Tolkien Funding Sukuk No1 – First Sharia compliant RMBS in Europe for Al Rayan Bank

Since last August, I’ve had the pleasure to be working on the structuring of the above deal for Al Rayan bank. This is a prime UK sharia compliant mortgage pool rated AAA / Aaa by S&P and Moody’s. Structure is a static pass through. Having started out in Financial Services in 1996 and in structured credit in 1998 this has to be one of the more enjoyable transactions that I have worked on. Good client, interesting issues to overcome and a successful placement at the end. The £250 million deal priced last week and closed yesterday.

As with any deal in a new asset class, liquidity is the first question on the minds of potential investors. Credit here is due to Standard Chartered Bank, the JLM on the deal who stepped up and agreed to make markets and provide repo to widen the secondary appeal, and who did a great job in organizing the roadshow. We have also structured the transaction to tick all the HQLA eligibility criteria.

Thanks to Al Rayan for the opportunity to dust off my Lead Arranger skills and congratulations to them on what is, I’m sure the first of many forays into the capital markets.

4 thoughts on “Tolkien Funding Sukuk No1 – First Sharia compliant RMBS in Europe for Al Rayan Bank

  1. Ian great job, would love to understand what actually makes this deal Sharia Compliant. Hope all is well with you.

    1. Thanks Ben. Been a long time! The actual underlying “mortgages” are what’s called a home purchase plan (HPP). This effectively means that the bank not the customer owns the property and the customer makes two payments per month – 1) Rent on the part of the property owned by the bank and 2) an Acquisition payment to the bank to purchase the beneficial interest in the property over time (set at the original purchase price so the customer doesn’t take any market risk).

      The Sukuk itself takes the cash flows from these assets in a very similar way to a conventional RMBS but there are structural differences – for example the normal z note structure is more difficult under sharia law as you have to make sure that there is no subordination. We therefore used overcollateralisation and a trust declared over the excess spread in favour of the bank. The Sukuk certificates pay a profit rate rather than interest, but that profit rate is only contingent in the same way a normal coupon is contingent upon performance and it is linked to 3ML plus a margin.

      Happy to talk you through it if there is a convenient window where London and Sydney times work!

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