Allen & Overy has advised on the world's first global Islamic securities issue – the Federation of Malaysia's $600 million offering of trust certificates. The securities were issued in the form of trust certificates, governed by English law.
The deal represents a step forward in the sophistication of Islamic financial instruments.
Islamic finance operates in compliance with shariah law, religious law derived from the Koran. Although Islam is not anti-commerce (the Prophet Mohammad was himself a merchant), it views with suspicion profits generated from money lending. This prohibition originally arose in response to the practice of usury; excessive interest generated from exploitative lending. But in many Islamic states it now applies to interest in general.
Although Islamic finance is rooted in pre-capitalist society it has, in Malaysia at least, served to modernize the financial industry through its emphasis on private property, free enterprise and the sanctity of contracts.
In this transaction the issuer, a newly-formed Malaysian special purpose vehicle (SPV), purchased beneficial title to certain parcels of land from the Federal Lands Commissioner of Malaysia, a government entity that continued to hold legal title to the parcels, and leased the property to the government pursuant to an Islamic lease (ijarah).
The SPV then declared a trust over its assets, consisting primarily of the land parcels and its rights under the ijarah and related agreements, for the benefit of holders of the trust certificates. Under the ijarah, the issuer as lessor receives a Libor-based return, which is then passed on to holders of the trust certificates. On the scheduled redemption date of the trust certificates, the issuer will sell back the land parcels to the government and apply the sale price to redemption of the trust certificates.
Islamic financial institutions around the world are now estimated to hold assets of approximately $230 billion and Allen & Overy, which advised the Federation of Malaysia, is rapidly developing a reputation for structuring Islamic deals. "We were particularly pleased to advise on this transaction as it continues our string of recent innovative Malaysian and Islamic deals," says Ken Aboud at Allen & Overy Shook Lin & Bok in Singapore. "The challenge of this transaction was in harmonizing the structure and documentation to satisfy the differing needs of both international bond market investors and Islamic investors, meanwhile ensuring that the rating agencies became comfortable with a structure of first impression."
A&O is also working on Iran's planned bond issue (see article page 13). Sebastien Sperber led a team from Cleary, Gottlieb, Steen & Hamilton advising the issuer. Zul Rafique & Partners advised on Malaysian law.
This is the third such deal that A&O has advised on recently. The firm's Singapore joint law venture with Shook Lin & Bok advised on the first asset-backed Islamic financing, a $150 million issuance through First Global Sukuk, a Labuan-incorporated SPV.