IIBR, the Islamic Interbank Benchmark Rate
Utilising contributions from up to 16 major Islamic banks and Islamic banking windows, the IIBR provides a robust indicator of the average expected cost of short term interbank market funding for the Islamic finance industry. Since the establishment of the first Islamic commercial bank in 1975, the Islamic finance industry has been searching for an indigenous benchmark that can be applicable to transactions compliant with Islamic law (Shariah compliant). As an ethical financial system, Islamic finance prohibits interest and shuns all interest-related transactions and instruments as these are contradictory to the core principles of Islam. Despite this prohibition, in the absence of a reliable Islamic interbank benchmark, Islamic banks and financial institutions have continued to utilise conventional interest based benchmarks to calculate their cost of funding with no reference to either their assets’ risk profile or the regional particularities of Islamic banks. The Islamic Interbank Benchmark Rate (IIBR) serves to address some of these concerns by developing a rate that is contributed by and is indigenous to a global panel of Islamic banks and Islamic Banking windows with fully segregated funds. Sheikh Yusuf DeLorenzo serves on the Shariah Committee of the IIBR and was its first Chairman.
The Dow Jones Islamic Market Indexes
The Dow Jones Islamic Market indexes are the most visible and widely-used set of Shari´ah-compliant benchmarks in the world. With their launch in 1999, a consensus was reached on the criteria for investing in the stock markets of the world and a flood of investment funds came to the markets. To determine their eligibility for the indexes, stocks are screened to ensure that they meet the standards set out in the published methodology. Companies must meet Shari´ah requirements for acceptable products, business activities, debt levels, and interest income and expenses. By screening stocks for consistency with Shari´ah law, the indexes help to reduce research costs and compliance concerns Muslim investors would otherwise face in constructing Islamic investment portfolios. Sheikh Yusuf DeLorenzo was one of the original members of the Dow Jones Shariah Board and now serves as its Chairman.
East Cameron Sukuk
This Sukuk was the first to be based on assets in the United States. As Chairman of the Shariah Board that included Sheikh Nizam Yaquby of Bahrain, Sheikh Yusuf DeLorenzo worked alongside Vinson & Elkins, Merrill Lynch and BSEC – BEMO Securitization SAL, the lead arrangers to issue a US$167.67 Million Sukuk for East Cameron Partners, an independent oil and gas exploration and production company in Texas. The Sukuk were backed by Gulf of Mexico assets, including an overriding royalty interest. The project was named the 2006 “Most Innovative Islamic Finance Deal of the Year” by Euromoney and “Best Structured Finance Deal of the Year” and “Best USA Deal of the Year” by the Islamic Finance News. The Sukuk made use of a dual-SPV structure: One SPV (which purchased and held the underlying assets) was set up in Delaware (USA) and the other one (which issued the Sukuk certificates) was in the Cayman Islands. In addition, The East Cameron Gas Sukuk included an innovative hedge agreement, based on bay’ al iltizam, with Merrill Lynch that explicitly intended to use commodity put options. Finally, owing to factors and considerations having nothing to do with the Shariah or the Shariah compliant nature of the project, there was a default on the Sukuk and the East Cameron Sukuk provided the industry with a landmark court case from which many lessons may be learned.
Caravan I Sukuk
Volaw Trust Company and Voisin & Co., in conjunction with Bemo Securitisation SAL based in Lebanon, successfully concluded the establishment of a Jersey Special Purpose Vehicle (SPV) that financed the purchase of assets in Saudi Arabia through the issuance of Sukuk to investors in the Gulf Cooperation Countries (GCC). This was the first such structure in which the assets being securitised were physically located in the GCC and were in the private sector; prior to this all the Sukuk that had been issued were backed by governmental agencies. The Sukuk had a three year maturity period and offered Islamic investors a variable rate of return paid on a monthly basis, with a forecast return over their life estimated at 6%. The transaction was backed by a pool of vehicles and lease agreements sold by HANCO Rent A Car, one of Saudi Arabia’s leading car leasing and rental companies. The Sukuk had several structuring and credit enhancement features: a two-tier two-jurisdiction structure with 16.96% overcollateralisation, a 4.75% equity tranche and 8.73% cash reserves. The structure also benefited from embedded early warning triggers mitigating its performance risk. The Sukuk also employed a dual-SPV structure; one based in Saudi Arabia (because possession of Saudi-Arabian properties is legally restricted with regard to foreigners) and another one in Jersey (to both ensure the necessary independece from the originator and to issue the Sukuk certificates). Sheikh Yusuf DeLorenzo was Chairman of the Caravan Shariah Board that included Dr Mohammed Elgari of Saudi Arabia and Dr Mohamad Daud Bakr of Malaysia. A few years later Sheikh Yusuf DeLorenzo advised on the structure of Caravan II.
Mezzanine Investment Partners Fund II, Ltd
The Fund provided capital to fund the construction of a portion of the residential units being built as part of a larger project in Qatar. Additional financing was obtained from other financial institutions for the construction of the other components of the Project. The capital was provided through two istisna’a agreements. The other financial institutions and the Fund entered into an intercreditor agreement clarifying their respective relationships. In many ways, the project was an ambitious and innovative one. Owing to difficulties arising from the global credit crisis, however, the project was set aside.
A Multi Manager Shariah Compliant Alternative Investment Fund Platform
Shaykh DeLorenzo was key to the development of a comprehensive Shariah compliant platform comprised of single strategy, alternative investment managers with Barclays Capital as the prime broker and custodian. Designed as a “one-stop” platform primarily for hedge fund managers, the platform provides a complete Shariah suite of solutions, including Shariah equity screens, and a Shariah compliant short position methodology in addition to prime brokerage, administration and trustee oversight. Sheikh Yusuf DeLorenzo acted as Executive Representative to the Shariah Board that included Sh Nizam Yaquby of Bahrain, Dr Daud Bakr of Malaysia and Dr Sultan Al Olama of the UAE. During the development phase, Sheikh DeLorenzo worked closely with internal counsel at Barclays and their external counsel, Norton & Rose in London. In the US, he worked with K&L Gates and, at the early stages of the project, with King & Spalding. At later stages, Sheikh DeLorenzo worked with Patton & Boggs and Skadden Arps who represented BlackRock (which manages a Global Resources & Mining Fund), and with the law firms representing other managers on the platform (Zwiegg Dimenna, Lucas Energy, and Toqueville Gold). As the platform housed one of the first Shariah compliant fund of hedge funds, Sheikh DeLorenzo wrote extensively about the Shariah precepts and principles behind the structure and process of the platform, including a White Paper and a set of FAQs in English and Arabic.
As liason to Guidance from the Shariah Board, Sheikh Yusuf DeLorenzo was a part of the development team that looked at several different Islamic financial contracts, comparing these and our goal with the standard Freddie Mac/Fannie Mae documents for a conventional mortgage loan at interest. In doing so, the team considered the prior Islamic models, but ended up rejecting them one by one. Instead, the team crafted a novel set of documents in which the team essentially made the Freddie/Fannie shoe fit the Islamic foot. The method for doing so resulted in one truly unique document, the Contract of Co-ownership, an Islamic ownership contract between two parties. Additional documents were crafted which re-constituted the standard Freddie/Fannie documents into a Security Instrument to replace a mortgage lien or deed of trust, a Consumers Obligation to Pay instead of a Promissory Note, and an Assignment instead of a negotiable Promissory Note. In sum, these documents create a home financing model which is based on acceptable Shari`a precepts and which also may be securitized (sold to different investors) and made available to the mass market.
Navis Asia Fund
Partnering with CIMB Islamic, this fund has a focus on equity and equity-related investments in the Asia-Pacific region, with a general focus on Southeast Asia, India, China and Australasia. The fund invests only in industries with attractive characteristics and companies which Navis believes to have considerable upside potential. The General Partners implement improvements in operating and financial performance by applying relevant experience with Asian enterprises developed in the context of previous funds managed by Navis, and through the operational and strategic expertise of Navis’ investment staff developed in the course of their professional careers in Asia. The Partnership’s return objective is to exceed 30% per annum on an internal rate of return basis. All transactions are Shariah compliant and have included; management buyouts, earning shares subject to meeting performance targets based on expansion and profitability metrics, the exercise of controlling aggregate ownership stakes, the development of management equity participation schemes, and growth-oriented buyouts.