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<p>KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES ISLAMIC CAPITAL MARKETS (ECON 6862) CASE STUDY:</p> <p>THE INVESTMENT DAR (TID) : DEFAULT OF TID GLOBAL SUKUK I LIMITED</p> <p>PREPARED BY: GUSTINA G0820164</p> <p>SAKEEYAH MATEEYOH G0826296 IYLIA HANIS SUTHINEE SUAYNGAM G0916656 G0916798</p> <p>SUBMITTED TO: PROF. DATO DR. MOHD AZMI B. OMAR</p> <p>SEMESTER I, 2010/2011</p> <p>1) THE BACKGROUND AND PRINCIPAL BUSINESS OF THE ORIGINATOR AND THE ISSUER</p> <p>1.1)</p> <p>The background and principal business of the Originator</p> <p>The Investment Dar Company (TID) was established in 1994 and started actual operations a year later as one of the first shareholding companies in the Gulf Cooperation Council (GCC) specialized in consumer Islamic finance. Since 1999, TID established several new companies and acquired many others. The company's diversified activities through three distinct phases. In the first phase, from incorporation until 1999, TID was engaged almost exclusively in consumer financing activities, mainly Sharia-compliant car financing. In the second phase, from 2000 through 2002, TID added real estate development and additional financing as well as direct investment to its existing activities. In the third phase, 2002 until present, TID restructuring its various existing businesses into separate and independent companies and has retained overall control of each. In 2007, the company led a consortium of local and international investors purchasing the majority shares of the British prestigious cars producing company of Aston Martin from Ford Motor. One year earlier, TID made the second largest Islamic finance deal in the UK history when it acquired one of London's most historic buildings, Grosvenor House Apartments. Today, TID employs a staff of over 400, and is a diversified holding company with interests in consumer finance, investment and investment management, asset management, banking, real estate, insurance, consulting services and logistics. As a result of its growth, TID is currently one of the largest finance and real estate companies in Kuwait as well as in the GCC (the Gulf Cooperation Council). It has achieved such growth while continuing to adhere to principles of Islam in all of its activities. Moreover, TID was the first Sharia-compliant company to obtain the ISO</p> <p>9001 International Quality Standards Certification in 1999, which was upgraded to ISO 9001:2000 in 2005. Being listed in Kuwait Stock Exchange market (KSE), and its operations are based predominantly in Kuwait and partly in the other GCC states. As of the date of this offering circular, TID has an issuer rating of A- by ICRA Limited, an Asian Associate of Moodys Investor Service, and BBB- long term rating by Capital Intelligence.</p> <p>TIDs main activities by sector are:</p> <p>1. Investment &amp; Assets Management:TID invests directly in subsidiaries and associated companies whether these companies are newly established by TID or acquired. These investment activities are performed by TIDs holding company and its affiliates Al Madar Finance &amp; Investment Company (Al Madar) and Al Dar Asset Management Company (ADAM), who collectively maintain a diversified portfolio of shares, listed on the Kuwaiti Stock Exchange, for trading. Moreover, the business activities cover assets and investments management in all international, Arab and local markets.</p> <p>Consumer Finance:TIDs affiliates Wared Lease &amp; Finance (Wared), and Al Madar engage in finance activities by offering a wide range of financing and leasing solutions to customers at every stage of their life cycle. The companys diverse range of products include a host of personal and business finance solutions, insurance, investment and operating leases. Wared is the main provider of consumer financing, and it strives to tailor products according to its customer needs, with a personal income as prime consideration.</p> <p>Wared has several subsidiaries in the vehicles leasing and services industry, including Autociti and Drive Car Rental. Al Madar is the main provider of real estate financing and has been active particularly in Kuwait where the government has recognized it for its assistance in addressing the chronic housing shortage problem.</p> <p>Investment services and other fee based services Investment and other fee-based services are comprised of asset management, project management and debt collection and ratings services, which are mainly provided by TIDs affiliates ADAM, Proman Project Management Company (Proman) and Credit Rating &amp; Collection Company (CRC) respectively. Asset management is mainly a fee generating income activity provided by ADAM and includes portfolio management, funds management, private placements and advisory fees. Proman is a limited liability Kuwaiti company established with the objective of project planning and management, cost control, project structuring and development. In addition, Credit Rating &amp; Collection (crc), the company aims to assist other companies and corporations in recovering their debts from the market, enabling them to focus more on their specialized business. CRC also provides risk management and debt recovery services, protecting the banking and commercial process by fulfilling the cycle of unpaid debts. It is the first listed company in the region that provides professional credit rating services and the first credit rating agency licensed in Kuwait.</p> <p>2. Real EstateReal estate activities are primarily provided by TIDs affiliates Manazel Holding Company (Manazel), Al Dar National Real Estate Company (ADNREC), Oqyana</p> <p>Real Estate Company (Oqyana) and Khabary Holding Company (Khabary) and include real estate investment, real estate trading and large real estate projects. Real estate investment are mainly real estate project development where TID, acting through one of its subsidiaries or associates, acquired either an existing property or a plot of land and engage in development of construction of residential or commercial properties. Furthermore, TID engage in real estate trading by investing in plot of land and properties either through purchase from the market or by auction and then typically acts such properties within three month if the acquired asset was a plot of land or a built property. Since 2004, TID has also focused on participating in very large real estate developments both in Kuwait and in the GCC region.</p> <p>1.2)</p> <p>The background and principal business of the Issuer</p> <p>TID Global Sukuk I Limited was incorporated as an exempted limited liability company in The Cayman Islands on 1 June 2006, and as is registered office at the offices of Maples Finance Limited, Queensgate House, South Church Street, P.O. Box 1093 GT, George Town, Grand Cayman, Cayman Islands with Registration number 168 167. The Issuer has been formed solely for the purpose of issuing the Sukuk and entering into the Musyarakah and, in this respect, participating in the transaction and activities contemplated by the Transaction Document. Moreover, pursuant to the terms of the Transaction Documents, the Issuer may not issue any securities other than the Certificate or otherwise incur in any indebtedness, except as contemplated in the Transaction Document. Besides that, the issuer has no subsidiaries.</p> <p>2) WHY DID THE ISSUER DECIDE TO SELECT A PARTICULAR SUKUK STRUCTURE? The issuer decide to select a particular sukuk structure ( Sukuk Musharakah) because is to utilize the capital contribution to earn profit, through entering into Islamic</p> <p>financing arrangements with clients of The Investment Dar Company K.S.C. Moreover, under the Musharakah, each of the Issuer and TID shall have an undivided interest in the Musharakah Assets, subject to the sharing of profit and bearing of losses, pursuant to the terms of the Musharakah Agreement.</p> <p>3) DESCRIBE AND EXPLAIN THE SUKUK STRUCTURE AND ITS MAIN FEATURES.</p> <p>Sukuk Musharakah: financing under which both the investors and the client/ contractor must contribute capital either in term of cash or asset. These are investment that represents ownership of Musharakah equity. The profit distribution is negotiable, while in case of losses, both parties will loss in proportion to the size of their investment pursuant to the terms of the Musharakah Agreement. The purpose of Sukuk Musyarakah are use to mobilize funds to establish new projects, or to develop an existing one, or to finance a business activity on the basis of partnership contracts. The main features of Sukuk Musyarakah are flexibility of application, prospect of higher than average returns without significantly higher risks. Moreover, it can be an excellent mode of finance particularly for short term transactions.</p> <p>Musyarakah Sukuk structure (TID global sukuk I):</p> <p>Pursuant to the Musharakah Agreement, TID and the Issuer agree to enter into the joint venture, or Musharakah, established pursuant to the terms of the Musharakah Agreement. The Musharakah will commence on the date of the Musharakah Agreement and will terminate on the date falling five years and six months of the Musharakah End Date. TID and the Issuer have appointed TID to act as the Management Agent of the Musharakah for the purpose of servicing agency that include: maintenance, collections, insurance, Operating Account, Musharakah revenues, Musharakah Accounts, Taxes, Authorisations,</p> <p>Marketing and Business Plan. The Management Agent have no right or authority to imposed any obligation or liability on either Musharakah Partner in connection with the Services, save as expressly set out in the Management Agreement. In addition, the Management Agent shall provide the Services in accordance with all applicable laws and regulations, with the degree of skill and care that it would exercise in respect of its own assets, and in a manner that is not repugnant to Sharia. In consideration for acting as management agent, the Issuer and TID shall pay the Management Agent an initial fee of US$100 (payable on the Closing Date) and Incentive Fees in respect of any Accounting Period, the Musharakah Accounts show a Net Cash Profit payable to the Issuer greater than the Periodic Distribution Profit Amount.</p> <p>The SPV Company (TID Global Sukuk I Limited) as an Issuer will enter into a Musharakah agreement with the Investment Dar Company K.S.C (TID) as an Originator. 1. The SPV Company issues the Musharakah Sukuk from the Sukuk holders of US$150,000,000 Trust Certificates (Sukuk al-Musharaka). 2. Sukuk Holders will proceed with cash US$150,000,000 to the Issuer. 3. The SPV Company will contribute 48.78% of the capital in cash to the Musharakah Joint Venture for the purpose of purchasing specific assets on the basis of Sharikat al-Melk. 4. Investment Dar Company will contribute 51.22% of the capital in-kind in the form of vehicles and real estate, on the basis of Sharikat al-Melk which will be valued at their actual value. 5. The amount of US$307,500,000 of the underlying assets will invest in accordance with purchasing specific asset. 6,7. Profit will distribute among the partners (SPV and Investment Dar Company) in proportion to their respective capital contribution. In case the profits exceed a certain</p> <p>percentage agreed upon in the management agreement, the Manager is entitled to such excess amount as a bonus in consideration for its good management. 8. SPV pays the coupon payment to the Sukuk holders.</p> <p>Country Sukuk Name Name of Issuer Principal activities of issuer Name of Originator/Obligor Principal activities of Originator / Obligor</p> <p>Kuwait TID Global Sukuk I ( Sukuk Al-Musyarakah) TID Global Sukuk I Limited, a Cayman Island exempted limited liability company The issuer has been form solely for the purpose of issuing sukuk and entering into the Musyarakah and participating in the transaction and activities contemplate by the transaction document The investment Dar Company K.S.C (TID), a Kuwait shareholding company 1) Investment 2) Finance 3) Investment and other fee-based services 4) Real estate</p> <p>Date of Issue Issue size Tenor (years) Issue Price Listing Status Shariah Principle Used sukuk issuance Rating</p> <p>20th September 2006 US$150 million Trust Certificates 5 years and 6 months ( due 2011) 100 per cent of the aggregate principal amount of the certificate Dubai International Financial Exchange (DIFX) Sukuk Al-Musyarakah</p> <p>The issuer rating of A- by ICRA Limited, an Asian associate of Moodys Investor Service, and a long-term rating of BBB by Capital Intelligence. Years 1-3: 6-month LIBOR + 125 bps p.a. Years 4-5: 6-month LIBOR + 175 bps p.a.</p> <p>Profit/Coupon</p> <p>Profit / Coupon Payment Frequency Underlying/ Identified assets</p> <p>Semi-annual coupon payment Type of asset: Vehicles and real property Value of underlying asset: US $157,500,000 Location: Kuwait</p> <p>Purpose of Issue / Utilization of sukuk proceeds</p> <p>The objective of the Musyarakah is to utilize the capital contribution to earn profit, through entering into Islamic Financing arrangements with clients of TID in accordance with business plan</p> <p>Historical Graph</p> <p>Historical Chart Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 5.4014% 5.3723% 5.3212% 5.3581% 5.3844% 5.3817% 5.3863% 5.3269% 5.5350% 5.1325% 4.8063% 4.9100% 2008 4.5963% 3.0413% 2.9313% 2.6144% 2.9650% 2.9106% 3.1088% 3.0838% 3.1175% 3.9813% 3.1213% 2.5913% 2009 1.7500% 1.6600% 1.8031% 1.7356% 1.5650% 1.2400% 1.11125% 0.92500% 0.75500% 0.62875% 0.56438% 0.48813% 2010 0.42969% 0.38438% 0.38688% 0.44438% 0.53063% 0.75188% 0.75250% 0.66781% 0.49669% 0.46250%</p> <p>In the case of TID, during the first 3 years the coupon/profit rate is 6-month LIBOR + 125 bps per annum. For example in September 2007, LIBOR rate is 5.5350%. Thus, the coupon for TIDs sukuk is 5.5350% + 1.25% = 6.785% The coupon/profit rate during the following years is 6-month LIBOR + 175 bps per annum. For example in September 2008, LIBOR rate is 3.1175%. Thus, the coupon for TIDs sukuk is 3.1175% + 1.75 = 4.8675%</p> <p>4) IS THIS SUKUK ASSET-BASED OR ASSET-BACKED? EXPLAIN. Sukuk musyaraka issued by TID is an asset-based sukuk. There is no real ownership in the Musharaka Assets by the certificate holders. This is clearly stated in the Covenant that under no circumstances shall the Trustee or any Certificateholders have any right to cause the sale or other disposition of any of the Trust assets, except pursuant to the Purchase Undertaking. The sole right of the Trustee or any Certificateholders against the Obligor shall be to enforce the obligation of the Obligor to pay the Exercise Price or Early Redemption Amount thereunder. Moreover, the nature of the sukuk is limited recourse. Sukuk holders have no rights to any assets of the Obligor in the event of any shortfall in the expected amounts from the trust assets.</p> <p>Finally, the existence of purchase undertaking, in which the Issuer has the right to enforce the Obligor to purchase the Issuers Units at the Dissolution amount or Early Redemption Amount, as the case maybe.</p> <p>1) DESCRIBE THE RISKS INVESTORS MIGHT FACE...</p>