Sabana Reits sukuk is the first sukuk ever to be convertible into units in a reit (real estate investment trust). It could signal Singapores push to become an Islamic financial centre.
Although Singapore boasts arguably the most complex reit markets in Asia, Sabana was the first to issue a shariah-compliant reit listed on the Singapore Exchange (SGX). It has now issued the first convertible sukuk on the SGX.
The issuance of the convertible sukuk could herald the issue of more sophisticated shariah-compliant instruments in Singapore, perhaps putting it in competition with Malaysia as a centre for Islamic finance.
This transaction highlights how reits can have access to a wide variety of Islamic financing structures, including complex and tailored sukuk structures, to meet their financing needs, said Allen & Gledhill partner Suhaimi Zainul-Abidin, who advised Sabana Reit.
Deal counsel explained that the sukuks structure was specifically tailored for property acquisitions. Zainul-Abidin said that it is unlike the typical ijarah or wakala-based sukuk structures where the assets generating the profits would usually start off as assets owned by the obligor or group company.
Instead it combined the concepts of murabaha, ijarah and wakala so that the sukuk was issued to acquire real estate assets. These formed some of the trust assets that generate profit for sukuk holders.
Gregory Man, senior associate at Clifford Chance who represented Morgan Stanley as sole lead manager and book-runner, explained that a wakala was at the heart of the transaction.
We then needed to execute the transaction in two stages because Sabana reit required the funding from this issue to acquire the real estate asset that would ultimately underlie the sukuk, Man added. We entered into a murabaha transaction to provide Sabana with its acquisition funding, and then the asset was injected into the structure so that the transaction going forward was part-murabahah and ijarah.
Man commented that the most complicated aspect of the deal was to allow flexibility in the structure to account for convertibility features that convertible bond issues expect to see in a conventional convertible deal. To meet expectations, counsel had to work on the deals underlying structure.
More convertible sukuk ahead?
More convertible sukuk issues may be forthcoming. The last convertible sukuk issue was in 2009, and the lull in issuances is due to both economic conditions and questions arising from the instruments compliance with shariah principles.
However structures have developed as shariah-compliant instruments become more complex, and this transaction could be the beginning of a trend.
Zainul-Abidin said that this deal is in line with recent trends in various jurisdictions to encourage the establishment of shariah-compliant Reits and business trusts.
Now that other these entities have seen convertible sukuk being done again, they may consider following suit. Man said, Those issuers for whom it would make sense to issue a convertible instrument could look to either convertible bonds or convertible sukuk.
Singapore as an Islamic finance hub
Singapore is looking towards becoming an Islamic finance hub, but is competing with Malaysia, which boasts the largest and most well-developed Islamic finance market in the world. This year Malaysia introduced the innovative collateralised murabahah instrument and saw the first sukuk issuance from the CIS region listed on Bursa Malaysia.
Man added that it will be difficult to displace Malaysia as the main centre in Asia for Islamic finance. The history and maturity of Malaysia have contributed to it being the largest Islamic finance market in the world.
But Zainul-Abidin said that Singapore is catching up, and has introduced significant changes in terms of tax equalisation and other permissive regulations which should effectively remove any barriers to Islamic financing in or through Singapore.
However, for the time being, Malaysia is at the forefront of Islamic finance. Given the amount of liquidity in the Malaysian ringgit market at present, Man said that it wouldnt surprise him if he saw more foreign issuers looking to tap some of the liquidity in Malaysia through ringgit issues. Equally, there appears to be less incentive for domestic issuers to issue abroad at the moment.