Case Study: Sukuk Al Ijarah by Golden Crop Returns

By Loh Mei Mei

Introduction

This case study examines a fundraising exercise by Boustead Holdings and its subsidiaries (Boustead Group) through an innovative Islamic asset-backed securitization of certain of their oil palm plantations and palm oil mills (plantation assets) owned by 10 companies in the Boustead Group (originators), pursuant to the Guidelines on the Offering of Asset-Backed Securities issued by the Securities Commission (ABS Guidelines).

This transaction represents the largest securitization of plantation assets in Malaysia. The lead arranger was Affin Bank and the advisors were Affin Bank and Pacifica Alliance Capital.

The issuer, Golden Crop Returns, is a “bankruptcy remote” special purpose company incorporated under the Companies Act, 1965 in compliance with the ABS Guidelines. The issuer was incorporated for the sole purpose of carrying out and implementing this asset-backed securitization transaction.

Under the transaction, the issuer purchased the beneficial interest to the plantation assets (including interest under native lands in Sabah) from the originators and thereafter leased back the plantation assets to the originators for an agreed rental price (Ijarah rental) for fixed lease periods (Ijarah periods).

The purchase consideration of the plantation assets was part-financed through the issuance of RM442 million (US$120.42 million) Sukuk to investors and a subordinated facility of RM300 million (US$81.74 million) granted to the issuer under the Shariah principle of Musharakah (profit sharing) by Lembaga Tabung Angkatan Tentera (LTAT).

Under the transaction, the issuer purchased the plantation assets from the originators for a purchase consideration, which was determined in compliance with the pricing guidelines of the Shariah Advisory Council of the Securities Commission. Under the sale and purchase agreements (SPAs) entered into between the originators and Golden Crop Returns, only the beneficial rights, title and interest of the originators in relation to the plantation assets are sold to the issuer, which means the legal title remains with the originators. Simultaneously with the execution of the SPAs, the originators executed the declarations of trust wherein the originators declared that they will hold the plantation assets as trustees for and on behalf of the issuer.

The issuer then leased back the plantation assets to the originators for the Ijarah period of up to three, five and seven years, which coincided with the expected maturity dates of the Sukuk issued by the issuer. Three master Ijarah agreements were entered into between Golden Crop Returns as lessor and the originators as lessee to evidence the leaseback transaction. The Ijarah periods will be extended for further periods of 18 months from the respective expected maturity dates of the Sukuk to coincide with the respective legal maturity dates of the Sukuk upon the occurrence of certain trigger events.

The purchase consideration for the plantation assets was financed through: (a) issuance of the Sukuk (trust certificates representing beneficial ownership of the plantation assets, the issuer's rights, title, interest and benefit under the transaction documents in relation to the Sukuk and monies standing to the credit of the transaction accounts to be maintained under the terms of the Sukuk (trust assets)); and (b) the RM300 million (US$81.74 million) Musharakah facility from LTAT.

The trust assets are held on trust by HSBC (Malaysia) Trustee (the trustee) as trustee for the Sukuk holders and LTAT pursuant to the trust deed entered into between the issuer and the trustee.

During the respective tenors of the Sukuk, the issuer will distribute Ijarah rental received from the originators, as lessees to the Sukuk holders, as coupons calculated semi-annually. The balance of the Ijarah rental, if any, will be distributed to LTAT as expected profit.

In furtherance, the issuer granted the originators three call options (granted at the end of each Ijarah period) whereby the originators are entitled to call on the issuer to sell identified plantation assets to the originators at an exercise price.

To protect the interest of the Sukuk holders and LTAT, three trigger events are specified, namely: (i) the failure of the issuer to redeem the Sukuk on their respective expected maturity dates; (ii) the event of default under the master Ijarah agreements; and (iii) the failure by the originators to exercise their call options. Upon occurrence of any of the trigger events, the trustee shall proceed to sell the plantation assets to third parties.

Shariah concepts and principles
There are three Shariah concepts applied in this transaction:

Sukuk (securities)

“A document or certificate which represents the value of an asset.”

The issuance of the Sukuk which represented the trust certificates in relation to the trust assets by Golden Crop Returns to the Sukuk holders.  

Ijarah (leasing)

“A manfaah (usufruct) type of contract whereby a lessor (owner) leases out an asset or an equipment to its client at an agreed rental fee and pre-determined lease period upon the ‘aqad (contract). The ownership of the leased asset remains in the hands of the lessor.”

The leaseback of the plantation assets by Golden Crop Returns to the originators after the purchase of the interest in relation to the plantation assets by Golden Crop Returns from the originators.

Musharakah (profit and loss-sharing)

“A partnership arrangement between two parties or more to finance a business venture whereby all parties contribute capital either in the form of cash or in kind for the purpose of financing the business venture. Any profit derived from the venture will be distributed based on a pre-agreed profit-sharing ratio, but a loss will be shared on the basis of equity participation.”

The partnership between Golden Crop Returns and LTAT as evidenced by the Musharakah facility agreement wherein LTAT contributed an investment amount of RM300 million (US$81.74 million) for the joint venture upon the terms and conditions set out in the Musharakah agreement.

Legal challenges and resolutions

• To achieve a “true sale” of the plantation assets which will meet the off-balance sheet requirements without effecting a transfer of the legal ownership of the plantation assets to the issuer. This was achieved by an absolute assignment of rights and beneficial interest and title of the originators in relation to the plantation assets to the issuer. The originators also executed declarations of trust wherein the originators declared that they will hold the plantation assets as trustees for and on behalf of the issuer, together with a power of attorney to enable the issuer and the trustee to sell the plantation assets. The structure is further strengthened by the deposit of the original titles and lease agreements in relation to the plantation assets with the trustee, as evidenced by a memorandum of deposit.
  
  
• The plantation assets represented different interests of the originators. To overcome this, separate sale and purchase agreements were drafted and executed for each category of interests, namely:
• SPA 1 (where originators are the registered proprietors).
• SPA 2 (where originators are the beneficial owners).
• SPA 3 (where originators are the registered lessees).
• SPA 4 (where originators are the registered proprietors or registered lessees over lands in Sabah).
  
  
• Some of the lands on which the plantation assets are situated in Sabah are native lands which involve the Sabah land rules. The interest of the originators in relation to these native lands is by way of lease of the said lands by the natives to the originators. Fortunately, the lease agreements permitted the assignment of rights of the originators to third parties. In order to achieve a “true sale” of this interest, all the rights and beneficial interest of the originators in relation to the leases were absolutely assigned to the issuer.
  
  
• Some of the plantation assets located in Kedah are Malay Reserve Lands which fall under the ambit of the Kedah Enactment. In order to effect the sale of these plantation assets to the issuer, an express consent from the relevant authority was obtained. However, should the trustee be required to dispose of these plantation assets, it would be required to sell these plantation assets to qualified persons under the Kedah Enactment.
  
  
• Some of the lands are gazetted for other use and not for oil palms, which would constitute a breach of the conditions of the land title. A cash reserve was set aside as conversion premium in the event that the land use is required to be converted. In addition, the originators are obligated to replace the land with another land of equivalent value and cashflow generating ability should such land be forfeited by the relevant authority.
  
  
• To ensure that the Musharakah facility is subordinated to the Sukuk, a further agreement called a trust assets sharing and subordination agreement was executed between the issuer, LTAT and the trustee, which set out the manner and basis of sharing the trust assets between the Sukuk holders and LTAT. It also sets out the ranking of the Sukuk and the Musharakah facility (subordinated to Sukuk). Furthermore, in order to protect the “bankruptcy remoteness” of the issuer for purpose of the ABS Guidelines, LTAT can only enforce its rights under the Musharakah facility agreement after full redemption of the Sukuk.
  
  
• In order to allow the originators to continue to maintain the plantation assets, the originators were appointed as servicing agents, as evidenced by the servicing agency agreement. Essentially, the role of the servicing agents is to maintain, service and administer the plantation assets for and on behalf of the issuer, as owner of the plantation assets. The costs and expenses incurred by the servicing agents are netted off against the call option sale price, should the call option be exercised by the originators.  

Conclusion
This transaction reinforced the usage of Shariah concepts and principles to facilitate an Islamic asset-backed securitization structure. It allowed the Boustead Group an opportunity to capitalize on the appetite of Islamic investors and to tap alternate sources of funding by using their plantation assets. It also paved the way for a new category of assets – namely plantation assets – for future issuances of Islamic asset-backed securities by other companies.

The author is a partner at Zul Rafique & Partners, Kuala Lumpur , Malaysia . He can be contacted by phone on: +603 2078 8228, or by email on: lmm@zulrafique.com.my.