Common Challenges Facing New Debt Issuers
Prospective new sovereign/corporate issuers (in the emerging & frontier markets) often tumbled into unchartered territory with debut sukuk issuance, especially if that jurisdiction of an issuer has never issued an Islamic debt instruments before. There is no easy crash course that can summarize what these prospective issuers can expect as each jurisdiction has its own unique challenges.
Here is a summary of the main common challenges and what should prospective new issuers expect with debut issuance.
On the regulation side, issuers need to be mindful of local and international regulations that regulate debt issuance. Sukuk offerings may take longer to structure and document than conventional offerings owing to the need to establish an SPV (onshore/offshore), identification of appropriate assets, regulatory/government approvals, additional structuring and approvals from Islamic Scholars (Fatwa).
The relevant Tax Authority should consider providing the necessary tax waivers (VAT, Sales tax…) to the Sukuk Sale Agreement and Purchase undertaking (if applicable under the issuer’s jurisdiction).Other Tax considerations ,such as Transfer tax/Stamp Duty , Withholding tax, need to be consider prior the issuance.
What to expect on:
1) Legal front
If the issuance is an international one, then issuers need to consider the following counsels:
- International Counsel : Advise sovereigns in relation to documentation and regulatory compliance under English laws
- Issuer Counsel : Counsel in Offshore / Onshore jurisdiction
- Delegate Counsel : Advise Delegate in relation to its obligations acting on behalf of Certificate holders.
2) Listing requirements
The governing law varies depending whether the listing is in the domestic market (follows local law) or the international one (follows the English law). Certain jurisdictions (like Ireland) require listing agent to facilitate sukuk listing on the Stock Exchange.Listing Agents prepare all of the material for the submission to the stock exchange - application documentation, prospectus etc.
We can not cover everything on the documentation side of the sukuk but we can highlight at least three of them. Firstable the Prospectus. Such Investor documentation is as per international standards and usually conform to the laws of an internally / externally accepted jurisdiction. Offering Circular (“OC”) /Prospectus is compiled by the Underwriters & Legal Counsel on behalf of the Issuer. The OC is prepared for distribution. It Includes Issuer’s description. The OC summarizes the Offering and details of the terms and conditions is prepared by the Book runner's Legal Counsel.
On the other hand there is the Trust Deed which governs the relationship between the Issuer and the Trustee. The Trustee acts on behalf of the Noteholders in the relationship between Issuers and Noteholders. This is typical of transactions where country of issue is separate from country of listing. Furthermore, the Subscription Agreement is signed between parties involved in the agreement (i.e. SPV (acts as an issuer) and Lead Managers). The Issuer agrees to issue and sell the notes to the Underwriters. The Underwriters jointly and separately agree to subscribe to the same