FACTBOX:Asset-based or asset-backed sukuk: billions at risk?

Legal protection for sukuk holders in the case of non-payment or default has become a hot topic after a rash of problems at Islamic financial institutions.

Unlike mainstream bonds, sukuk do not pay interest, as it is forbidden in Islamic finance. Instead, holders receive returns from underlying assets.

Sukuk issuance may climb to $16 billion in 2010, from last year's $14.9 billion, top sukuk arranger Malaysia's CIMB Islamic said in September. But defaults have sparked fears about the security of the assets underlying sukuk -- most of which are 'asset-based' rather than 'asset-backed'.

Here are some examples of how sukuk are toughing out the sector downturn.

****************** ASSET-BACKED SUKUK *********************

* Tamweel Sukuk Ltd, $220 million in four issues

-- UAE-based Islamic mortgage lender Tamweel, has been hit by the Dubai property price slump, and had three executives detained in a prolonged corruption probe.

-- Dubai's number two lender, it is looking to merge with number one lender Amlak. Both firms are being restructured by the government.

-- Shares in both have been suspended since last year and will only resume trading on the Dubai bourse once the government unveils the new structure.

* Sun Finance, Sorouh Real Estate, $1.1 billion in 3 issues

-- Billed as the first true-sale Islamic securitisation backed by a land instalment sale, the sukuk was judged 'Structured Finance Deal of the Year 2008' by the International Securitisation Report.

-- The sukuk's originator, Abu Dhabi developer Sorouh Real Estate, dissolved two joint ventures on a residential project on Reem island, near Abu Dhabi city, with Tameer holdings in June.

* East Cameron Gas Co, $165 million

-- The fate of the gas-backed sukuk issued in 2006 by Texas-based oil-and-gas company East Cameron is being closely watched as a test case on protection for sukuk holders, in the wake of the originator filing for bankruptcy in October 2008.

-- East Cameron has challenged the bond's characterisation as a 'true sale' of assets in a court case, in a dispute about innovative bond structures which goes to the heart of the asset-backed and asset-based divide.

******************** ASSET-BASED SUKUK ******************** * Golden Belt 1 Sukuk, Saad, $650 million

-- Investors in the bond, issued in 2007, have been shaken by a debt restructuring by Saudi conglomerate Saad Group and considering dissolving the bond to attempt to regain their money in August.

-- The Saad sukuk is scheduled to mature in 2012, paying coupons twice a year. The May 2009 coupon has been paid, but it is not clear whether the November coupon will be on schedule.

* ADIB Sukuk Co Ltd, Abu Dhabi Islamic bank, $5 billion

-- Abu Dhabi Islamic Bank took $227 million in provisions as of June 30, it said in September, but has not revealed how much of the safeguard relates to its exposure to troubled Saudi firms Saad and Algosaibi.

-- In March it secured $599 million in emergency government deposits and converted it into regulatory capital. Source: Reuters, Moody's (Writing by Gillian Murdoch; Editing by Kim Coghill)

Link: http://www.forexyard.com/en/reuters_inner.tpl?action=2009-11-05T070153Z_01_KLR513410_RTRIDST_0_ISLAMIC-SUKUK-FACTBOX