Saturday, June 12, 2010

Sukuk Investors Need Protection? Or Just to Read the Prospectus

There's an interesting article in The National about the need for greater protections for investors in Sukuk.
“What good is it in the event of a default if you can’t have access to the underlying assets?” said Rifaat Abdel Karim, the secretary general of the Islamic Financial Services Board, a body based in Kuala Lumpur that sets standards for Sharia compliance. “As an investor you need to know what you get.”
Indeed, you need to know what you get.  That requires that you read the Offering Circular.
 
Every sukuk Offering Circular or Memorandum that I have read sets forth whether or not the investors have a collateral interest in the underlying asset.  Generally, legal issues (including ownership, enforcement and other risks) are set forth as well.

In TID's Global Sukuk I Offering Memorandum, the first Risk Factor (page 11) clearly states that  if there is a default,  the investors have no direct recourse to the underlying assets and have to rely on the obligor (TID) to repurchase the sukuk.  

In the Offering Memorandum for Saad's Golden Belt Sukuk, the second Risk Factor (page 24) also makes a similar statement.  As I've noted before, the potential for  a legal  challenge to the determination of the Periodic Rental Payment ("interest payment") is disclosed as are potential difficulties in enforcing rights. (pages 25 and 29).  The fact that the land remains registered in the name of Mr. AlSanea is noted on page 26.

For IIG's Sukuk, turn to Risk Factors (page 17) under Limited Recourse make a similar statement about access to the underlying assets as TID and Golden Belt.  Page 24 discusses that while the certificates are convertible to shares, the Company has not obtained shareholder consent or approval from the Kuwaiti authorities to issue new shares.

There's a very simple rule in finance.  Don't buy an investment if:
  1. You're not capable of figuring out what you're buying.
  2. And you don't want to hire a professional to help you.
  3. Or you're capable, but just don't want to spend the time reading the Offering Memorandum and asking a few questions.

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