Goldman Sachs First & Second Sukuk Issues

Done by: RAZAN ALTWAIRQI, Zainab Bin Mafouz, and Noha Dhaba’an

Goldman Sachs The firm

Goldman Sachs is an American multinational firm founded in 1869 in New York, while Saudi Arabia Goldman Sachs were authorized in January 2009. The firm offers a wide range of financial services primarily in investment banking services, lending, securities, financial management and financial engineering. It deals basically with institutional clients beside the high-net worth individuals, and provides a variety of financial specialized services that can be classified into four major categories:

 1- Investment banking as strategic advising, risk management, IPOs and underwriting for other securities.

 2- Institutional client services as facilitating the client’s transactions and making markets in financial and commodity products.

3- Investing and lending services as originating loans to finance the clients and investing through financial assets and real estate entities.

4- Investment management services as financial counselling, portfolio management, wealth advisory and transaction services.

The first Sukuk issue:

In 2011 Goldman Sachs intended to inter the Islamic capital market by issuing a 2 billion U.S.D worth sharia compliant Sukuk. This issue has caused a large debate in the Islamic region due to many reasons. Firstly, the Islamic community had a great doubt in the intention and the goals behind this issuance. As per the idea that says, Muslims are willing to accept lower returns on their investments in comparison to their conventional counter party just for the sake of a sharia compliant product that they understand its cost and liabilities.

 In addition, they are willing to share risk with the issuer of the Sukuk as part of the main profit loss sharing Islamic principle. The second reason the Islamic society was hesitant about this issuance is the accusations to the western financial sector of causing the financial crisis by applying the easy money product that contradicts the Islamic principles, so what do they have to offer to the Islamic conservative capital market. The third and most important reason is that the society was skeptical on what sharia knowledge does Goldman Sachs has to create an Islamic compliant product. (Global Islamic Finance Report “GIFR”2012).

On the other hand, voices in the Islamic capital market supported this issuance as they expected it to boost the market and enhance the current creditability of the market. Moreover, it will open new financing channels by the cooperation between the advanced western capital market and the Islamic markets.

In spite of these two contradicting opinions of the Goldman Sachs issue, the logic would be to inspect the compliant of the Sukuk structure offered. As per the rulings of Islam, everything is permissible unless it violates a sharia rule. Western companies are offering many different products to the Islamic world, and Muslims have been trading with non-Muslim countries for ages. Then the core of this issue is to investigate the compliance of the Sukuk despite its source and take a decision that considers the best interest of the society.

The first Sukuk structure:   

Goldman Sachs announced that it was going to the market to rise financing totaling $2 billion through a Murabaha agreement; they set up a special purpose vehicle (SPV) called “Global Sukuk Company Limited” as a trustee. The Trustee was incorporated under the laws of the Cayman Islands on 6 September 2011 as an exempted company with limited liability. The Trustee is a newly formed entity and has no operating history, there only asset will be the Trust Assets held for credit holders (from Goldman Sachs’ base prospectus). The base prospectus submitted to various stock exchanges including the London Stock Exchange and the Irish Stock Exchange. The SPV in its capacity as issuer and trustee has established a program for the issuance of Murabaha trust certificates in a maximum aggregate face amount of $2,000,000,000 as may be increased in accordance with the terms of the Master Declaration of Trust (MUSHTAK, 2012).

Below are the terms and conditions of Trust Certificate Issuance Program taken from GLOBAL SUKUK COMPANY LIMITED’s base prospectus.

Trustee: Global Sukuk Company Limited, as trustee for and on behalf of the Certificate-holders and, in such capacity, as issuer of the Certificates.

Ownership of the Trustee: The authorized share capital of the Trustee is U.S.$50,000 consisting of 50,000 ordinary shares of U.S.$1.00 each, of which 250 have been fully paid up and issued.

Arranger: Goldman Sachs International

Guarantor: The Goldman Sachs Group, Inc.

Guarantee: GSG (as the Guarantor) will agree to unconditionally and irrevocably guarantee to the Trustee the prompt and complete payment when and to the extent due, whether by acceleration or otherwise, of all payment obligations, of GSI arising out of or under the Master Murabaha Agreement.

Initial Program Amount: Up to U.S. $2,000,000,000 (or its equivalent in other currencies) aggregate face amount of Certificates outstanding at any one time.

Issuance in Series: The Certificates will be issued in series .The specific terms of each Series will be completed in the applicable Final Terms. Certificates may be distributed by way of private or public placement and in each case on a syndicated or non-syndicated basis.

Currencies: Certificates may be denominated in Dirhams, U.S. Dollars, Saudi Riyals and Singapore Dollars or any other currency or currencies, subject to compliance with all applicable legal and/or regulatory and/or central bank requirements.

Maturities: The Certificates will have such maturities as may be agreed between the Trustee and the relevant Dealer.

Issue Price: Certificates may be issued at any price on a fully paid basis.

Status of the Certificates: Each Certificate will represent an undivided ownership interest in the Trust Assets of the relevant Series.

Dissolution Amount: In relation to a particular Series, the sum of (i) the aggregate face amount of the Certificates of the Series and (ii) the profit amount due on the maturity of such Series, which shall in aggregate, be equal to the Deferred Payment Price in respect of the Murabaha Contract for such Series.

According to Wouters (2011) he indicated that the above chart represents Murabaha Arrangements used by Goldman Sachs in their first Sukuk issuance:

1. The Trustee (as the Seller) will, at the request of the Purchaser, enter into a Murabaha Contract with the Purchaser whereby the Seller will use the proceeds from the issuance of the Series to purchase certain commodities from a third party supplier on immediate delivery and immediate payment terms.

2. The client (GSI) will act as the buying agent of the trustee in this acquisition transaction from the supplier.

3. Then the trustee will sell the commodities to the GSI (as a purchaser) on immediate delivery but with deferred payment basis (cost + the markup).

The certificate holder will receive their periodic distribution amount as it comes due.

Sharia Issues:

In 2011, GSI declaration of $2 billion Sukuk issuance was marred with controversy, and consequently, was faced by a storm of disapproval to the extent that is was never issued. Before going through the main issues in GSI first proposed Sukuk issue, it is worth noting that the idea of a conventional bank issuing Islamic bonds is by itself widely controversial. According to (CHAPTER 10: Goldman Sachs Milestone Global Sukuk, 2012); while some Muslim investors are willing to sacrifice high return for being in compliance with Sharia principles, and consequently, will refrain from investing in any financial products issued by conventional financial institutions, others deem the participation of conventional banks in Sukuk issuance as a step that might contribute to the development of Islamic markets. In general, scholars and Islamic finance practitioners had specified three main problems in GSI 2011 Sukuk issue related to its structure, listing on an exchange, and the use of its proceeds.

The Structure

Regarding the issue of GSI’s 2011 Sukuk structure, it was stated in the prospectus that it was Murabaha based Sukuk as the contract between the SPV (Global Sukuk Company as a trustee and seller) and GSI was Murabaha. However, Mohammed Khnifer, a renowned Islamic banking practitioner, Sukuk structurer, and strategist, argued that GSI’s 2011 Sukuk issue structure can possibly be deemed as reverse Tawarruq as the Sukuk proceeds’ cycle was not entirely revealed prospectus (2011). Accordingly, a verification of such a claim is essential.

Murabaha Sukuk, as defined by AAOIFI, are certificates of equal value issued to provide financing for the acquisition of goods through a Murabaha-based sale contract where the certificate-holders are the owners of the commodity. Figure (2) illustrates the structure of Plain Vanilla Murabaha Facility as proposed by GSI Sukuk base prospectus in which the following statement was repeatedly stipulated

“…whereby the Trustee will, at the request of GSI, use the proceeds of the issuance of the Series to purchase certain commodities from a third party Seller on immediate delivery and immediate payment terms and will immediately sell such commodities to the GSI on immediate delivery terms but with payment on a deferred basis.” (Global Sukuk Company Limited, 2011, p. i)

Moreover, Mr. Asim Khan, MD and head of structuring for Dar Al Istithmar (the Sharia advisor for Global Sukuk issue), stated that the documents “clearly shows that Trustee, as seller, sells the commodity to GSI, as purchaser. That’s it…” (Khan, 2011)

However, despite the apparent conformity to Sharia, the structure requires a second leg to attain cash flows to make Sukuk of value, a thing that originated the debate regarding the existence of Tawarruq transaction. Apparently, a simple review of the legal documentation is insufficient to provide a clear evidence regarding the implicit existence of reverse Tawarruq. Therefore, looking at the intentions of the parties involved might provide an insight on this issue. In essence, GSI is likely to sell the commodities immediately in order to get cash. This constitutes a situation of gaining money against deferred payments with a markup. Thus, for sure there will be a pre-intended second leg associated with the proposed Murabaha facility as it was stated in the base prospectus

Upon completion of the sale of the Commodities by the Trustee (in its capacity as Seller) to the GSI, the latter may hold the Commodities as inventory or elect to sell the Commodities in the open market provided that where GSI elects to sell the Commodities, it shall sell the Commodities to a third party buyer that is not the initial Seller.” (Global Sukuk Company Limited, 2011, p. 16)

Additionally, and to ensure the full compliance with Sharia, Dar Al Istithmar declared in the base prospectus that once the commodities are sold to GSI, it will have full discretion regarding the utilization of commodities (Khan, 2011). This seems like a confirmation that the structure of GSI 2011 Sukuk is far from being tainted with the non-complaint features of Organized Tawarruq.

Tawarruq, in its essence, is generally deemed acceptable from a Sharia point of view as it is considered a cash generating facility as funds will be firstly converted to commodities with deferred payment, and then back to cash. Yet, the organized version of Tawarruq, where the Islamic financial institution (IFI) will organize the process by acting as an agent that will sell the commodity on behalf of the client, had been categorized as unlawful by the Organization of Islamic Countries (OIC) Fiqh Academy (2009). Traditionally, the IFI used to provide assistance to the client by offering to organize the Tawarruq process, as the client usually has no expertise in regards to the sale of the commodities. This is a situation in which the client only has to sign some papers in order to end up with cash at the cost of deferred payments. Accordingly, one can conclude that since the Trustee (SPV/IFI) is not playing the role of an agent of GSI (in its client capacity), this will render the structure far from being classified as Organized Tawarruq. Yet, further scrutiny in regards to GSI Sukuk structure will reveal the true classification of this Sukuk structure.

In (Khnifer, 2011), the author argued that the structure of GSI 2011 Sukuk, illustrated in Figure (4), suggested that except for the legal issues (signing of papers and transfer of legal title), the Trustee (SPV) has no role in the first purchase transaction. Instead, GSI acted as an agent for the Trustee in this transaction, thus, was actually organizing the two legged structure by itself with full control over the process and the behavior of the Trustee. It is true that GSI, with its well situated global presence, is utterly capable to solely run the two legs of the structure, yet, this situation is deemed in clear contradiction to Sharia principles. This is because the purpose for which the SPV presence was required (to protect the rights and to work for the interest of the certificates-holders) was not fulfilled. The fact that the role of the Trustee in GSI Sukuk structure was clearly marginalized has rendered the structure not in full compliance with Sharia. This explains why most of the Islamic scholars, especially those who were mentioned in the base prospectus as members of the Advisory board of Dar Al Istithmar, refrained from approving this Sukuk issue (Davies, 2012).

Listing on the Irish Stock Exchange

Mr. Mohammed Khnifer and other Islamic financial practitioners had further concerns regarding GSI 2011 Sukuk listing on the Irish Stock Exchange (ISE). It was clearly stated in (Khan, 2011) that

…the offering circular clearly states in several places that the certificates can only be traded on a spot basis and at par value if they are to be Sharia compliant … hence the listing can, practically speaking, only have a taxation and regulatory benefit without impinging on Sharia principle in any manner.

Although this statement might seemingly provide reassurance regarding the Sukuk trading on ISE, neither it nor the base prospectus provided a clarification regarding the procedures by which the implied non-tradability feature of Murabaha Sukuk can be ensured. Khnifer (2011) asserted that the ability of ISE to ensure that GSI Sukuk will be traded at par is questionable. More importantly, he stated that, practically, listed securities are intended to be traded and this is always associated with fluctuations in the yield. Thus, a situation of debt trading will be created, a thing that will render the process of Sukuk issuance impermissible due to the prohibition of debt sale under Sharia.

In fact, any leniency in regards to such a case might open the door for possible disguised interest bearing transaction to be dominant, a thing that will surely compromised the credibility of Islamic finance as a whole. This is because as time passes, and with enough clemency, modifications to what are supposedly non-tradable Sukuk would be applied just to create more demand by attracting more investors regardless of their sentiments. In other words, the mere intention to promote Murabaha Sukuk, by listing them on a stock exchange for instance, just to make them more appealing to non-compliant investors is hazardous as it jeopardizes the authenticity of this type of Islamic investments as it cannot be distinguished from conventional bonds any more. Ideally, non-compliant investors must accept the principles of Islamic finance if they want to invest their wealth using any facilities categorized under this concept. Hence, issuers as well as investors involved in Islamic oriented investments must abide by the rules and principles of Islamic finance while the “vice versa” situation cannot be applied.

 The use of the Sukuk Proceeds

According to Khnifer (2011), there are strong indications that GSI will eventually use the proceeds of the Sukuk to fund its conventional activities, a thing that was clearly classified as impermissible by AAOIFI. Referring to Khan (2011), who was quoted previously in this paper, he asserted that proceeds would be only used for GSI “general corporate purposes and to meet its financing needs.” Assuming that GSI will do this with good faith, still, the alternatives available for this conventional, creative financial engineering practitioner to use funds in Sharia compliant investments are outnumbered by the proliferated non-Islamic investment activities. The fact that GSI lack an Islamic window/unit raises more concerns regarding the true availability of Sharia compliant ventures in which Sukuk proceeds can be utilized. Furthermore, according to Wouters (2012), none of the following was found in the base prospectus:

1)    A written commitment from GSI to utilized the proceeds in full compliance to Sharia principles;

2)    A guarantee by GSI in regards to provide full isolation to the proceeds from the institution’s interest-contaminated funds;

3)    An assurance by the Sharia Board regarding the existence of continuous monitoring, reporting, isolating, and cleansing of the funds.

In general, people with conservative perspectives oppose the participation of conventional banks in Sukuk issuance due to the possibility of the use of the proceeds in financing non-Sharia compliant activities. According to (Davies, 2012), Badlisyah Abdul Ghani, the chief executive of the Islamic unit of CIMB group in Malaysia, stated that except for development banks, conventional banks should be banned from issuing Sukuk. This is because Islamic finance, in essence, involves providing funds for Sharia-compliant activities, a thing that is not applicable to the interest-based nature of the conventional banks activities.

As we have seen the Goldman Sachs has offered a controversial structure in its Sukuk, this Sukuk remained as a plan and was not issued in real. However, Goldman Sachs has planned a second Sukuk issuance in 2014.

The second Sukuk issuance:

In 2014 Goldman Sachs issued their five-year second Sukuk of 500 million U.S.D. In this Sukuk issuance results turned around after the first issue failure, after the roadshows in Qatar and UAE the majority of the Sukuk were bought by Middle Eastern banks as the represented 87% of the investors while European investors represented 11% and Asian investors by 2% according to Gulf Business. These were significant results as the second issue of a conventional bank in a Muslim country especially after the controversial first Sukuk were Goldman Sachs has to cancel the issuance due to sharia incompliance.



The information about this issuance as per the base Goldman Sachs prospectus:

Face amount: 500,000,000 U.S.D

Issue price: 100%

Profit rate: 2.844%

Maturity date: 23 September 2019

Expected rating (S&P/Fitch): A- / A

Lead Manager(s): Goldman Sachs International, Abu Dhabi Islamic Bank, Emirates NBD Capital, National Bank of Abu Dhabi, NCB Capital & QInvest.

Trustee: JANY Sukuk Company limited

Arranger: Goldman Sachs

Guarantor: The Goldman Sachs Group, Inc.

The primer asset: crude oil assets via Wakalah agreement invested in a portfolio as follows:

51% sharia compliant commodities.

49% deferred payment Murabaha.

Dissolution Amount: As per the event of dissolution, the company is obligated to find a third party purchaser to purchase for a price equal to the then market value of the commodities.

By this Sukuk Goldman Sachs managed to inter the Islamic capital market after three years of its first attempt. Muslim investors represented mainly by Islamic financial institutions as banks bought the Sukuk Al-Wakala and were the majority of investors who invested in this Sukuk.  Goldman Sachs could inter the Islamic capital market this time by changing the structure of its Sukuk and due to changes in circumstances in the Middle East.

 The second Sukuk structure:

This is Goldman’s second attempt to issue Sukuk, after a $2 billion plan to issue a one-year Sukuk in 2011 was withdrawn amid charges that it failed to uphold Sariah principles. Goldman plans to use a new hybrid structure and has named four prominent Arab Gulf banks to manage the proposed $500 million, five-year issue: Abu Dhabi Islamic Bank, Emirates NBD Capital, National Bank of Abu Dhabi, and Saudi Arabia’s NCB Capital. The Sukuk will be listed on the Luxembourg Stock Exchange (Gordon, 2014).

Gordon stated in Global Finance magazine in October 2014 that Goldman investment vehicle JANY Sukuk will act as the Trustee and enter into a Murabaha (cost-plus sale agreement) for 49% of the issue and into a Wakala agreement for 51% with Goldman subsidiary J. Aron. Under a Wakala, where one party manages assets on behalf of another.

Figure 5 GSI Second Sukuk Issue Structure

Fitch Ratings, which said it expected to issue an A rating to the Sukuk program, noted that Goldman will unconditionally and irrevocably guarantee the payments of J. Aron under the Murabaha contract. The underlying assets are linked to commodities and crude oil (Bernardo, 2014).

Below are further details of the Sukuk terms and conditions taken from the Goldman Sachs’ Base prospectus. However, the structure diagram was taken from the general hybrid Wakala-Murabaha structure concept.

1, 2.The Goldman investment vehicle JANY Sukuk (SPV) will receive the proceeds from certificate issuance.

3. Then SPV will enter a 49% of Murabaha cost plus in Sharia commodities and 51% Wakala agreement with J. Aron (Wakeel).

4, 5. The Wakeel will purchase the assets from a third party (seller) and invest in the Wakala assets profile.

6, 7. The return on investment will be transferred to the SPV by the wakeel in order to be distributed to the investors.

8. Investors will receive the periodic amount distribution as well as the dissolution amount at maturity.

9. At the maturity the GSI will buy the assets as the purchaser and pay the exercise price.

Resolving the Previous Sharia Issues:

Apparently, GSI had learned the lesson and was able to resolve most of the Sharia issues related to the first Sukuk issue. Firstly, GSI opted to issue the second Sukuk using Wakala facility, in which one party manages assets on behalf of another, which became the preferred structure for Sukuk by multinational banks such as Societe Generale, HSBC, and Bank of Tokyo-Mitsubishi UFJ (Narayanan & Hamzah, 2014). Wakala is a basic structure and less complicated than other structures opted for in similar deals such as Murabaha; thus posing fewer challenges as to its conformity and compliance with Islamic Sharia principles, especially when it is structured and promoted by a conventional bank.

Moreover, it was clearly specified that the proceeds of the Sukuk would be used to fund the commodities business of J. Aron & Co. (Goldman Unit). This is deemed as an assurance by GSI that the Sukuk proceeds will be used to finance Sharia complaint activities (Narayanan & Hamzah, 2014).

More importantly, this time around GSI made sure it had on board key players in the GCC, including Abu Dhabi Islamic Bank (ADIB), Emirates NBD, National Bank of Abu Dhabi, QInvest and NCB Capital as arrangers, as well as itself (Narayanan & Hamzah, 2014). This has been done to engage institutions with more expertise in Sukuk issuance field to provide simultaneous facilitation and guidance regarding the requirements of Sharia compliant investors, especially those high net worth ones in GCC region.

Furthermore, the issue had been listed on the Luxembourg Stock Exchange as the trading of Wakala Sukuk is less controversial than trading Murabaha-based Sukuk (Kerr & Braithwaite, 2014). This is due to the absence of the indebtedness in the former type of Sukuk which rendered the trading of latter type impermissible. Yet, Mr. Mohammed Khnifer still emphasized on GSI expected efforts regarding ensuring the isolation of the Sukuk proceeds from financing its conventional activities (Kerr & Braithwaite, 2014).

Additionally, the involvement of multinational financial institutions with their profound financial expertise and investor base would, in a way or another, positively contribute to development of Islamic finance. However, this is contingent to these financial wholesalers level of disclosure regarding the characteristics of the underlying assets/projects and to the extent to which they abide by Sharia principles.


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