Euro Bonds

INTERNATIONAL BOND FINANCING EUROBONDS AND SUKUK BONDS RIZWAN SHAUKAT SALMAN IRSHAD 31 HASHMAT NAWAZ

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What are bonds? A

bond is a debt security issued by the government or a company to the general public for a fix return and for a specified period of time. Bills - debt securities maturing in less than one year. Notes - debt securities maturing in one to 10 years. Bonds - debt securities maturing in more than 10 years.

Different Types Of Bonds  Government

Bonds  Municipal bonds  Corporate Bonds  Zero-Coupon Bonds  For

example, let's say a zero-coupon bond with a $1,000 par value and 10 years to maturity is trading at $600; we will be paying $600 today for a bond that will be worth $1,000 in 10 years.

The Eurocurrency market “Currency” “Euro”  Eurocurrency  Eurocurrency  Eurobanks

market

Eurobonds (Global bonds) A

Euro bond underwritten by an international syndicate of banks and other financial institutions and placed in the countries other than the country in whose currency the issue is denominated.  Benefits   

choose country small par value high liquidity

Eurobonds (Global bonds)  Interest  Maturity  Unsecured  Euro A

bonds VS Foreign bonds

foreign bond is underwritten by a syndicate consisting of members from a single country, sold primarily within that country and denominated in its currency.

Eurobond Market composition Issuer

Market Components • Syndicate • Primary market

Bank

• Secondary market

(lead manager)

Managing group

Underwriter Selling group

ISLAMIC BOND MARKET

ISLAMIC BOND MARKET Categories of Islamic Bonds  Ijarah

bonds  istisna‘  bonds  mudarabah or muqaradah bonds  musharakah bonds  salam bonds and  murabahah bonds

ISLAMIC BOND MARKET IjARAH Ijarah is a contract according to which a party purchases and leases out equipment required by the client for a rental fee. The duration of the rental and the fee are agreed in advance and ownership of the asset remains with the lessor.

ISLAMIC BOND MARKET ISTISNA Istisna‘ is a contract to sell a manufacturable good with an undertaking by the seller to present it manufactured from his own material, according to specified description and at a determined price.

ISLAMIC BOND MARKET WHAT IS SUKUK BOND? Investment certificate representing a proportional or undivided ownership interest in an asset or pool of assets  Sukuk

al-ijara bonds and Sukuk alistisna bond

ISLAMIC BOND MARKET Three main steps involved in the bond issuance  Securitization  Bond

Issuance  Trading of debt certificates

ISLAMIC BOND MARKET SECURITIZATION  Role of al-mal or property  Haqq mali- investor’s right to sell the bond  The accounting and auditing organization for Islamic Financial Institutions – standard for Investment Sukuk BOND ISSUANCE  Issue of Debt certificates  Issuing company or special purpose vehicle (SPV)  Islamic coupon bonds and islamic zero

ISLAMIC BOND MARKET  Role

of riba (interest)

"And whatever riba you give so that it may increase in the wealth of the people, it does not increase with Allah." [Ar-Rum 30:39]

ISLAMIC BOND MARKET TRADING OF DEBT CERTIFICATES  Islamic

bonds bought for long-term investment  Lack of secondary market

Pakistani Infrastructure Sukuk Sukuk Holder Certificate Proceeds

Pak Co. Seller

Sale/ transfer SPV issuer or lesser of asset Certificate Proceeds

Power Plant

Sukuk Certificates/ payments

Pakistan government guarantee Ijara agreement SPV lease to lessee

Pak Co. Lessee

(Special purpose Vehicle)

Transfer title to issuer

Lease rentals LIBOR +margin

Comparison of Euro bonds and Sukuk Bonds  Security  Risk  Rent

Vs Interest  Trading in secondary market

Euro bond issued by Pakistan Why Pak entered the bond market ?  On February 12, 2004 

issued

US $ 500 million 5 year maturing in 2009 lead managed by Deutsche Bank, JP Morgan and ABN Amro Bank • four times oversubscribed • highly appreciated by international and local print and electronic media

Euro band issued by Pakistan 

Sukuk issue held by the GoP on 16 March 2005 subscriptions

of around US$ 1.2 billion Issued USD 600 million 5 year bond priced at 6-month US$ Libor + 220 bps

 Malaysia

2003

and Qatar in 2002 and