Interesting question: as far I understand the Sukuk, according to Sharia is not repaid with the "interest" like a loan (a Bond is a financial loan) but  conceptually, it should be repaid from the" result" of the operation itself. Therefore, I see the Sukuk practice potentially and conceptually assimilated to a mezzanine loan, with interest content considered to be zero and  participation to the value creation (economic  one) generating the funds to cover the repayment rate. If my  guess is correct (I repeat , I am only reasoning on your question, but I have not a  direct knowledge of the specific  practice in Islamic countries) , the Sukuk practice, looks to me like  an unsecured loan with minimal protection and   preferential treatment, to equity holders ones, comparing to what happens, eventually, to  Senior Debt Bond  holders that are reimbursed before any equity holder claim. 

I will follow too, with attention, more informed  answers and contributions to your question , to understand  and learn, also my side, which is the actual practice in Sukuk case, when financial problems and related insolvency cases, are happening.

In my view as bond is a debt instrument bearing interest and a principal it should be paid before sukook,  in cases of insolvency. But as Sukook is similar to investment units in investment funds, I think there should not be legal obligation to compensate them in the case of bankruptcy. A basic principal underlying Islamic finance in general is risk sharing .

Ibrahim,

    you have written it more clearly then what I did originally, (so I have restated more precisely  the concept in my previous post).

In conclusion based on what you say:

If Sukuk  is considered similar to investment units, cannot bear the same protection rights of the Senior debts and it is, probably, only on the good faith of the equity holders to give a minimal protection to Sukuk risk holders. 

Anyhow, what made me curious about the Roslina question, is the fact of  thinking to a combined  Sukuk-Bond financing mix . Do you know of existing cases Roslina or  do you consider it only as a  possibility to be explored?

It is peculiar , from my point of view, the Idea of combining bonds (finance bearing interest ) and Sukuk (as  investment  unit funds,  to be remunerated by preferential profit sharing, eventually)..

Kind regards

Alberto

Hi Alberto and Ibrahim,

Sukuk is issued with underlying assets (fixed assets) , for that the sukuk holders are the owners of the assets.....this is in contrast with bonds holders where they only lend their money ( there are some bonds issued with asset-backed, but only few).

Hence, what ever happens to the assets, affect the sukuk holders directly.

I assume that the priority is as follow:

1. sukuk holders

2. bonds holders

3. equity holders

However, I do not know the current practice. Perhaps someone could shed  lights on this matter.

Alberto, I dont get the idea of  combining sukuk and bonds. it is two different principles....any islamic products should be free from the elements of riba (interest), gharar (uncertainty in contract) and maisir (gambling/trick)...

Thanks.

Hello, Roslina! Thank you for this stimulating question. This field of Islamic bonds is new for me as well. The literature in quite rich but not very elucidative.

More clarifying answers come from Mohammed Khnifer and Dodik Siswantoro and their comments regarding the sukuk default and also from the Bloomberg (annex).

Facts:

1. From the Shariah perspective, there is no preference of one

contract over the other. However, the issuer normally chooses

the type of Shariah contract based on some factors such as

economic objectives, the availability of underlying assets, the

level of debt of the company, the credit rating of the issuer,

the legal framework in the jurisdiction and the tax implication

of a structure (ISRA, 2011).

2. According to Natalie Schoon ("Islamic Banking and Finance", 2010), sukuk have both characteristics of bonds and equity.

3. The rules governing the priority of repayment of the sukuk holders in cases of default are not consistent (http://thismatter.com/money/bonds/bonds.htm). We could rather talk about priorities among different classes of sukuk bonds (e.g. sukuk Ijarah class A > sukuk Ijarah class B > sukuk Ijarah class C).

I will come back with new information after a deeper analysis.

Best regards,

Monica

Thank you very much Iulia Monica Oehler-Sincai

Dear all,

As far as i know in case of insolvency Sukuk owners have either ownership of the whole underlying asset, or a slice of it. I don't think assets obtained via Sukuk financing can be used as collateral for loans. So, Sukuk owners would keep the assets they financed if insolvency occurs.

Actually Sukuk financed assets should not even be included in the balance sheet by the issuer, as they are like rented assets until repaid. Only the repaid part becomes part of issuer patrimony and can be used as collateral, but because of the shared property, i am not sure is feasible without a breach of the Sukuk contract.

As a principle, mixing Sukuk and bonds as financing tools is debatable. Bond financing means interest (riba), so it is "haram". Basically a bond issuer should be "haram" for "sukuk" financing, just like financing alcohol or gambling businesses.

What i said here is only theory. I have no idea what happens in practice.

Dear Alberto,

I totally agree with Roslina and Bradut in their view about mixing Sukuk and bonds that is unlikely a feasible idea. They are totally different modes with completely different principles; one based on money lending/ interest bearing and the other is underlying asset (backed)/ profit and loss sharing. 

Can you please elaborate more your point of view about mixing them?