On the 26th November 2007, Ras Al Khaimah Investment Authority (RAKIA) priced and launched its debut five-year Sukuk. The US$325 million Sukuk were backed by a guarantee from the government of Ras Al Khaimah (the government). The Sukuk are listed on the Dubai International Financial Exchange and the London Stock Exchange.
Formed in 2005, RAKIA was placed under the direction of HH Sheikh Saud bin Saqr Al Qasimi, the crown prince and deputy ruler of Ras Al Khaimah. The primary purpose of RAKIA is to develop the economy of the emirate. In line with this objective, the emirate intends to attract local and international investors to its industrial and free zones, and also to participate in its real estate and tourism developments. At present, RAKIA operates a total of 17.4 million sq m of industrial and free zones and is in the midst of developing another 25.3 million sq m, which will be fully completed within the next three years.
The transaction structure
A special purpose vehicle (the issuer) was established to act as the agent and trustee for the investors. The issuer issued the Sukuk and raised the issue amount from the investors. The issuer used part of the proceeds of the Sukuk issue to purchase from RAKIA areas of land off the coast of Ras Al Khaimah; the development is known as the Al Marjan Islands (the project land). Al Marjan Islands have been designated for the construction of residential and commercial properties. The development will comprise a series of man-made islands in shallow waters south of Ras Al Khaimah and is expected to be completed by 2009.
As part of the transaction, the issuer and RAKIA entered into a management agreement where RAKIA was appointed as the managing agent. Under this capacity, RAKIA received the remaining part of the Sukuk proceeds from the issuer for the completion of all infrastructure, including transportation and communication systems, water and power lines, as well as public areas on the project land (the works).
In addition to the completion of the works, the managing agent is responsible for the marketing and selling of the project land to third party developers. The proceeds from the disposal of the project land will be invested, on behalf of the issuer, in Shariah compliant investments. The managing agent will use the returns generated from the sale of the project land and from the investments to pay the issuer, who will use the money received to fund the quarterly profit payments payable to the investors. If the returns generated are greater than the required profit payment, the managing agent may retain the excess to fund the next profit payment. The excess will be held on account of the investors throughout the life of the Sukuk. Any excess remaining at maturity of the Sukuk will be given to the managing agent as incentive fees.
Meanwhile, on the occurrence of an event of default prior to maturity of the Sukuk, RAKIA will purchase any remaining unsold project land, together with the works from the issuer, at a pre-agreed price. Since only a part of the face value of the Sukuk will be redeemed through the purchase undertaking, RAKIA in its independent corporate capacity has provided a guarantee that will cover the payments from the third party developers to the issuer for the remaining face value of the Sukuk.
Principal transaction documents
The Islamic structure used in the Sukuk combines the principles of: (i) Bai’ (Sale), (ii) Wakalah (agency) and (iii) Waa’d (promise). The principal transaction documents used in the Sukuk structure are as follows:
(i) Sale and purchase agreement
Pursuant to the SPA, the seller (RAKIA) sold to the issuer, rights, interest and title over the project land. The issuer used part of the proceeds from the Sukuk issue to pay the purchase price for the project land.
(ii) Management agreement
The agreement was entered into between RAKIA and the issuer, where the issuer appointed RAKIA as the managing agent to, among others, procure the completion of the development of the project land and the works, and administer the sale of the project land to a third party developer.
The managing agent is also responsible for the collection and investment of the sales proceeds and to ensure that the issuer fulfills the profit payment obligations to the investors.Under this agreement, the managing agent may provide a Shariah compliant financing facility to the issuer in the event that the returns generated from the assets fall short of the required periodic profit payment.
(iii) Purchase undertaking
This undertaking was given by RAKIA in favor of the issuer. It is a key document from a credit perspective because it allows the investors to be paid either on early termination or on the redemption of the Sukuk. Under the purchase undertaking, RAKIA agrees to purchase the issuer’s rights, interest and title over the assets at a specified price on a specified date following the issue of a notice from the issuer. The notice will be served by the issuer either upon the occurrence of an event of default or immediately before the maturity date of the Sukuk, and the assets will be sold to RAKIA under a separate sale agreement.
(iv) Sale undertaking
(v) Sales contract undertaking
This undertaking was given by RAKIA in favor of the issuer, where RAKIA in its own independent capacity guarantees that the works will have a value of US$125 million following its completion. In addition, RAKIA also guarantees the payment performance of the third party developers for at least US$200 million. This will ensure that the full amount of the Sukuk will be recoverable at maturity, given that RAKIA will only acquire the works pursuant to the purchase undertaking at maturity.
The terms of this undertaking are designed to ensure that the investors will receive the outstanding principal amount in a manner that fits into the Sukuk structure.
(vi) Guarantee deed
The guarantee was issued by the government in favor of the issuer, where the government irrevocably and unconditionally guarantees RAKIA’s payment obligations under the transaction.
Distribution Analysis
Despite the difficult market conditions brought on by the international liquidity crunch during the time of closing, the transaction was oversubscribed beyond the issue size. The final distribution achieved investor diversification with banks comprising 53% of the investors, while corporates, private banks and fund managers made up the remaining 47%.
RAKIA managed to establish new investor relationships while maintaining balanced distribution between traditional fixed-income and buy-and-hold investors. The transaction was an important test of investor appetite for Sukuk from the Middle East in light of the credit crisis which began in mid-2007, a test that RAKIA passed.
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RAKIA Sukuk
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