Chapter 5 Post-Default Sukuk Restructuring: An Appraisal of Shari’ah Issues

Sukuk restructuring primarily aims at offering a debtor more latitude, in form and time, to settle his obligations. To meet Shari'ah requirements of transferring assets to Sukuk holders in asset-based Sukuk, the originator usually transfers the beneficial ownership to the issuer special purpose vehicles (SPV). However, in asset-backed Sukuk, the originator sells the underlying asset to an SPV and Sukuk holders do not have recourse to the originator in the event of defaults. Among some key unresolved Shari'ah issues in this regard is whether a change of contract necessitates entering a new contract. Other related issues that conflict with the tenets of Shari'ah are: (1) Sukuk structuring on tangible assets and debts; (2) receiving the full title by the Sukuk holders to the underlying assets in the event of default in case of securities that are publicized as asset backed; (3) Sukuk's similarity with interest bearing conventional bonds: (a) capital guarantee by the originator or third party, (b) the originators, promise to repurchase Sukuk at face value upon their redemption, and (c) providing internal and external credit enhancement. The Shari'ah-compliance of the above-mentioned clauses and structures of Sukuk remain debated among the Shari'ah scholars. Based on some specific cases, this study examines the Shari'ah viewpoint on sukuk restructuring and potential solutions to these unresolved Shari'ah issues in light of the past and recent declaration of some Sukuk defaults as non-Shari'ah complaints. Undoubtedly, resolution of these and other unresolved issues pertaining to Sukuk defaults can help strengthen the confidence of investors in Islamic capital market structures

Which firms do prefer Islamic debt? An analysis and evidence from global sukuk and bonds issuing firms

The Islamic debt instrument sukuk has been in the market for two decades; still, we do not know why a firm prefers an Islamic debt over conventional debt, set aside religiosity issue. We argue there is a genuine reason to choose Islamic debt because it has lighter indebtedness, benefits of avoiding external monitoring, and tax incentives. Based on the cross-country data for 346 firms issuing dollar-denominated global sukuk and bonds, we find that firms that prefer Islamic debt and issue sukuk are financially more unstable, and thus exposing to higher insolvency risk as compared to bond issuing firms