US$700 million Sukuk Trust Certificate by Qatar Global Sukuk
An Islamic bond (sukuk) has economic characteristics similar to those of a conventional bond, but is structured so as to be compliant with Sharia'a law and can be sold to Islamic investors who are prohibited, by Sharia'a, law from investing in conventional debt securities.
QSC purchased a certain land parcel from the Government of the State of Qatar. The land parcel was leased by QGS to the Government of the State of Qatar for a 7-year period corresponding to the duration of the trust certificates. QSC declared that it would hold these assets in trust for the holders of the trust certificates. The lease rental payment from the Government of the State of Qatar to QGS will exactly match the periodic distribution payments payable on the trust certificates. The lease rental payment was calculated based on 6-month US dollar LIBOR plus a margin.
This case describes the Qatar Global Sukuk rated trust certificates (Sukuk), the proceeds of which will ultimately be used for general funding purposes by the Government of the State of Qatar. The rationale for this transaction is to allow the Government of the State of Qatar to raise Sharia'a compliant funds.
The case draws extensively on the offering circular which is summarised for the reader.
- Background to the Sukuk
- The Offering
- Summary of the Offering
- Summary of The Certificates
- The Trust Assets and the Master Ijara Agreement
- Investment considerations
- Case study questions
Background to the Qatar Global Sukuk QSC
Location, Area and Historical Background
Qatar is an independent state in the Southern Arabian Gulf having a land border with Saudi Arabia and maritime boundaries with Saudi Arabia, Bahrain, the United Arab Emirates and Iran. The country extends over a peninsula approximately 185 kilometres long and between 55 to 100 kilometres wide and covers a total area of 11,521 square kilometres, including a number of islands. Doha is Qatar's capital city, the seat of the Government and the country's cultural, commercial and financial centre. It is also the location of Qatar's main port and the international airport.
Qatar has an arid desert climate with low annual rainfall and little vegetation or surface water.
Qatar has vast hydrocarbons resources within its territory with both onshore and offshore oil fields and the third largest proven natural gas reserves in the world. This includes the North Field, the world's largest single non-associated gas deposit in the world.
Historically, the peninsula was inhabited by nomadic tribes, coming under the influence of several major Middle Eastern civilisations, including the Dilmun civilisation, in 4,000-2,000 B.C., the Umayadd and Abassid caliphates (8th-13th centuries) and the Ottoman Empire. In the 16th century, the Qatari peninsula came under the influence of, first, the Portuguese, and then the British. In 1916, the British concluded a treaty with the ruling al-Thani family under which Qatar became a British protectorate. It remained so until September 1971 when the country declared independence. Qatar's petroleum resources have led to rapid development and the construction of a modern infrastructure.
Government Organisation and Political Background
Qatar is an absolute monarchy and has been ruled by the al-Thani family since the nineteenth century. In 1916, the al-Thanis entered into a treaty with the British pursuant to which Qatar became a British protectorate. Qatar declared independence on 3 September 1971. The current Emir, His Highness Sheikh Hamad bin Khalifa al-Thani, replaced his father as Emir and assumed his position on 27 June 1995. The Emir is the principal executive officer in Qatar, although the cabinet, appointed by the Emir, carries out the day-to-day administration of the country's affairs.
Legal System and Enforceability of Judgements
The judiciary in Qatar is divided into two separate systems. The Civil and Commercial courts and the Sharia'a courts. Each system has its own Court of Appeal, which is the highest court for each system. Judges are appointed by a decree of the Emir on the recommendation of the Minister of Justice or Minister for Endowments and Religious Affairs.
Any dispute relating to the Sukuk Certificates adjudicated in Qatar would be initiated in the civil and commercial courts which, according to present Qatari law, have jurisdiction over commercial disputes. The Government is subject to suit under the civil and commercial code of Qatar with respect to commercial transactions entered into by the Government, its ministries and departments. Under the civil and commercial code, contractual provisions for the charging and payment of interest are permissible and enforceable in accordance with their terms, although a court applying Qatari law may not enforce such a provision to the extent that such provision provided for the payment of compound interest. Due to the fact that there is no doctrine of binding precedent in Qatar, the future attitude of the Qatari courts and Qatari law, regarding the payment and receipt of interest, and other matters cannot be predicted.
The economy of Qatar (at the time of the Sukuk issuance)
Qatar has a strong economy dominated by oil and gas export revenues. Since the discovery of oil in Qatar in 1939, the country's economic performance has largely mirrored the fluctuations in oil prices in the international market. In the years of low oil prices. Qatar has witnessed significant budget deficits, and when international oil prices have boomed, there have been marked budget surpluses.
In 2002 the contribution of the oil and gas sector to nominal GDP was 59 per cent. Due to the economy's vulnerability to oil price movements as well as the finite nature of oil reserves, the Government has pursued a policy of economic diversification in promoting the development of energy-intensive heavy industries using natural gas as fuel and encouraging the participation of private enterprises in the industry. At the same time, the Government has privatised a number of services to reduce pressure on the budget. Qatar is also developing a modern infrastructure to facilitate and provide a framework for future development.
Qatar's natural gas resources, estimated to be 900 trillion cubic feet, rank in size behind only those of Russia. Qatar's extensive North Field natural gas reserves contain the majority of these reserves and account for an estimated 5 per cent, of total proven worldwide natural gas reserves. The Government predicts that by 2008 the revenues of the export of LNG will exceed those of the export of oil without any cut in crude oil production levels.
Qatar's current economic stability was reflected in the upgrade by Standard & Poor's to Qatar, in July 2003, of Qatar's credit rating to A+.
Gross Domestic Product
The principal component of GDP for the period 1998 -2003 was the oil and gas sector, the estimated value of which amounted to US$10.3 billion in 2002, representing approximately 59 per cent, of nominal GDP for that year. In the non-oil sector, the finance, insurance and real estate sector is estimated to have accounted for US$1.3 billion in 2002, representing approximately 7.5 per cent, of nominal GDP in that year. Revenues from the manufacturing sector are estimated to have reached US$989 million in 2002, representing approximately 5.7 per cent, of nominal GDP in that year.
Qatar's GDP has grown over the past five years in a pattern that largely follows the fluctuations of international oil prices and the increased sales of Liquefied Natural Gas (LNG), with growth averaging 13.9 per cent between 2000 and 2002. The significant reductions in world oil prices and levels of crude oil production in 1998 resulted in a contraction in Qatar's economy in that year, while a substantial increase in the price of oil contributed to an improved GDP in 1999. In 2000, as oil prices reached a ten-year high and almost doubled in terms of value, nominal GDP grew by 45.5 per cent, to US$17.6 billion. In 2001, when oil prices and production levels fell, nominal GDP saw a fall of 3.6 per cent. In 2002 there was a modest rebound of 2 per cent, to US$17.4 billion. According to the Qatar Central Bank estimates, nominal GDP grew by 5.3 per cent. to US$4.9 billion at the end of the first quarter of 2003, compared to US$4.7 billion at the end of the last quarter of 2002. This increase largely reflected the rise in world oil prices due to the war in Iraq and disruption of South American oil industries.
Oil and Gas Sector
The oil and gas sector, which consists of the production and export of crude oil and other hydrocarbons such as condensate, propane, butane and other natural gas liquids, is the principal sector of the Qatari economy, with revenues from this sector accounting for approximately 60.4 per cent, 58.7 per cent. and 59 per cent of nominal GDP in 2000, 2001 and 2002 respectively.
Gas constitutes Qatar's principal hydrocarbon resource. The North Field is one of the world's largest non-associated (i.e., not part of an oil reservoir) gas deposits and currently accounts for approximately 5 per cent. of worldwide gas reserves. As at 31 March 2003, the North Field's proven reserves of gas were estimated by Qatar Petroleum to be in excess of 900 trillion cubic feet. Development of the North Field gas reserves for export and as feedstock, for the domestic refining and petrochemicals industry, is the Government's economic and strategic priority. Earnings from exports of LNG and other products based on gas, either as feedstock or a fuel source, are expected to represent an increasingly important source of revenue for the Government for the next several decades, particularly as Qatar's oil reserves begin to decline.
Qatar Global Sukuk QSC- The Offering
(Incorporated in Qatar with limited liability)
US $700,000,000 Trust Certificates due 2010
Issue Price: 100 per cent
The US $700,000,000 Trust Certificates due 2010 (the "Certificates" or the "Sukuk") of Qatar Global Sukuk QSC (the "Issuer") will be constituted by a declaration of trust dated on or about 9 October 2003 made by the Issuer. Pursuant to the Declaration of Trust, the Issuer will declare that it will hold certain assets, primarily consisting of a certain land parcel and rights under the related Master Ijara Agreement, upon trust absolutely for the holders of the Certificates pro rata according to the face amount of Certificates held by each Certificate holder.
On the ninth day of each April and October commencing in April 2004 the Issuer will make a Periodic Distribution an amount which is calculated on the basis of (i) LIBOR plus 0.40 per cent per annum, calculated on the outstanding principal amount of the Certificates as at the beginning of the relevant Return Accumulation Period on an actual/360 basis plus (ii) beginning with the Periodic Distribution Date falling in April 2006, an Amortisation Payment of one-tenth of the initial principal amount of the Certificates.
The Issuer will make such Periodic Distributions solely from the proceeds received in respect of the Trust Assets which include rental payments under the Master Ijara Agreement, which rental payments will be calculated based on LIBOR plus a margin, and will equal the Periodic Distribution Amounts payable to Certificate holders on the Periodic Distribution Date coinciding with the payment date for such rental.
Unless previously redeemed the Certificates will be redeemed on the Periodic Distribution Date falling in October 2010 at the Dissolution Distribution Amount.
The Certificates have not been and will not be registered under the United States Securities Act of 1933, as amended or with any securities regulatory authority of any state or other jurisdiction of the United States and may not be offered, sold or delivered within the United States or to US Persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Accordingly, the Certificates are being offered, sold or delivered solely to non-US Persons (as defined in Regulation S) outside the United States in reliance on Regulation S under the Securities Act ("Regulation S"). Each purchaser of the Certificates is hereby notified that the offer and sale of Certificates to its being made in reliance on the exemption from the registration requirements of the Securities Act provided by Regulation S.
Delivery of the Certificates in book-entry form will be made on the Closing Date. The Certificates will be issued in registered form in minimum denominations of US $10,000 and integral multiples of US $1,000 in excess thereof. Certificates will be represented at all times by interests in a global registered certificate without coupons attached, deposited on or about the Closing Date with HSBC Bank plc as common depositary for Euroclear Bank SA/NV as operator of the Euroclear System ("Euroclear") and Clearstream Banking, société anonyme. Interests in the Global Certificate will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream, Luxembourg.
Joint Lead Managers
Summary of the offering
Qatar Global Sukuk QSC, a joint stock company incorporated in Qatar under Article 68 of the Commercial Companies Law, Law No. 65 of the year 2002 (the "Issuer").
The authorised and issued share capital of the Issuer is 30 Riyals divided into three ordinary shares of par value 10 Riyals each. The Issuer's ordinary shares are owned by the Government and HSBC Bank Middle East Limited (in the latter case, solely as agent for the Certificate holders). Pursuant to a Share Agency Declaration the made by HSBC Bank Middle East Limited the Share Agent holds its share in the Issuer (the "Golden Share") as agent for and on behalf of Certificate holders.
The Government (the "Seller") will convey to the Issuer (as trustee and agent for and on behalf of Certificate holders) title to a certain Land Parcel pursuant to the Purchase Agreement.
The Government will lease from the Issuer the Land Parcel on the terms set out in the Master Ijara Agreement for a period of seven years commencing on the Closing Date and terminating on the Periodic Distribution Date falling in October 2010.
HSBC Bank plc ("HSBC") and Qatar International Islamic Bank ("QIIB") are the "Joint Lead Managers"
The Issuer will act as trustee in respect of the Trust Assets for the benefit of Certificate holders in accordance with the Declaration of Trust and the Conditions.
Summary of the Certificates
The Trust Assets and the Master Ijara Agreement
The Trust Assets are comprised of the Land Parcel, all of the Issuer's rights, title, interest and benefit, present and future, in, to and under the Transaction Documents, all monies standing to the credit of the Transaction Account, and all proceeds of the foregoing.
The Land Parcel
The "Land Parcel" is the plot of land intended for the proposed development of Hamad Medical City measuring approximately 337,540 square meters located in Doha, Qatar, bordered by the following streets:
North, Mohammed Bin Thani Street;
East, Al-Istiqlal Street;
South, Asiad 2006 Street; and
West, Ahmad Bin Ali Street,
with title number 99679 registered in the Department of Real Estate Registration in Doha. The Land Parcel excludes all buildings and all other fixtures forming part thereof at any time, in respect of which the acquisition, construction or completion costs are paid for by the Lessee.
Pursuant to the Purchase Agreement, the Seller will sell to the Issuer the Land Parcel (free from all claims and encumbrances and with all attached or accrued rights as of the date of the Purchase Agreement). The gross proceeds received by the Issuer from the issuance and sale of the Certificates will be used to pay the purchase price for the Land Parcel.
Master Ijara Agreement
Under the terms of a Master Ijara Agreement the Issuer as lessor and the Government as lessee, the Issuer will agree to lease to the Government, and the Government will agree to lease from the Issuer, the Land Parcel during the term commencing on the Closing Date and extending to the Scheduled Dissolution Date.
Under the terms of the Master Ijara Agreement, the Government will agree that the Issuer shall not under any circumstances be liable to the Government or to any third party for any cost, claim, demand, loss, damage or expense of any kind or nature caused directly or indirectly by, or out of, the use of any part or the whole of the Land Parcel. The Government will agree to indemnify and keep indemnified and save harmless the Issuer against all and any such costs, claims, demands, losses, damages and expenses.
Under the terms of the Master Ijara Agreement, the Government shall, at its own cost and expense, be responsible for the performance of all General Maintenance required for the Land Parcel. General maintenance means all repairs, replacements, acts, and maintenance and upkeep works required for the general usage and operation of the Land Parcel and to keep, repair, maintain and preserve the Land Parcel in good order and condition, and in compliance with such maintenance, repair and upkeep standards and procedures generally expected in the ordinary course of business.
The rental payments under the Master Ijara Agreement will be calculated by reference to (i) LIBOR plus the Margin plus (ii) beginning with the Rental Payment Date falling in April 2006, an Amortisation Payment, and will equal the Periodic Distribution Amounts payable on the Periodic Distribution Date coinciding with the Rental Payment Date for such Rental. Rentals will be re-calculated semi-annually based on LIBOR.
The Government will be obligated to pay Rentals on the ninth day of each April and October, commencing in April 2004 up to and including October 2010.
Under the Master Ijara Agreement, if payment of a Rental is not made to the Issuer, in full, on its due date for payment, the Government irrevocably undertakes to donate directly, in accordance with Sharia'a principles, a late payment amount to be paid to a charity of the Issuer's choice in respect of the period from and including the due date for payment.
Under the Master Ijara Agreement, the Government will bear the entire risk of loss of or damage to the Land Parcel or any part thereof arising from the negligent or improper usage or operation thereof by the Government, and will indemnify the Issuer against the same.
In the Master Ijara Agreement, the Government will covenant that from the Closing Date and for so long as its liabilities under the Master Ijara Agreement have not been discharged, the Government will not without the prior written consent of the Issuer create or permit to subsist any encumbrance over all or any of its present or future revenues or assets other than those permitted encumbrances specified therein.
Investment considerations for investors in the Qatar global sukuk
There is currently no secondary market for the Certificates and there may be limited liquidity for Certificate holders.
There can be no assurances that a secondary market for the Certificates will develop, or if a secondary market does develop, that it will provide the Certificate holders with liquidity of investment or that it will continue for the life of the Certificates. The market value of Certificates may fluctuate. Consequently, any sale of Certificates by Certificate holders in any secondary market which may develop may be at a discount from the original purchase price of such Certificates. Consequently, an investor in the Certificates must be prepared to hold the Certificates for an indefinite period of time or until their maturity.
The Issuer has no operating history.
The Issuer is a newly formed entity and has no significant operating history. The Issuer will have no material assets other than the Land Parcel, which will be leased to Qatar pursuant to the Master Ijara Agreement. The Issuer will not engage in any business activity other than the issuance of the Certificates and the acquisition and lease of the Land Parcel. Payments by Qatar under the Master Ijara Agreement, the Purchase Undertaking and the Sale Undertaking, which payments are direct obligations of Qatar to the Issuer, will be the Issuer's principal source of funds.
The certificates are limited recourse, unsecured obligations of the Trust.
Recourse to the Issuer is limited to the Trust Assets and proceeds of the Trust Assets are the sole source of payments on the Certificates. Upon occurrence of a Dissolution Event, the only remedy available to Certificate holders will be to exercise the option under the Purchase Undertaking to require Qatar to purchase the Land Parcel at the Exercise Price. Certificate holders will otherwise have no recourse to any assets of Qatar (to the extent it fulfils all of its obligations under the Transaction Documents to which it is a party), the Joint Lead Managers, the Agents or the Payment Administrator or any affiliate of any of the foregoing entities in respect of any shortfall in the expected amounts from the Trust Assets.
Qatar is obliged to make its payments under the Transaction Documents to which it is a party directly to the Issuer, and the Issuer, as trustee for the benefit of the Certificate holders, will have direct recourse against Qatar to recover payments due to the Issuer from Qatar pursuant to the Transaction Documents to which Qatar is a party. There can be no assurance that the net proceeds of the realisation of, or the enforcement with respect to, the Trust Assets will be sufficient to make all payments due in respect of the Certificates.
The ratings on the Certificates may be changed at any time and may adversely affect the fair market value of the certificates.
It is a condition to the issuance of the Certificates that the Certificates be rated "A+" by S&P upon issuance. The rating addresses the likelihood of full and timely payment to the Certificate holders of all payments of Periodic Distribution Amounts on the Certificates on each Periodic Distribution Date.
The ratings of the Certificates will be based primarily on the credit rating of Qatar. If S&P lower their ratings of Qatar, the rating of the Certificates may be lowered by S&P. A rating is not a recommendation to purchase, hold or sell the Certificates. There is no assurance that a rating will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by an assigning rating agency. If the ratings initially assigned to the Certificates are subsequently lowered or withdrawn for any reason, no person or entity will be obligated to provide any additional credit enhancement with respect to the Certificates. Any reduction or withdrawal of a rating may have an adverse effect on the liquidity and market price of the Certificates.
Case Study questions
Following the recent string of successful Sukuk issues, and the fact that they are a relatively new concept in corporate finance, your employer, an Investment Bank, has selected your group to make presentations to the Board regarding the key issues involved.
Your group must consider the following questions and you must present your findings to the whole class. Please be ready to explain any technical concepts to the class. You will be expected to defend your answers.
Remember that "time is money" and that your responses must be succinct and not overly descriptive. In other words - get to the point!!
- Describe the exact nature of the Qatar Sukuk
- What Islamic modes of finance underpin the Qatar Sukuk?
- Describe how these modes of finance work and the exact relationship they have with the Qatar Sukuk
- What investment considerations would you need to take account of when considering investing in these Sukuk?
- Is Qatar a good place to invest?
- What Sharia'a Board requirements were put in place?
- Are issues of corporate governance relevant to this issue?
- What was innovative about this issue?
- How was the issue rated and by whom?
- was the issue a success?
- What lessons can be learnt for the issue of future sukuk? How do the critical factors for Qatar Sukuk compare with those for the other Sukuk issued?
Identify the following parties in the Qatar Sukuk:
Ownership of the Issuer
Identify and explain the following elements of the Sukuk Certificates:
Form and Delivery of the Certificates
Clearance and Settlement
The Trust Assets
The Master Ijara Agreement
Use of Proceeds
Demonstrate with a flow chart the nature of the underlying transactions.
The author would like to acknowledge drawing on the Issue Prospectus for this work
About the Author
Brian Kettell worked for several years as an Economic Advisor to the Bahrain Monetary Agency (now the Central Bank of Bahrain) with numerous Islamic banking responsibilities. This Islamic banking experience has been reinforced, most recently, whilst working for the Central Banks of Iran and Syria.
His banking and financial background was acquired whilst working for the Arab Banking Corporation in Bahrain, Citibank, American Express and Shearson Lehman.
Brian has taught at a number of universities worldwide including the London School of Economics, London University and the City University of Hong Kong. He has worked as a visiting professor at the Universities of Syracuse and Maryland and is a visiting professor at the Business Schools of Lille, Dijon and Rennes.
Brian graduated with an M.Sc. (Econ) from the London School of Economics. He has published over 100 articles in journals, business magazines and the financial press with articles in Islamic Business and Finance, the Central Banking Journal, Euromoney, the Securities Journal and the International Currency Review. He has published 14 books on banking and financial markets. These are:
- Islamic Sukuk : A Definitive Guide to Islamic Structured Finance
- Islamic Banking and Finance in the Kingdom of Bahrain (BMA)
- Financial Economics (FT-Prentice Hall)
- Economics for Financial Markets (Butterworth-Heinemann)
- What Drives Currency Markets (FT-Prentice Hall)
- What Drives Financial Markets (FT-Prentice Hall)
- The Valuation of Internet Stocks (Butterworth-Heinemann)
- The Federal Reserve System (FT-Prentice Hall)
- The Finance of International Business (Graham and Trotman)
- Businessman's Guide to the Foreign Exchange Market (Graham and Trotman)
- The International Debt Game (Graham and Trotman)
- Monetary Economics (Graham and Trotman)
- The Foreign Exchange Handbook (Graham and Trotman)
- Gold (Graham and Trotman)