and payment of the second stage of completion of the plant, HSBC would buy the palladium from the SPV at US$26 million. The SPV used the cash to pay Tabreed the second installment under the istisnaá.  When the second stage of the plant was completed, the sukuk traded in the secondary market. 

Standard & Poor’s stated that in this transaction, the following security is provided by the issuer: The issuer acts as trustee in respect of the trust assets for the benefit of the note holders. The trust assets include investments in plants linked to the istisna’a agreement, the commodities and authorized investments, any plants delivered, the rights under the transaction documents and all proceeds held to the credit of the transaction account (this account is where payment from the lessee is collected on each periodic payment date).  Tabreed’s istisna’a sukuk benefits in theory from ownership of the district cooling plants built once they have been delivered to the issuer.  In practice, however, Tabreed’s cooling plants are fixed to the land on which they are constructed.  Title to the applicable land includes title to the cooling plants which have no separate rights of ownership.  As the land is owned by the Abu Dhabi government, Tabreed ultimately only has contractual rights over the cooling plants and not legal title.  Legal title over the cooling plants is therefore likely only theoretical and not capable in practice of truly being assigned to the note holders.  Having said this, machinery and equipment relating to the constructed plants is legally owned by Tabreed and can be transferred to the note holders as part of the trust assets, although the value of such assets is likely to be well below any market value assigned to the cooling plants.


The key reason we considered the Tabreed sukuk financing to be secured is that enough features were present in the structure to render the financing comparable with other existing Tabreed secured financings.  These features included: 1) A negative pledge over plants delivered to the issuer and leased by Tabreed; and 2) A cash waterfall structure where revenues derived from the leases were directly sent to a transaction account, which in turn is assigned to the note holders. These two features meant that that the designated cooling plants delivered to the issuer could not be commingled into Tabreed’s business or used to meet other Tabreed unsecured obligations while the sukuk was outstanding. Standard & Poor's Ratings Services assigned its BB long-term debt rating to the proposed non-deferrable, deeply subordinated mandatory convertible Ijarah Sukuk notes issued by Tabreed 08 Financing Corp., a special-purpose vehicle (SPV) subsidiary of UAE-based National Central Cooling Co. PJSC, Tabreed; BBB-/Stable/--, that is incorporated in the Cayman Islands.


Tabreed plans to use the proposed Sukuk issuance to fund the construction of cooling plants. An Istisna’a agreement and a lease agreement will govern the Ijarah Sukuk structure. The Ijarah nature of the Sukuk refers to the sale-leaseback aspect of the transaction and Istisna’a refers to the construction and delivery aspect. On the closing date, the issuer buys the plants or a part thereof from Tabreed and enters into a lease arrangement with Tabreed as lessee. Tabreed will distribute annual profits, or lease payments, to the Sukuk SPV, which will service the coupon payments on the notes over the first three years. At maturity, Tabreed will buy back the cooling plants from the issuer in exchange for shares in Tabreed. Standard and Poor’s stated that the Sukuk structure contained weaker security features than what they have seen typically in senior Ijarah Sukuk structures. This included very broad events of default and a limited right to sell the cooling plants upon an event of default. This was in line with the subordination features of the Tabreed 08 Financing Corp. Ijarah Sukuk. Standard & Poor's assigned a high equity content to the notes because they had the following positive characteristics:  The notes would mandatorily convert into ordinary shares of Tabreed within three years and Principal and interest payments were subordinated to all of Tabreed's other debt obligations, unless expressly qualified as more junior, and currently rank senior only to common shares. In their calculation of Tabreed's financial ratios, S&P classified the whole principal outstanding of the notes as equity. Similarly, coupon payments would be considered as dividends for the purpose of their analysis.  S&P expected the two-notch differential between the rating on the proposed notes and the long-term corporate credit rating on Tabreed to be maintained as long as the latter rating remained investment grade in order to reflect: The proposed notes' subordination and; The market risk resulting from the relative evolution of the share price and of the conversion ratio of the instrument.


The instrument would be settled in shares in all cases, apart from possible complete or partial cash settlement if Tabreed were to be declared insolvent in court or if the shares potentially created were to exceed the applicable foreign ownership threshold. Both restrictions were imposed by laws and regulations in the country of issuance, the UAE. Standard & Poor's considered these exceptions as acceptable because they are appropriately remote and the consequent cash claims on Tabreed would remain deeply subordinated. S&P regularly monitored the headroom under the foreign share ownership rule, assuming all note-holders to be foreign, apart from those duly registered as domestic. Possible excess foreign ownership would result in S&P reducing the equity content of the instrument by the amount potentially created above the threshold.  The issue would help increase the equity-like content in Tabreed's financing structure. Standard & Poor's assessed the equity to be created by the issuance of the notes, and their eventual conversion, as permanent in nature, in the context of Tabreed's current financial policy and development plans. Despite this issuance, S&P expected Tabreed's leverage to remain aggressive over the medium term. The servicing of the bond until conversion may not be deferred. This is not a significant hurdle in our view of the equity content, due to the short time to conversion.  In fact, the Tabreed sukuk repaid in full its 06 Sukuk. The repayment follows the completion of the Company’s recapitalization program on 1 April 2011.  The total amount paid today to certificate holders of the 06 Sukuk is AED 735 million.  Waleed Al Mokarrab Al Muhairi, Chairman of Tabreed said:  “The strong capital structure that was put in place with the recapitalization program underpins Tabreed’s long-term growth potential. The repayment of the 06 Sukuk today was contemplated in our structuring of the recapitalisation program and improves the Company’s overall financial position.”  The Sukuk 06 was launched in July 2006 and matured 20th July 2011.


Posted on 1st April 2016 by

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