Case studies 4
Zubair Chapter 9
SUKUK BONDS VERSUS SECURITIZATION
Sukuk are of two general types: Islamic bonds and securitizations. Islamic bonds are based upon the credit of an entity that is participating in the transaction, such as the issuer, a guarantor or another provider of credit support. Securitizations involve a transfer of assets from an originator into a trust or similar special purpose vehicle (SPV) with the issuance of securities by that trust or SPV. Payments on the issued securities (the sukuk) are derived solely from the payments received in respect of those transferred assets, rather than any general credit of an issuer or participating party. Thus, securitizations are based upon the credit of the securitized assets. To date, most sukuk issuances have been Islamic bond issuances. True securitization sukuk issues are rare, and issues of this type that have been rated by a major international rating agency are nonexistent.
While both types of issuances access the capital markets and are necessary for balanced growth of the capital markets, true securitizations have benefits that transcend those available from bond issuances alone. Securitizations allow, often require, broad diversification of the assets in the securitized pool. The originator of the transferred assets uses the securitization to manage its balance sheet and capital structure. The originator transfers assets that generate deferred payments and receives an immediate cash payment from the capital markets in respect of that transfer. This enables the originator to immediately generate more assets and results in further diversification of the financing in respect of the transferred assets and access to a broader financing base. The securitization process allows greater risk management and liquidity management for all market participants.
At a broader market level, the securitization