The Luxembourg-domiciled issuer established by the International Liquidity Management Corporation (IILM) issued at the end of August a long-awaited landmark US$490 million Sukuk, aimed at developing a cross-border market in Islamic financial instruments.
The IILM is an international institution that was created with the objective of issuing short-term Shariah compliant financial instruments to facilitate effective cross-border Islamic liquidity management. Its current shareholders are the Islamic Development Bank in Jeddah and the central banks of Indonesia, Kuwait, Malaysia, Mauritius, Nigeria, Qatar, Turkey, the UAE and Luxembourg. Due to this international structure and the involvement of various Shariah boards from different jurisdictions, the issue was delayed several times.
The three-month Islamic bonds were denominated in US dollars and were fully subscribed, receiving an ‘A-1’ rating from S&P. The primary dealers that participated in the auction were AlBaraka Turk, Kuwait Finance House, Maybank Malaysia, National Bank of Abu Dhabi, Qatar National Bank, Standard Chartered Bank and KBL European Private Bankers in Luxembourg.
The Sukuk issuance aims to address challenges that Shariah compliant financial institutions have been facing with respect to the availability of short-term financial instruments. The issuer of the Sukuk program, which is intended be increased to around US$2 billion, is a Luxembourg-domiciled securitization vehicle based on the Luxembourg Securitization Law of 2004 (the Law).
The Law has features that allow for innovative Sukuk structures, creating a legal framework which is considered to be one of the most complete, comprehensive and advantageous legal frameworks existing in Europe today. Its advantage is also that it is specifically designed for cross-border securitizations.
The Law allows for a high degree of flexibility when structuring a securitization transaction through Luxembourg in terms of choice of legal form of the vehicle, regulation, asset classes, forms of transactions and segregation of assets. It also provides for a high level of investor protection, legal certainty and ensures a tax-neutral treatment of securitizations in Luxembourg.
The Law covers basically all types of securitization transactions, in the broadest meaning of the term, ranging from term transactions and commercial paper conduits to simple repackaging, regardless of the type of asset classes, giving the concept of securitization a very flexible scope so as to cover both traditional structures as well as the most innovative ones. As a consequence of the flexibility, the Luxembourg Law has been used for the establishment of innovative Sukuk structures, including the IILM program.
This legal framework also allows for the cost-efficient establishment of compartments, which can be compared to the creation of subfunds for regulated investment funds. A large number of securitization vehicles allowing for the creation of such compartments have been set up in the past, as the use of a single securitization vehicle with multiple, fully isolated compartments, allows for not negligible savings at the level of setup and ongoing administrative costs. Each such compartment corresponds by operation of law to a segregated part of its assets and liabilities, which is treated as a separate entity between investors and creditors, although it is possible to deviate from this general principle of segregation and create links between the different compartments of the same securitization vehicle. Each compartment may issue different forms of Sukuk and is also possible to issue different kind of instruments, conventional and Shariah compliant, in one vehicle as the assets and liabilities can be fully segregated. Some of these entities have also established issuance program covering a wide range of instruments capable of being issued within compartments, facilitating the issuance and listing of such instruments within a short time frame.
The securitization vehicles are bankruptcy remote and can be created as a corporate or fund structures. The Law also provides for legal certainty, as it explicitly validates limited recourse provisions, subordination arrangements, waterfall arrangements and non-attachment and non-petition provisions.
This legal framework has seen considerable success so far, and a large number of securitization vehicles have been set up since the enactment of the securitization law. Only three years after the law’s creation in 2004, more than 300 SPVs with more 2,000 compartments had been created, according to research by PwC.
The IILM Sukuk uses a Wakalah structure. This structure stems from the concept of a Wakalah which, literally translated, means an arrangement whereby one party entrusts another party to act on its behalf. A Wakalah is thereby similar to an agency arrangement. The securities are issued with the purpose of buying specific assets that are then given to a Wakil or agent for management, which charges a fee for its services. The originator undertakes to buy the assets at maturity at an agreed price.