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The Dar Al Arkan sukuk showed how a
shariah-compliant transaction could be structured on
conventional high-yield principles, opening up a new option for
accessing Islamic markets. But covenants must be cautiously
structured to make sure they apply to all facilities.
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“A typical high-yield package contains a whole raft of
covenants, most of which will be applicable in a
shariah-compliant financing such as
sukuk,” said Mohammed Al-Sheikh, managing partner
of Latham & Watkins’ Riyadh office in a web seminar on
September 14.
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But where conflicts can arise is when making sure that all
covenants and agreements apply equally across the whole deal,
and not just to the conventional parts of the transaction.
Particular care needs to be taken with covenants that limit
indebtedness, and those that control permitted refinancing.
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“The covenant packages you see in European deals will
not take into account murabaha, sukuk or
wakhala arrangements,” said Al-Sheikh.
“Because they are not simple loan arrangements but based
on a return concept, they do not typically get picked up by the
traditional definition of a loan.”
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Instead, standard covenants must be amended to make sure
that shariah-compliant forms of financing do not fall
outside their reach.
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Drafting is important on permitted refinancing too. As
Al-Sheikh explained: “You have to make sure the permitted
refinancing exemption is wide enough, and worded properly, to
allow the refinancing of shariah financing and not
just conventional arrangements.”
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Latham & Watkins advised the issuer, Dar Al-Arkan Real
Estate Development Company, and a Linklaters team represented
the joint lead managers.
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To listen to the web seminar ‘Islamic finance: the
realities of debt’, please visit: http://www.brighttalk.com/webcast/22877
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