Allen & Overy LLP (A&O) acted as the advisor for HSBC, the lead arranger and dealer in connection with the establishment of a US$5 billion trust certificate issuance program established by Abu Dhabi Islamic Bank (ADIB). This ground-breaking Sukuk issue was established in the UAE and was the largest program, whether conventional or Islamic, in the region. It was also the first Sukuk program to be listed on the London Stock Exchange (LSE).
ADIB completed its first issue of trust certificates under a Sukuk program on the 12th December 2006. This was an issue of US$800 million trust certificates, due in 2011. Earlier, ADIB had announced the establishment of a US$5 billion Sukuk program using a co-ownership structure, Sharikat al-Melk. This program was the first such program to be established in the UAE and the first Sukuk program to be listed on the LSE. As one of only a very small number of Sukuk programs to be established to date, the ADIB Sukuk program marks a further significant step in the development of the Islamic capital markets.
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a management agreement, under which ADIB, as managing agent, manages the co-owned assets and ensures that there is a sufficient profit return from the underlying assets to enable payment of periodic distributions to holders of the trust certificates;
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a purchase undertaking deed, under which ADIB agrees to repurchase the issuer’s co-ownership interest in the co-owned assets to enable redemption of the trust certificates;
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a master trust deed, under which the issuer declares a trust over its co-owned assets and its rights under the relevant program documents and under which an international trust company is appointed as delegate of the issuer (in its capacity as trustee) to protect the interests of the holders of the trust certificates; and
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the terms and conditions of the trust certificates, which are drafted to cover a wide range of possible issue options but are then tailored at the time of each issue by means of a completed final terms supplement, which sets out the specific commercial terms of the particular issue.
In the non-Islamic capital markets, a debt program offers a number of significant benefits for regular issuers of debt instruments. The main issue terms are negotiated once, at the establishment of the program, and are not thereafter, subject to renegotiation at the time of each subsequent issue. In addition, while it is slightly more expensive, in both legal and printing costs terms, to establish a program, subsequent issues under the program result in very significant cost savings. Once a program is established, an issuer will be able to tap the market more swiftly, hence better positioning him to take advantage of potentially short-term market windows.
These advantages apply equally to Islamic issues. In particular, Islamic issues are generally more expensive to document than a non-Islamic issue by the same issuer, due to structuring elements. However, once the program has been established, subsequent issues require substantially less documentation than would be the case if the Sukuk was issued on a stand-alone basis. The principal documents needed at the time of issuance under the program are the final terms supplement, a supplemental purchase contract and a supplemental trust deed. The form of each of these is pre-agreed in the program documentation at the time the program is established.
In addition, a stand-alone issue will generally take up to three or four weeks to be approved by an international stock exchange and will require an issue-specific disclosure document to be prepared by the issuer and the underlying credit entity. A program trade can be listed simply by the filing of the completed final terms supplement with the relevant stock exchange and no separate disclosure document is required. These factors can reduce the time to market by many weeks, as well as reducing the legal expenses associated with the issue by up to approximately 80% when compared to a stand-alone issue.
The ADIB program includes the flexibility to issue Sukuk which pay periodic distributions calculated at either a fixed rate or a floating rate. It also anticipates that subordinated Sukuk may be issued. It is expected that any such issue of subordinated Sukuk will constitute lower tier two regulatory capital. This is the first time that subordination provisions have been included in Islamic financing documentation in the UAE.
Typically, in conventional debt financing, subordination is achieved either contractually or through a trust mechanism. Contractual subordination simply relies on the agreement by the holders of the subordinated debt that, in an insolvency situation, they will only be repaid after all prior ranking debt has been repaid. In a number of jurisdictions, however, there is an insolvency rule, often referred to as the pari passu rule, that requires all creditors to be treated equally and, where there is this rule, it is feared that contractual subordination may not be effective. In the trust subordination situation, the trustee on behalf of the subordinated creditors proves in the insolvency of the debtor as an ordinary creditor, thereby not infringing the pari passu rule, but then holds the monies received first on trust for any senior creditors to the extent that their claims have not been repaid, and only thereafter for the subordinated creditors.
Neither of these subordination methods would have been appropriate in the ADIB Sukuk program. In the case of contractual insolvency this is because there is a pari passu insolvency rule in the UAE. In the case of trust subordination, the additional trust provisions required would not have fit conveniently into the existing Sukuk structure. Accordingly, the method of subordination used was the less common contingent debt subordination. This form of subordination relies on the subordinated creditor agreeing that his debt shall only become due and payable if and to the extent that the debtor will, having paid the subordinated creditor the amounts due to him, have sufficient assets left to pay the senior creditors in full. This method does not infringe the typical pari passu rule as there is no debt unless and until the creditor has sufficient funds to pay it.