In a joint effort to continuously and rapidly innovate and widen the existing range of Shariah compliant products and services, Asian Finance Bank Berhad (AFB) and AmanahRaya Investment Bank (ARIB) Labuan signed a memorandum of understanding in October 2007 to establish Malaysia and Asia’s first US dollar-denominated Islamic marine fund.
The fund named Safeena, or “Our Ships” in Arabic, is structured as a Shariah compliant 10-year closed-end fund. It was constituted via a collective investment scheme in the form of an incorporated entity, Safeena (L), domiciled in the Federal Territory of Labuan, Malaysia on the 15th February 2008. The company subsequently obtained consent from the Labuan Offshore Financial Services Authority (LOFSA) to operate the fund on the 30th April 2008.
As joint fund manager and investment adviser, AFB and ARIB aim to raise US$300 million via equity participation and Islamic financing facilities at 30:70 into Safeena. The objective is to acquire a portfolio of good-quality vessels and marine infrastructure assets that will provide opportunities for sophisticated institutional investors locally and globally, to participate in and take advantage of the robust growth of the shipping industry.
Investors will have access to a diversified portfolio of marine vessels that could generate an attractive medium-to-long-term stable income stream of up to 10% yearly.
To achieve this, Safeena will assemble a portfolio of quality ocean-going as well as coastal vessels operating within Malaysian waters as well as worldwide and enter into long-term bareboat charters or any other arrangements acceptable by the board of Safeena.
Safeena will initially focus on vessels catering to the oil and gas sector as well as bulk carriers, product tankers and offshore support vessels, plying routes that have shown historic sustainable income stream.
All investments by the fund will comply fully with Shariah principles. Shariah committee members comprise prominent scholars from the Middle East and Malaysia.
The fund will have an investment committee comprising five members, of which AFB and ARIB will nominate two members each. The investment committee will evaluate all proposals by the managers and select the appropriate investment strategy in relation to the proposed vessels. The fund will also be advised by the technical adviser, an independent shipping manager with a proven track record in the shipping industry.
Safeena was set up as a closed-end investment fund with a life of 10 years. At the end of this period, the vessels will be disposed of and the fund liquidated. The managers may seek board approval to extend the life of the fund for two additional one-year periods (for example, 10+1+1) to arrange for the orderly winding down of investments. However, the board reserves the right to terminate the fund at any time without penalty to any party involved.
In liquidating the fund, the managers shall use their best endeavors to make distributions in cash. However, distributions may also be made in such form as determined by the board on the recommendation of the managers.
All distributions shall be made in proportion to the participating shares held by each participating shareholder and shall be adjusted to reflect any unrealized gains or losses attributable to investments distributed in kind.
The managers may retain any fees, expenses, charges or deductions for which they are entitled to payment or reimbursement, and they may make several partial distributions.
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Each sponsor invests up to US$25 million, with each holding one management share. The sponsors will source for other equity investors (participating shareholders) for the balance of equity required.The management shares carry the right to vote on any matter required under the Act and the right to return of capital paid up on the management shares (after the return of the capital paid up on the participating shares) but do not carry any right to dividend or to share in surplus investments remaining after the return of capital paid up on the shares of the company.
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The fund will be in the form of a private fund, established in the Labuan tax haven.
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The trust will set up special purpose vehicle (SPV) companies, each to own a vessel acquired by the fund. This is for the purpose of avoiding sister-arrests situations.
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Investment managers identify assets to be acquired by the fund. The investment manager’s role will be jointly assumed by AFB and ARIB.
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Investment managers will be assisted by a technical adviser on vessel acquisition matters.
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The fund will raise Islamic financing to finance acquisition of vessels.
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The fund’s investment committee will evaluate all acquisition proposals submitted by the investment managers.
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The investment committee will be advised by an investment adviser on proposals submitted.
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The fund will purchase vessels from sellers and then lease them back to the same parties (“obligors”).
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Purchase of vessels will only be approved if backed by a corresponding lease by the obligor and is acceptable to the investment committee having reference to the investment criteria for such purchases. It is proposed that the vessels have a put and call option to lock in a disposal/purchase price at the end of the lease.
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The fund distributes profit in the form of dividend to investors.
Corporate governance
The board shall be responsible for the corporate governance of the company and has overall responsibility and authority to manage the business of the company.
The managers set up the investment working group for the purpose of making recommendations to the board in relation to the making of investments, realization of such investments and all matters falling within the responsibility of the investment working group.
Notwithstanding the establishment of the investment working group, the board shall be responsible for, and shall have ultimate discretion on, all decisions relating to investments and realization of investments and all other matters relating thereto.
The responsibility of the investment working group is to source for investment opportunities and prepare the investment brief in addition to:
(a) Preparing the annual budget and business plans of the fund;
(b) Assisting in procuring financing arrangements relating to the fund; and
(c) All other matters as stipulated in the investment advisory services agreement.
The board retains the ultimate responsibility for risk management and for determining the appropriate level of risk that it is willing to accept in the conduct of the fund’s business activities. The board will review the effectiveness of the risk management processes.
The risk review group is responsible for identifying, evaluating and managing risk in accordance with this policy through the proposed risk management framework.
The investment working group is responsible for the completeness and accuracy of the due diligence information, investment analysis and risk information in any proposal papers submitted to the board for approval.
Risk review group is responsible for evaluating the reasonableness and validity of risk information reported to the board. In addition, the risk review group shall ensure clear communication throughout the fund of the board and senior management’s position on risk.
Shariah committee
The Shariah committee oversees all Shariah matters and provides views and rulings relating to the fund’s investment activities based on Shariah principles. The independent body reviews and ensures that all transactions, contracts, products and applications relating to the fund complies with Shariah rules and principles with the specific fatwa, rulings and guidelines that have been issued.
The Shariah committee has approved the Shariah investment guidelines to guide the managers when evaluating investment decisions and the Shariah committee shall confirm the compliance of prospective investments with the Shariah investment guidelines.
The Shariah committee is not responsible for any investment decisions made by the investment working group. It is merely responsible for ensuring compliance of such investments with Shariah principles. However, the investment working group shall not recommend any investments that the Shariah committee has not confirmed as Shariah compliant.
Investment objective and strategies
The fund’s objective is to provide long-term stable return through a Shariah compliant portfolio of vessels as approved by the board upon the recommendation of the investment working group. The investment focus shall be on bulk carriers, tankers and offshore support vessels.
The managers shall source and identify investment opportunities based on the fund’s investment criteria and strategies. The investment working group shall review and recommend prospective investments which it believes will assist the fund in achieving the fund’s investment objective.
The principal investment strategy of the managers is to invest primarily in vessels with focus on offshore support vessels, bulk carriers and product tankers.
The initial portfolio of Safeena will in turn be bareboat chartered or by such other charter arrangements deemed appropriate, to the obligors for periods between five and 10 years. Notwithstanding this initial portfolio, the fund will continue to seek opportunities to acquire and deploy more vessels on various income-generating charter arrangements.
Safeena will invest in vessels constructed by reputable shipbuilders with a good track record and certified by classification societies, to ensure quality in the design and build of the vessel.
The managers’ key financial objective is to provide participating shareholder(s) with consistent and attractive yield and a competitive rate of return for their investment by ensuring regular distributions to participating shareholder(s) as well as achieving long-term growth in distributions per participating share. The managers’ plan is to achieve this financial objective through the following strategies:
a) Active charter and investment management strategy
The managers believe that there is scope to sustain and enhance the medium- to long-term returns on Safeena’s portfolio by active management of charters and investments. The managers will seek to achieve attractive and sustainable returns with consideration for factors including charter rates, charterer’s track record and creditworthiness, tenure and mix.
• Optimize charter structures
Safeena’s vessels may be chartered on bareboat charter basis or such other charter arrangements deemed appropriate by the managers, with the charterer paying to vessel-owning companies where fixed charter hires in advance. The charter arrangement that Safeena will enter into will depend on, among other things, prevailing market conditions, the length of the charter term and the track record of the charterer.Safeena may conduct periodic inspection on its vessels to ensure that the charterers are operating and maintaining them to a sufficient standard in order to maintain the vessels’ value- and income-generating capabilities. Safeena will focus primarily on entering into bareboat charters or such other charter arrangements deemed appropriate by the managers, with charterers who meet the relevant criteria, in view of their stable income and reduced commercial and operational risks.
• Select established and creditworthy charterers
The managers will seek to deliver stable and sustainable returns to participating shareholders by chartering its vessels only to charterers with established track records and with the ability to fulfil their obligations under the charter agreements in a timely manner.• Managing charter tenures
The managers aim to reduce the exposure to a concentration of charters that expires in any one year by managing the respective tenures of its vessels’ charters. Safeena’s initial portfolio will be on long-term bareboat charters or such other charter arrangements deemed appropriate by the managers, under the charter agreements.Safeena’s strategy is to leverage on a core portfolio of long-term charter arrangements that can provide participating shareholder(s) with steady cash flows, while at the same time, having the flexibility of deploying its vessels selectively on shorter-term charters to take advantage of market opportunities as and when they arise. The managers will take into consideration, among other things; prevailing shipping market conditions, their assessment of the outlook on charter rates and Safeena’s overall portfolio size and mix, so as to be able to provide participating shareholder(s) with improved risk-adjusted cash flows.
b) Acquisition growth strategy
The managers believe that during the tenure, there will be further opportunities to acquire additional vessels that will provide participating shareholder(s) with attractive investment yields and returns, as well as income and capital growth prospects.
Safeena shall acquire vessels from the obligors and will target a balanced mix of vessels and charters. With the acquisition of additional vessels, Safeena’s portfolio will be further diversified and its versatility in the deployment of its vessels will also be enhanced.
Furthermore, the expansion of its portfolio size will create more financing opportunities for Safeena and prospectively enhance Safeena’s ability to negotiate more favorable financing terms with its financiers.
The managers believe that Safeena’s acquisition strategy will be further strengthened by the fact that all acquisitions of investment(s) by Safeena may have in place a “put and call arrangement” with the obligors. This arrangement shall grant the fund the option to put to the obligors to purchase the investment a pre-determined price during or at the expiry of the tenure. The obligor shall also be granted the right to call on the fund (or the vessel owning companies, as the case may be) to sell the investment to the obligor at a pre-determined price during or at the expiry of the tenure.
The managers will evaluate future acquisitions of vessels against the following criteria and considerations:
Impact on distributions and return: The managers will seek to acquire vessels that can provide income and yields that offer attractive and sustainable returns to participating shareholders. The managers will consider acquiring vessels which are secured with long-term charters, thereby ensuring stable returns from the acquisitions and minimizing the risk of volatility caused by excess supply.
Competition, demand and supply dynamics: The managers will take into consideration the relevant competition, demand and supply dynamics that affect particular sub-segments in the shipping market when evaluating acquisitions. For example, they will generally acquire in-demand vessels of versatile capabilities that can be readily deployed in most trade lanes, thereby ensuring greater prospects for deployment.
Vessel quality and characteristics: The managers will seek to acquire vessels that are certified by the classification societies, and are constructed by reputable shipbuilders with a good track record and in established shipyards with due consideration given to other relevant factors including their size, tonnage, state of maintenance, operating versatility, cost efficiency and equipment specifications.
c) Capital management strategy
• Capital management
The fund aims to optimize Safeena’s capital structure and cost of capital and intends to use a combination of financing and equity to fund acquisitions and maintenance works for the vessels.The managers’ objectives in relation to capital management are to:
i) Structure financing facilities to coincide with the vessels’ underlying charter agreement;
ii) Minimize the cost of financing; and
iii) Manage the exposure arising from adverse market movements.
Taxation of the fund and SPVs
The income of Safeena Islamic Fund will comprise substantially the dividend and profits on shareholders’ advances received from each SPV. The income of each SPV is derived from charter income from the chartering of the vessels to ship operators.
Safeena Islamic Fund, a private fund in the form of an offshore company incorporated under the Offshore Companies Act 1990 (OCA), would be carrying on an offshore non-trading activity and, as such, shall not be charged to tax pursuant to section 3 of the Labuan Offshore Business Activity Tax Act 1990 (LOBATA) in respect of dividend and profits on shareholders’ advances.
The taxation of the SPV, which are offshore companies incorporated under the OCA, would depend on the type of charter and the country of residence of the obligor.
The SPV would be carrying on an offshore trading activity and is chargeable to tax at 3% of audited net profits, pursuant to section 4 of LOBATA. Alternatively, under section 7, an election can be made to pay a tax of RM20,000 (US$6,155).
Taxation of profits and distributions
Distributions in the form of dividends paid by Safeena Islamic Fund to its shareholders are not subject to Malaysian withholding tax. If the shareholders are Malaysian tax residents, the dividends are exempt in the hands of such Malaysian residents pursuant to Income Tax (Exemption) (No. 22) Order 2007.
Profit payments made by the SPV to Safeena Islamic Fund and the investors are not subject to Malaysian withholding tax. If the investors are Malaysian tax residents (other than a person licensed to carry on a business under the Banking and Financial Institutions Act 1989, Islamic Banking Act 1983, Insurance Act 1996 or Takaful Act 1984), the profits are exempted in the hands of such Malaysian residents pursuant to Income Tax (Exemption) (No 22) Order 2007.
While the manager and the seller believe that the sale of the vessel at the end of the tenure will not give rise to any adverse tax position within the SPV, neither the manager nor the seller can give.
Asian Finance Bank Berhad
Podium Block
Kenanga International
Jalan Sultan Ismail
50500 Kuala Lumpur
Tel: +603 2079 1000
Fax: +603 2079 1100