Corporate Bonds for Real Estate with Sukuk Features

1. Corporate Bonds for Real Estate with Sukuk Features Presented By: Naim Farooqui Managing Director ORIX Investment Bank Pakistan Limited International Islamic Finance and Investment Symposium 2006 December 7, 2006

2. 1 Bank Syndication Debt -Rs. 150 m Corporate House Equity – Rs. 121 m Real Estate Acquisition Transaction Structure Equity + Debt Rs. 271 m Rentals Company 1 Purchase Company 2 Rented Office Building Company 3 Company 4

3. Making a Case for Securitization for A Real Estate Finance Company (REFC) 2 • Securitization is a process for institutions to turn their locked up assets i.e. mortgages in the instant case, which are illiquid and lumpy, into tradable securities such as bonds. • Securitization is an open market selling of financial instrument backed by asset’s cash flow or asset value (mortgages). • A contractual arrangement whereby the REFC sells its mortgage receivables to a special purpose vehicle (SPV). • SPV issues debt instruments (bonds) to finance the purchase

4. Normal REFC Business Operations Securitization Structure Receivables 3 Mortgages Typical Structure Mortgage Backed Securitization Real Estate Finance Company Extension of Loans For Real Estate Cash Proceeds Raised Via Issuance of Debt Securities Housing Mortgage Receivables SPV DebtSecurities Safeguarding Investors Interest Cash • Key Issues To be Addressed • Non-Recourse Element • Accounting Clearance • Legal Issues • Market For Instrument • Regulatory Aspects • Security Mechanisms Investors Trustee Private Placements Public Placements

5. Structure of SPV 4 • Originator: entity that generates receivables • Issuer of the securities: SPV (any form, usually trust, corporation, partnership, etc.) • Advisor/Arranger: structures transaction; prepares documentation alongside legal, liaison with auditors • Underwriter: who places securities in the market

6. 5 Structure of SPV…contd. • Custodian: entity that holds receivables as agent and bailee for the trustee or trustees • Servicer: who collects receivables and transfers funds to accounts of trustees • Trustee: who deals with the administration—holds receivables; receives payment on receivables, makes payment to security holders • Rating agencies: JCR-VIS, PACRA.—helps in structuring; determine opinions needed, etc.

7. 6 General Benefits of Securitization • Why Securitize? • Lower-cost financing • Liquidity crunches? • Equity saving • Leverage restrictions • Reduction of assets – create liquidity to the company • Matched funding / funding strategy • Earnings • Originator capitalizes the future cash flow

8. Summing Benefits for all Stakeholders 7 • To owner/originator • Alternative financing instruments • Improve liquidity in the balance sheet • Reinvestment and freeing up the low-yield assets • Transfer the interest rate risks to SPV • Reducing corporate gearing • To bondholders/investors • New Investment opportunities for diversification • Direct participation in real estate market by small investors • Building as collateral • To Real Estate Market • An active secondary capital market for institutional investment • Alternative Financing Options

9. 8 Conclusions Similarities of SUKUK with the proposed structure The proposed structure though based on conventional model can easily be converted into a Shariah Compliant Sukuk Bond. It has the following characteristics which are important elements of Sukuks: • Corporate Bonds are easily Tradable – Similarly, SUKUK being liquid real assets, are easily transferred and traded in the financial market. • Corporate Bonds can be Rated – Credit rating increase the credibility of financial instruments. SUKUK are easily analyzed by international and regional rating agencies which facilitates their marketability. Differences in Main features: • Sukuk have share holding in the underlying asset while Bonds are purely a debt instrument. • Sukuk are limited to Sharia permissible ventures/products.

10. 9 Recent Deals July 2003 July 2003 July 2003 July 2003 July 2003 National Police Foundation Security Services Limited July 2003 July 2003 July 2003 July 2003 July 2003 ORIX Securitization Transactions Completed Brookes Pharmaceutical Limited Baluchistan Glass Limited International HousingFinance Limited Ittehad Chemicals Limited National Police Foundation Security Services Limited ORIX Securitization Transactions Completed Brookes Pharmaceutical Limited Baluchistan Glass Limited International HousingFinance Limited Ittehad Chemicals Limited Rs. 250 Million Rs. 200 Million Rs. 100 Million Rs. 150 Million Rs. 38 Million Rs. 250 Million Rs. 200 Million Rs. 100 Million Rs. 150 Million Rs. 38 Million Sept 2003 Mortgage Backed Bridge Financing Listed Term Finance Certificates Lease Syndication Debt Syndication Debt Syndication Sept 2003 Mortgage Backed Bridge Financing Listed Term Finance Certificates Lease Syndication Orient Petroleum Inc Debt Syndication Debt Syndication Orient Petroleum Inc Sept 2003 August 2003 Nov 2003 Oct 2003 June 2004 Sept 2003 August 2003 Nov 2003 Oct 2003 June 2004 Fidelity Investment Bank Limited Rs. 1 Billion Crescent Ujala Limited Grays Leasing Limited Sigma Leasing Limited Telecard Limited First Oil & Gas Securitization Company Fidelity Investment Bank Limited Rs. 1 Billion Crescent Ujala Limited Grays Leasing Limited Sigma Leasing Limited Telecard Limited Securitization First Oil & Gas Securitization Company Rs. 150 Million Rs. 400 Million Securitization Rs. 100 Million Rs. 130 Million Rs. 200 Million Rs. 150 Million Rs. 400 Million Rs. 100 Million Rs. 130 Million Rs. 200 Million Privately Placed Term Finance Certificates Privately Placed Term Finance Certificates April 2005 Debt Syndication Debt Syndication Debt Syndication Privately Placed Term Finance Certificates Privately Placed Term Finance Certificates April 2005 Debt Syndication Debt Syndication Debt Syndication Orient Petroleum Inc Dec 2003 Jan 2004 Dec 2003 March 2004 May 2004 Orient Petroleum Inc Dec 2003 Jan 2004 Dec 2003 March 2004 May 2004 Crescent StandardInvestment Bank Limited Crescent Steel & Allied Products Limited Al Zamin LeasingModaraba Limited Sindh Abadgar Sugar Mills Limited Orient Petroleum Inc Rs. 1.2 Billion Crescent StandardInvestment Bank Limited Crescent Steel & Allied Products Limited Al Zamin LeasingModaraba Limited Naimat Basal oil & Gas Securitization Company Sindh Abadgar Sugar Mills Limited Orient Petroleum Inc Rs. 1.2 Billion Naimat Basal oil & Gas Securitization Company Securitization Rs. 100 Million Rs. 300 Million Rs. 125 Million Rs. 300 Million Rs. 50 Million Securitization Rs. 100 Million Lease Discounting Syndication Rs. 300 Million Rs. 125 Million Rs. 300 Million Rs. 50 Million Privately Placed Term Finance Certificates Privately Placed Term Finance Certificates Lease Discounting Syndication Sept 2002 Lease Discounting Syndication Debt Syndication Privately Placed Term Finance Certificates Privately Placed Term Finance Certificates Lease Discounting Syndication Sept 2002 Debt Syndication PILCORP June 2004 June 2004 June 2004 May 2004 June 2004 PILCORP June 2004 June 2004 June 2004 May 2004 June 2004 Indus Dyeing & Manufacturing Company Al Noor Sugar Mills Limited Rs. 100 Million Big Bang Communications Pvt Limited Eden Developers Pvt Limited International Brands Pvt Limited First Securitization Trust Company Indus Dyeing & Manufacturing Company Al Noor Sugar Mills Limited Rs. 100 Million Big Bang Communications Pvt Limited Eden Developers Pvt Limited International Brands Pvt Limited First Securitization Trust Company Lease Receivables Securitization Rs. 32 Million Rs. 110 Million Rs. 100 Million Lease Receivables Securitization Rs. 500 Million Rs. 100 Million Rs. 32 Million Rs. 110 Million Rs. 100 Million Rs. 500 Million Rs. 100 Million Commercial Paper Debt Syndication Debt Syndication Debt Syndication Debt Syndication Commercial Paper Debt Syndication Debt Syndication Debt Syndication Debt Syndication

11. Thank You!