Risk Management in
Islamic Financial Instruments
169
 Next, the originator contributes his share of the capital in the form of a transfer of ORRI
into the purchaser SPV.
 The purchaser SPV, holding ORRI in the properties, is entitled to around 90 percent of
ECP’s net revenue generated though gas production.
 The production is sold to two off-takers with Merill Lynch as a backup off-taker.
 Proceedings of the oil and gas sale are transferred to an allocation account. After paying
around 20 percent to government and private ORRI, the remaining amount would be
transferred to the Purchaser SPV. The purchaser SPV would allocate 10 percent for the
originator and the remainder for payment of expenses, periodic sukuk returns and
redemption amount.
 Once the sukuk is mature, the issuer SPV would redeem all the sukuk against the amount
left to be transferred to the sukuk holders.
An expected return of 11.25 percent was offered to the sukuk investors to be paid quarterly. A
reserve account was also maintained as a credit enhancement, dedicated to meet any shortfall
in return with the moneys reserved in the account.
A.2.5.1.5 Restructuring the ECP Sukuk
East Cameron Partners defaulted on periodic payments to the sukuk holders, due to the
financial problems arising from the shortfall in oil and gas production. On 16 October 2008,
East Cameron Partners filed a petition for bankruptcy protection under chapter 11 of the US
Bankruptcy Code in the United States Bankruptcy Court in Louisiana to reorganize their debts
and operations, but the bankruptcy court apparently rejected East Cameron’s argument saying
that “[sukuk] holders invested in the sukuk certificates in reliance on the characterization of
the transfer of the royalty interest as a true sale” (Fidler, 2009).
This verdict by the court is an important precedent about the protection of sukuk holders’
rights. It sets the precedent that asset-backed sukuk are, in fact, bankruptcy proof, and the
transfer of assets to the Sukuk SPV are shown to be safe from the bankruptcy of the originating
company. (Wijnbergen and Zaheer, 2013). Based on the court ruling, East Cameron Partners
filed a revised lawsuit; however, stakeholders preferred to resolve the case through
negotiations. Finally, the underlying sukuk assets were transferred to the issuer for the benefit
of sukuk investors and, according to the terms of the sale, the assets of East Cameron Partners
were sold to the Sukuk investors (Latham and Watkins, 2011).
A.2.5.2 The Nahkeel Sukuk
The Nahkeel sukuk is a Dubai-based, high profile sukuk, and one of the largest sukuk issuances
in the history of the industry. The sukuk were listed on the Dubai International Financial
Exchange on December, 14 2006, maturing in 3 years on 15 December 2009. The objective was
to raise a total of USD3.5 billion to finance a property development project in one of the public
sector enterprises of Dubai, Nahkeel Co. PJSC. A special purpose vehicle (SPV), Nahkeel
Development Limited, was incorporated with limited liability in the Jebel Ali Free Zone.