Approved by Jersey regulators and listed on the Vienna Stock Exchange, income-generating profit participating notes (PPNs) could become a viable alternative way for Sukuk to comply with the proposed AAOIFI Standard 62, Cordoba Capital Markets CEO Haris Irfan shared with IFN Investor.
Drawing inspiration from the revenue-based financing model, PPNs involve investor capital injection into a business transaction via a Mudarabah contract. With repayment predicated on a percentage of gross revenue, the PPNs’ indicative 16% return to investors can vary up or down accordingly.
As such, Haris explained the PPN does not rely on a conventional bond-like senior unsecured debt structure typical of many Sukuk issuances. The PPN is instead similar to the principles of classical trade in the Islamic economic model.
“This provides attachment to a real economic activity and providing consistent, reliable income while minimizing risks commonly associated with pure equity financing.”
The first such PPN issuance was for Singapore-headquartered agribusiness White Lion Foods, which recently closed the US$4.5 million first tranche of its US$12 million program. The second tranche for the balance is ongoing, with a scheduled close on the 6th December 2024.
For this scheme, Cordoba Capital Markets instituted a protected cell company incorporated (PCC) entity regulated in Jersey. This PCC acts as a master investment program handler for individual clients like White Lion Foods to issue distinct PPNs.
The PCC has obtained approval from the Jersey Financial Services Commission to issue these Shariah compliant US dollar PPNs for professional investors to participate in listed trade finance, working capital and supply chain financing opportunities.
A key requirement for the regulatory approval was for these PPNs to be listed and the Vienna Stock Exchange was chosen for the ease of due processes, explained Haris. “The investors don’t really care about the Islamic certification of the exchange as the instrument is clearly Shariah compliant.”
The PPN scheme was developed based on the initial requirement from White Lion Foods and took over a year to structure fully, said Haris. While the Singapore firm was ready to provide collateral, it wanted a cheaper alternative to bank financing but didn’t want the entry of new shareholders.
“The PPN may be the first Shariah compliant capital instrument of its kind. The returns are not fixed, even though it operates like Sukuk. Once the potential was clear on how this model could be duplicated and scaled, our operational research led us to the Jersey host jurisdiction and Vienna listing.”
Haris added that a number of other clients are in the pipeline to issue PPNs valued at around US$60 million as this capital instrument is gathering a lot of interest among investors seeking Islamic assets with decent returns linked to gross profits from a single business activity or asset.
