Standing true to Islamic teachings and virtues, sukuk are perceived to be ethically and morally protected from turning

bad. However, when sukuk defaults had been scrutinised by market practitioners and academicians, concerns had been raised on the reliability of their structures and Shariah supervision. This has created the perception that sukuk may not be any safer than conventional bonds in terms of investor protection and the treatment of defaults. However, the series of high profile sukuk defaults in the Gulf Corporation Countries (GCCs) such as Investment Dar and Dubai Worlds Nakheel Sukuk in 2009 , as well as the East Cameron Sukuk (US) have as tounded the markets confidence in t he global Islamic finance industry , provoking debate on investors protection and rights. Although sukuk are claimed to be more secure than conventional bonds due to the requirement of physical assets to underpin deals, sukuk are now asserted to have lost credibility as feasible and viable Islamic long-term project financing instrument. Despite being a leader in sukuk market, Malaysia has also recorded cases of sukuk defaults such as Ingress Berhad and Tracoma Holdings Berhad. Sukuk defaults in Malaysia raise concern on the investors protection and the survival of sukuk for the coming years. This study will discuss on the sukuk defaults in Malaysia based on the changes in the rating performances. This paper will follow qualitative or descriptive research method, related to the growing issues of sukuk defaults by focusing on Murabahah Underwritten Notes Issuance Facility (MUNIF) structure which has been recorded as one of the highest structure that gone defaulted. For this purpose, a case study of Murabahah Underwritten Notes Issuance Facility (MUNIF) issued by Oxbridge Height Sdn. Bhd. are discussed and analysed in depth. So far, studies on sukuk defaults are very limited as compared to conventional bonds defaults. Hence, this study contributes to the literature by providing constructive discussion on sukuk defaults and rating performance. This study will benefit the investors, industry players, regulators and also researchers in this area.

1.0

INTRODUCTION

Oxbridge is a single-purpose company that has been set up to undertake the development of Jaya Putra Perdana (JPP) in Tebrau, Johor. The Company is a subsidiary of Renewed Development Sdn Bhd, a Johor-based property developer. JPP is located approximately 15 km to the north of Johor Bahru city centre. It is surrounded by more established developments such as Taman Mount Austin and Taman Daya. Sprawling across 704 acres, the development has a total gross development value of RM1.85 billion and will span the next 8 years. The company need some capital to make development of JPP will be success as a planning. Oxbridge should find the investor whose agree to financing the project. Finally, Oxbridge found that Tradewinds Sdn Bhd volunteer to financing the project through principles Murabahah in Sukuk Islamic Financing.

2.0

HISTORY

On 13 September 2003, Oxbridge Heights Sdn Bhd (Oxbridge) was corporate in 12, Metropolis Tower, Jalan Dato Abdullah Tahir, Johor Bahru. Oxbridge was a property developer company with paid-up capital RM 2,000,001 and RM 5,000,000 authorized capital with the status resident controlled company and Non-Bumiputra controlled company. The Board of directors for Oxbridge as at 31 January 2005 are Mr. Yap Sing Lee, Mr. Yap Seng Maw, En. Shamlan Bin Mohamed Hashim. The shareholders of the company are Renewed Development Sdn Bhd and Simfoni Utama Sdn Bhd. Oxbridge Height Sdn Bhd (Oxbridge) is a single purpose company set up to undertake the development of Jaya Putra Perdana (JPP) in Tebrau, Johor. Oxbridge is a subsidiary of Renewed Development Sdn Bhd, a Johor-based property developer. JPP is located approximately 15 km to the north of Johor Bahru city centre and is surrounded by more established developments such as Taman Mount Austin and Taman Daya. Sprawling across 704 acres, the development has a total gross development value of RM1.85 billion and will span the next 8 years.

3.0

FINANCING

To facilitate the issuance, Tradewinds Corporation Berhad (Tradewinds) - as the beneficial land owner had voluntarily granted the identified assets to Oxbridge as a gift (hibah) for no consideration. The sukuk investors had then acquired the assets from Oxbridge at the purchase price. Thereafter, the sukuk investors had sold back the assets to Oxbridge at a price comprising the original purchase price and a profit margin, at a preagreed rate and on a deferred-payment basis. Once the sale and purchase transactions had been executed, Oxbridge had subsequently given back the assets to Tradewinds, based on the concept of hibah. Oxbridges obligation to pay had been evidenced through the issuance of the negotiable and non-profit-bearing promi ssory notes (MUNIF Notes or IMTN s) und e r the MUNIF and IMTN Facility, which it would redeem on the respective maturity dates. The issuance of the MUNIF Notes and IMTNs had been backed by various securities, such as a first fixed legal third-party charge over the identified land parcels (equivalent to 418.64 acres) and legal assignment of 20% of the proceeds from the sale of units under the JPP development.

4.0 DEFINITION OF SUKUK Sukuk is an Arabic word for Islamic bond. Sukuk began in Malaysia in 1990 with the small issuance of RM120 million (US$30 million) from a subsidiary of Shell Malaysia to East Cameron Gas. From the rst Sukuk to have originated in the US to the global marine terminal operator DP World, the rst issuer to issue both conventional and Islamic bonds and rst ever convertible instrument in the Islamic nance

market to airline Sukuk, ship nance Sukuk and so on. Today Sukuk have found acceptance in nonIslamic countries as well and are viewed as alternative nancial instruments. Sukuk are different from conventional bonds in their purpose. The basic concept behind issuing Sukuk is that Sukukholders get a share in the pro ts or revenues of enterprises. However, in the case of conventional bonds, holders of such certi cates are no more than lenders, the certicates are an acknowledgement of debt; and their earnings come from the interest on their investment. Sukuk represents ownership shares in assets that bring prots or revenues, whereas bonds are acknowledgement of interest bearing debt by the issuer. Sukuk are identical to conventional bonds, with regard to the distribution of prots from their enterprises at xed percentages based on interest rates (LIBOR). However, in order to differentiate it from conventional bonds, the issuance contract would state that the actual prots exceeding the percentage prescribed would be paid entirely to the partner in the organization for effective management of the business. Sukuk are among the financial instruments for raising funds and are vital vehicles for resource mobilization, whether in the public or private sector (Mohd Hafizuddin et al., 2010). According to AAOIFI (2002), sukuk refer to investment products and can be defined as certificates o f equal value represe nting undivided shares in ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity . As a certificate, sukuk is documented the undivided pro-rated ownership of underlying assets and the sak (singular of sukuk) is freely traded at par, premium or discount (Securities Commission of Malaysia (SC), 2010). Based on both definitions, sukuk can be further defined as a commercial paper that provides an investor with ownership in an underlying asset. It is an asset-backed trust certificate evidencing ownership of an asset or its usufruct. It has a stable income and complies with the principle of shariah. Unlike conventional bonds, sukuk need to have an underlying tangible asset transaction, either in ownership or master lease agreement. So far, among all the available structures, sukuk BBA and sukuk murabahah are the two sukuk with the highest default cases in Malaysia. In fact, sukuk BBA was the sukuk with the most issuance in Malaysia in 2004, before the Malaysian sukuk market got dominated by musyarakah sukuk beginning 2006. In the case of Murabahah Sukuk, the issuer of the certificate is the seller of the Murabahah commodity, the subscribers are the buyers of that commodity, and they are entitled to its final sale price upon the resale of the commodity. Murabahah Sukuk cannot be legally traded at the secondary market, as the certificates represent a debt owing from the subsequent buyer of the commodity to the Sukuk holders and such trading in debt on a deferred basis is not permitted by Shariah.

5.0

STRUCTURE OF SUKUK MURABAHAH

A contract that refers to the sale and purchase transaction for the financing of an asset whereby the cost and profit margin (mark-up) are made known and agreed by all parties involved. The settlement for the purchase can be either on a deferred lump sum basis or on an installment basis, which will be specified in the agreement. Murabahah Murabahah contracts are contracts where one party provides credit to the
other with an agreement to return the money back at a future date for a pre-determined price which is higher than the spot price. The differences between the money lent and received money is not considered interest but is the deferred price for the credit extended. Some scholars are of the view that this sort of a structure should be avoided as it is closely linked to the interest bearing transaction structure. Here, the concept of true sale is important for the transaction to qualify as a Shariah compliant transaction but there are certain limitations to the transaction. The sale is ctitious or momentary, as the asset moves into the buyers books to be immediately disposed off and short dated trades are not permissible.

Source: Securities Commissions of Malaysia, 2010.

1 Issuer will identify the assets and when get beneficiary ownership of the asset, SPV sell it to the Primary Subscriber by cash money as an example RM 250 million. This amount will be given to the company for developing the project and also the objective of the Sukuk issue. 4 - Primary subscriber resale the assets at selling price to the issuer (SPV) RM 300 million through phase payment in 5 years.

2- SPV issued Sukuk Murabahah for accepting on behalf ownership of subscriber to accept payment in phase payment (debt) from SPV and company. 3 - SPV will make a stage payment and from this subscriber will get back their capital plus profit which target in future for 5 year. 5 In 5 years due date of Sukuk, subscriber free for saving and accept assurance payment from SPV or sell it at Secondary Market to get a cash immediately. If it was sell, it use concept sell of debt ( bai-addayn which it have many practice in Malaysia but it was not complies with syariah by East Conutry and majority Ulama at international level. Note: Sukuk Murabahah can be traded in secondary market.

6.0 SUKUK OF THE OXBRIDGE HEIGHTS SDN BHD (Murabahah Underwritten Notes Issuance Facility (MUNIF) Oxbridge Heights Sdn Bhd (Oxbridge) is a property developer company is a purpose company set up to undertake the development of Jaya Putra Perdana (JPP) in Tebrau, Johor. Oxbridge is a subsidiary of Renewed Development Sdn Bhd, a Johor-based property developer. JPP is located approximately 15 km to the north of Johor Bahru city centre and is surrounded by more established developments such as Taman Mount Austin and Taman Daya. The RM 50 million MUNIF and up to RM 104 million IMTN has been issued subject to Reduction Schedule for MUNIF dan two tranches for IMTN as per table 1.

TABLE 1 KEY TRANSACTION INFORMATION KEY TRANSACTION INFORMATION Issuer Oxbridge Heights Sdn Bhd Instrument RM 50 million MUNIF and up to RM 104 million IMTN Issuance Date 29 April 2005 Islamic Contracts Murabahah and Hibah Underlying Assets Identified project land Principal Advisor/Lead Amanah Short Deposits Berhad Arranger/ Facility Agent Joint Arranger OSK Securities Berhad Shariah Advisor Dr Mohd Daud Bakar Purpose of Issues Proceeds from the MUNIF had been utilized for the following purposes: i) Direct payment of fees and expenses relating to the issuance. ii) To finance the construction, development and operating costs and expenses relating to JPP, Oxbridges mixed development project developed in Mukim Tebrau Daerah Johor Bahru, Johor.

However, proceeds from the IMTN had been utilized for the following purposes: i) To part finance the acquisition of the land development rights from the beneficial land owner. ii) To deposit into the FSRA 4.0% of each IMTN issued Legal Counsel Messrs Raslan Loong Trustee AmTrustees Berhad Initial Ratings A1(s)/P1(s) by RAM Ratings Source: RAM Ratings (2010)

6.1

STRUCTURE SUKUK OF THE OXBRIDGE HEIGHTS SDN BHD SUKUK BONDS

The basic structure was to securitize lands sales from Oxgride Heights Sdn Bhd. From this, Oxbridge then sell the lands to Tradewinds to get capital for developing Jaya Putra Perdana and sell it back to Oxbridge with purchase price (mark-up price) anh staged payment until due date of the Sukuk. Despite the basic structure being straightforward, to ensure syariah compliance it was necessary for the Sukuk to have a large number of components. The structure revolved around a Oxbridge special Purpose Vehicle (Oxbridge SPV). The Oxbridge SPV was the entity that would issue the Sukuk bonds to investors after sell and buy back the assets from investors with purchase price and staged payment, and with that funds they received, Oxbridge SPV will used it to manage their project development. The Sukuk was a Murabahah the issuer of the certificate is the seller of the Murabahah commodity, the
subscribers are the buyers of that commodity, and they are entitled to its final sale price upon the resale of the commodity. Murabahah Sukuk cannot be legally traded at the secondary market, as the certificates represent a debt owing from the subsequent buyer of the commodity to the Sukuk holders and such trading in debt on a deferred basis is not permitted by Shariah.

TABLE 2 OXBRIDGE HEIGHTS SDN BHDS MUNIF RM 50 MILLION AND IMTN RM104 MILLION NOMINAL VALUES SERIES BONDS THIRD PARTY Issuer hibah bank to Tradewind TradeWind (Beneficial (Beneficial owner) owner) hibah asset to issuer ISSUER (OXBRIDGE)

2. Investors purchase assets at Purchase Price (APAs)

3. Payment of proceed

4. Sell asset at 4. Issue Sell Price, MUNIF/IMTNs to deferred ((ASAs) evidence obligation to pay sale price

INVESTOR (TRADEWIND)

1. 3rd party (Tradewind) will first Hibah the underlying assets to be used for this deal to Oxbridge. 2. The issuer (Oxbridge) will sell these assets to the investors at a purchase price through Asset Purchase Agreements (APAs). The payment will be made to the issuer on spot. 3. The investor will then sell back the same assets straight away to the issuer but at a higher price including a profit margin through asset sale agreements based on Bai al-Inah. 4. The issuer (Oxbridge) will issue sukuk (MUNIF/IMTNs) to evidence his obligation to pay the sale price. 5. Once the sukuk has grown to Maturity The Very Underlying assets will then be given back to the 3rd party (which by the way is not the owner of the assets) through process of re-hibah. A contract that refers to the sale and purchase transaction for the financing of an asset whereby the cost and profit margin (mark-up) are made known and agreed by all parties involved. The settlement for the purchase can be either on a deferred lump sum basis or on an installment basis, which will be specified in the agreement. The Hibah or Gift concept shall where applicable be used to facilitate the above Murabahah transaction. The identified assets shall be either (a) beneficially owned by the Issuer or (b) a gift granted to the Issuer by Tradewinds Corporation Berhad or its successors/replacement (Beneficial Land Owner) on a voluntary basis for no consideration. The Issuer shall then use the gift for the subsequent sale and purchase transactions. The gift will be given back to the Beneficial Land Owner based on the concept of Hibah once the sale and purchase transactions are all executed.

6.2 SYARIAH COMPLIANCE

Table 3 OXBRIDGES RATING HISTORY RATING (IMTN/MUNIF) ASSIGNED RATING ACTION

DATE ANNOUNCED 12 April 2005

A1 (s) - (stable outlook) P1(s) - (stable outlook) A1 (s) - (stable outlook) P1(s) - (stable outlook) A1 (s) - (negative outlook) P1(s) - (negative outlook) A1 (s) - (negative outlook) P1(s) - (negative outlook)

Assigned

11 November 2005

Reaffirmed

20 September 2006

Reaffirmed

18 March 2008

Reaffirmed

5 November 2008

A1 (s) - (negative outlook) P1(s) - (negative outlook) A1 (s) - (negative outlook) P1(s) - (negative outlook) BB1 (negative outlook) NP (negative outlook) D

Reaffirmed

18 February 2009

Maintain

12 March 2009

Downgraded

6 April 2009

Downgraded and Restructed

Source : RAM Rating May 2010

IMTN/MUNIF ISSUED WITH RATING A1(S)/ P1(S)

11.11.05

Negative outlook reflects weakened fundamentals following its deferred & reduced launches

05.11.08

Downgraded rating to BB1/NP. Delayed land sale, deferred property launches, reduced launches, sales cancellation,contrsuction hold-ups and increase contruction costs

06.04.2009

12.04.05

Stable outlook maintain rating

18.03.08

Maintain with negative outlook A1(s)/P1(s) 12.03.09

Downgraded rating to D. Failed to redeem the RM10 million MUNIF (due date 3.4.09). Restructure the debt facility

RAM has assigned a long-term rating of A1(s) to Oxbridge Height Sdn Bhds (Oxbridge or the Company) proposed Islamic Medium-Term Notes Facility of up to RM104 million, with a stable outlook. Simultaneously, a short-term rating of P1(s) has been assigned to Oxbridges proposed Murabahah Underwritten Notes Issuance Facility of up to RM50 million. Both issues will be collectively referred to as the proposed Islamic securities.

The assigned ratings essentially reflect the structural features of the transaction to safeguard payment capacity. The transaction structure entails the tight ring-fencing of cashflow, which prioritises project completion and debt repayment via various restrictive covenants that prohibit any outflow via dividends and loans or advances to shareholders, directors or related companies. Oxbridge will open designated accounts that capture the proceeds from JPP; these accounts will be jointly operated with the Trustee. In the meantime, Oxbridge is not allowed to undertake any other activity during the tenures of the proposed Islamic securities, apart from the development of JPP. As a condition precedent to any drawdown of the proposed Islamic securities, the development projects must have secured, inter alia, confirmed sales equivalent to 1.5 times the issuance amount. All confirmed sales must be accumulated from each phase/sub-phase that has achieved a minimum 65% take-up rate. To a large extent, this pre-sale condition mitigates the demand risks faced by JPP. Underpinned by JPPs good location and accessibility, sales of its earlier launches have been impressive, i.e. its 1-storey terrace houses (705 units) and service apartments (116 units) - offered in 2004 achieved more than 80% take-up within only 3 weeks of being launched. Looking ahead, JPP intends to focus on landed residential units to capitalise on the success of its earlier launches. As a single-project company, Oxbridge is subject to the market risks associated with the location of JPP. RAM views such concentration risk, i.e. banking on a sole project, as a factor that moderates the ratings of Oxbridge. As the Company is not diversified in terms of project location, the repayment of the proposed Islamic securities hinges fully on the success of JPP. Based on RAMs estimates, Oxbridges cashflow will be sufficient to comfortably support the principal and profit portions of the proposed Islamic securities. The Companys respective operating cashflow debt coverage and operating cashflow interest coverage ratios are expected to range around 0.26 0.68 times and 3.22 19.08 times. On 11 November 2005, RAM has reaffirmed the long-term rating of A1(s) for Oxbridge Height Sdn Bhds (Oxbridge or the Company) Islamic Medium-Term Notes Facility of up to RM104 million; the rating carries a stable outlook. At the same time, RAM has also reaffirmed the short-term rating of P1(s) for Oxbridges Murabahah Underwritten Notes Issuance Facility of up to RM50 million (both debt issues will be collectively referred to as the Islamic debt securities). During the period under review, JPP managed to maintain the commendable sales performance of its maiden launches. In particular, the developments 342 units of 2-storey terrace houses and 547 units of 1-storey terrace houses, which had been offered in 4Q 2004, achieved respective 60% and 80% take-up rates within a month of being launched. Likewise, its shop offices (105 units) and 2-storey terrace houses (173 units) - launched in

2005 - garnered equally convincing 60% and 80% sales, respectively. Meanwhile, its earlier launches have been doing well; all of these, entailing terrace houses and serviced apartments, have surpassed the 85% sales mark. As at 30 September 2005, JPP had managed to sell almost RM247 million of properties, representing an overall 85% take-up rate. The ratings also reflect the structural features of the transaction, which entail the tight ring-fencing of the Companys cashflow, prioritising project completion and finance repayment - via various restrictive covenants that prohibit any outflow via dividends and loans or advances to shareholders, directors or related companies. Oxbridge has set up designated accounts that capture the proceeds from JPP; these are operated jointly with the Trustee. At the same time, Oxbridge is not allowed to undertake any other activity during the tenures of the Islamic debt securities, apart from the development of JPP. As a condition precedent to any drawdown of the Islamic debt securities, the JPP project must have secured, inter alia, confirmed sales equivalent to 1.5 times the issuance amount. All confirmed sales must be accumulated from each phase/sub-phase that has achieved a minimum 65% take-up rate. To a large extent, this pre-sale condition mitigates the demand risks faced by JPP. Based on RAMs estimates, Oxbridge should generate sufficient cashflow to comfortably support the principal and profit portions of the Islamic debt securities. The Companys net operating cashflow debt coverage is expected to range between 0.18 and 0.56 times during the remaining tenure of the Islamic debt securities. RAM has reaffirmed the enhanced long-term rating of A1(s) for Oxbridge Height Sdn Bhds (Oxbridge or the Company) Islamic Medium-Term Notes Facility of up to RM104 million (IMTN) on 20 September 2006. At the same time, RAM has also reaffirmed the enhanced short-term rating of P1(s) for Oxbridges Murabahah Underwritten Notes Issuance Facility of up to RM50 million. However, the outlook on the long-term rating of the IMTN has been revised, from stable to negative. The negative rating outlook is premised on the deferment of several planned launches in its Jaya Putra Perdana (JPP) development in Tebrau, Johor, amidst a difficult operating environment. As Oxbridge is a single-project company, the deferment would result in reduced earnings throughout the tenures of the Islamic debt securities. As at 31 May 2006, the total cumulative property sales from JPP came up to RM350 million, i.e. some RM10 million below RAMs expectations. In this regard, any further deferment would not bode well for Oxbridge given the fixed nature of its debt obligations. Notwithstanding the deferred launches over the past year, the JPP development managed to achieve an encouraging overall take-up rate of about 83% as at 31 May 2006. New launches (i.e. subsequent to 30 September 2005) entailing a total of 636 units of terrace houses were offered to the market in

November 2005 and January 2006; these achieved commendable take-up rates of 70% - 90% within a year. Meanwhile, most of the sales for its previous launches have surpassed the 65%-mark. The ratings also reflect the structural features of the transaction, which entail the tight ring-fencing of the Companys cashflow, via various restrictive covenants that prohibit any outflow via dividends and loans or advances to shareholders, directors or related companies. Meanwhile, as a condition precedent to any drawdown of the Islamic debt securities, the JPP project must have secured, inter alia, confirmed sales equivalent to 1.5 times the issuance amount, which must be accumulated from each phase/subphase that has achieved a minimum 65% take-up rate. To a large extent, this pre-sale condition mitigates the demand risks faced by JPP. Nevertheless, being a single-project company, Oxbridge is subject to the market risks associated with the location of JPP. RAM views such concentration risk, i.e. reliance on a sole project, as a moderating factor for the ratings of Oxbridge. As such, the repayment of the Islamic debt securities hinges fully on the success of JPP. Similar to other property developers, Oxbridges business profile is exposed to the performance of the overall industry, which in turn is closely tied to economic cycles, consumer sentiments and interest-rate movements, amongst other factors. RAM Ratings has reaffirmed the enhanced long- and short-term ratings of A1(s) and P1(s) for Oxbridge Height Sdn Bhds (Oxbridge or the Company) Islamic Medium-Term Notes Facility of up to RM104 million (IMTN) and Murabahah Underwritten Notes Issuance Facility of up to RM50 million; the negative outlook on the long-term rating has been maintained on 18 March 2008. Meanwhile, Renewed Global Sdn Bhd (Renewed, previously known as Renewed Development Sdn Bhd), the major shareholder of Oxbridge, is in the final stages of concluding the sale of approximately 600 acres of land for some RM260 million; the land belongs to another subsidiary under the Group. The proposed sale is expected to be completed by 3Q 2008. About RM80 million of the proceeds from this proposed transaction will be advanced to Oxbridge to meet the working-capital requirements of its property developments. In relation to this, the ratings take into consideration the successful execution of the Sale and Purchase Agreement for the above transaction, and the successful implementation of mechanisms to ensure that the RM80 million flows directly to Oxbridge. The negative outlook, on the other hand, reflects Oxbridges weakened fundamentals following its deferred and reduced launches. Moving ahead, RAM Ratings expects Oxbridge to continue facing a challenging operating environment. For 2008, the Company has lined up various launches; its offering of 120 property units in January saw fairly strong response with 71% bookings. Despite the strategic

location of JPP and its commendable sales over the years, there should be more visibility in property launches and sustained take-up rates before the negative outlook can be revised. In March 2008, RAM Ratings reaffirmed the rating for Oxbridges IMTN/MUNIF at A1(s)/P1(s), taking into consideration the successful completion of the land sale, which is expected to yield some RM260 million of proceeds, of which RM80 million will be advanced to Oxbridge to meet the working-capital requirements of its property developments. RAM Ratings Head of Real Estate and Construction Ratings said that the delay in the completion of the land sale initially expected to be by 3Q 2008 will affect the Companys cashflow profile, which is already weakened by deferments in its property launches in the last few years amid subdued market conditions, changes in development plans and construction delays. Published on 18 February 2009 RAM Ratings has maintained the Rating Watch (with a negative outlook) on the A1(s)/P1(s) ratings of Oxbridge Height Sdn Bhds (Oxbridge) Islamic Medium-Term Notes Programme of up to RM104 million and Murabahah Underwritten Notes Issuance Facility of up to RM50 million (IMTN/MUNIF). At the same time, the A2(s)/P1(s) ratings of Hartaplus Realty Sdn Bhds (Hartaplus) RM80 million Medium-Term Notes and RM40 million Commercial Papers (CP/MTN) remain on Rating Watch (with a negative outlook). Hartaplus and Oxbridge are single-purpose companies that had been set up to develop Bandar Pulai Jaya and Jaya Putra Perdana in Johor, respectively. The Rating Watch on Hartaplus and Oxbridge both subsidiaries of Renewed Global Sdn Bhd is premised on the delay in the proposed sale of about 600 acres of land under Hartaplus for RM260 million, originally expected to be completed by 3Q 2008. The sale proceeds had been earmarked for the full redemption of Hartaplus outstanding CP/MTN, fund its working capital, and partially settle outstanding development-rights payments; part of the proceeds were to have been channelled to Oxbridge to meet its working capital requirements. On 12 February 2009, a tripartite Sale and Purchase Agreement (SPA) was inked between Hartaplus, Ambang Budi Sdn Bhd (registered landowner and subsidiary of Tradewinds Corporation Berhad), and Extreme Consolidated Sdn Bhd (wholly owned subsidiary of United Malayan Land Berhad), to facilitate the disposal of the said land. Of the total consideration of RM233 million, RM84.13 million will be used to settle the outstanding development-rights payments to Ambang Budi and RM80 million will be utilised to redeem the outstanding CP/MTN. As part of the deal, Hartaplus will also have to incur RM32 million for the construction of the Bandar Pulai Jaya interchange, leaving it with RM36.87 million of net proceeds.

Although the source of repayment for Hartaplus CP/MTN has been identified, the proceeds will only be received over a period of 24 months from the date of the SPA; the CP/MTN will mature on 16 February 2010. RAM Ratings understands that the management is considering early redemption of the CP/MTN via a separate arrangement. In the meantime, Hartaplus business and financial profiles have weakened following deferred property launches amid the subdued property market. Despite the land sale, there are still concerns about Oxbridge. Initially, Oxbridge had stood to receive some RM80 million from Hartaplus for its working-capital requirements following the land sale. Given the downward revision in the disposal price, from RM260 million to RM233 million, and the unexpected cost outlay for the interchange, Oxbridge is not expected to benefit from any advances from the disposal. Meanwhile, Oxbridge has weak business and financial profiles as a result of postponed property launches in the last few years, changes in development plans and construction delays. RAM Ratings is currently seeking clarification and further information from the management on the land sale, and will make the necessary announcements upon the finalisation of this exercise. RAM Ratings' Rating Watch highlights a possible change in an issuer's debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt under special surveillance by RAM Ratings. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and interest. Issues will appear on RAM Ratings' Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM Ratings' Rating Watch, however, does not inevitably mean that the existing rating will be changed. It only means that a rating is under evaluation by RAM Ratings and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A developing outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered. Published on 12 March 2009 RAM Ratings has downgraded the ratings of Oxbridge Height Sdn Bhds (Oxbridge or the Company) Islamic Medium-Term Notes Programme of up to RM104 million and Murabahah Underwritten Notes Issuance Facility of up to RM50 million (IMTN/MUNIF), from A1(s)/P1(s) to BB1/NP. At the same time, the Rating Watch (negative outlook) on the ratings has been maintained. Oxbridge is a single-purpose company that had been set up to develop Bandar Jaya Putra Perdana in Johor, and is a subsidiary of Renewed Global Sdn Bhd (Renewed).

The Rating Watch had been placed in November 2008, premised on the delay in the sale of about 600 acres of land under Hartaplus Realty Sdn Bhd (Hartaplus) a subsidiary of Renewed originally expected to be completed by 3Q 2008. Part of the proceeds from the land sale (RM80 million) were to have been channelled to Oxbridge to meet its working-capital requirements. Despite the land-sale agreement being inked in February 2009, timing of advances to Oxbridge (if any) is uncertain due to the downward revision in the disposal price, from RM260 million to RM233 million, and the unexpected cost outlay to be borne by Hartaplus for the construction of an interchange; in addition, the balance purchase price shall be paid to Hartaplus within 24 months from the date of the sale and purchase agreement (SPA), subject to the successful completion of the interchange within a 15-month period from the date of the SPA. The rating downgrade reflects the significant deterioration in Oxbridges business and financial profiles as a result of the delayed land sale, deferred property launches in the last few years, reduced launches, sales cancellation, construction hold-ups and increased construction costs. Oxbridges cashflow has been weakened by deferred property launches in the last few years, pending decisions on the said land sale and in view of the subdued market. As such, no enhancement has been accorded to the ratings of the IMTN/MUNIF; despite the tight covenants under the transaction structure, the cashflow has been severely affected. Due to its weakened business and financial profiles, Oxbridge is expected to breach its covenanted ratios under RAM Ratings sensitivity analysis. The various issues plaguing the development have already been manifested through Oxbridges financials; its pre-tax profit for FY Aug 2007 slumped 32% year-on-year to RM7.51 million. In addition, the Company charged out about RM18 million of liquidated ascertained damages in FY Aug 2008 (unaudited) arising from persistently delayed construction work - leading to a loss for the year. Meanwhile, RAM Ratings was made to understand by the management that Renewed intends to inject funds into Oxbridge for its working-capital requirements as well as for the redemption of the IMTN in April 2009. On this account, we note that Renewed had advanced more funds to the Company in the past 1 year to cover its working-capital requirements; the amount owed to its holding company came up to RM21.21 million as at end-August 2008, against RM8.85 million a year earlier. The Company has obtained the trustees indulgence vis--vis meeting some of the requirements of the designated accounts. Under the original terms of the MUNIF/IMTN, the Sinking Fund Account must contain funds equivalent to at least 25% of the next payment (of principal and profit) 3 months before it is due, at least 50% of the amount due 2 months prior to the payment date, and must be fully funded (for principal and profit) 1 month before the next payment date.

Under Clause 12.1 of the trust deed, the ratings of Oxbridges IMTN and MUNIF having fallen below A3 and P3 constitutes an event of default. RAM Ratings has been informed that the management is exploring a possible restructuring of the MUNIF/IMTN. Pending the outcome of this, the Rating Watch (with a negative outlook) on the ratings has been maintained. RAM Ratings' Rating Watch highlights a possible change in an issuer's debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt under special surveillance by RAM Ratings. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and interest. Issues will appear on RAM Ratings' Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM Ratings' Rating Watch, however, does not inevitably mean that the existing rating will be changed. It only means that a rating is under evaluation by RAM Ratings and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A developing outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered. Published on 06 April 2009 RAM Ratings has downgraded the ratings of Oxbridge Height Sdn Bhds (Oxbridge) Islamic Medium-Term Notes Programme of up to RM104 million (IMTN) and Murabahah Underwritten Notes Issuance Facility of up to RM50 million (MUNIF), from BB1/NP to D. Concurrently, RAM Ratings has lifted the Rating Watch (negative outlook) on Oxbridge, in place since 5 November 2008. Following the downgrade to D, RAM Ratings no longer has any rating obligations on the MUNIF and IMTN facility. The rating actions are premised on confirmation from MIDF Amanah Investment Bank Berhads announcement through the Fully Automated System for Issuing/Tendering (or FAST) that Oxbridge had failed to redeem the RM10 million Islamic Commercial Paper under its MUNIF, which fell due on 3 April 2009. Under Clause 12.1A(vii) of the Trust Deed for the IMTN facility, any other indebtedness that becomes due or capable of being declared due before its stated maturity will trigger a cross-default and constitutes an event of default. RAM Ratings understands that the IMTN/MUNIF holders have not declared an event of default, premised on Oxbridges plans to restructure the debt facility.

7.0 CONCLUSION

From a rating perspective, it is very important to evaluate how sukuk would behave in the case of default. This can be done by ascertaining the salient features of the sukuk; specifically, whether the issue is asset-based or asset-backed. From there, investors will know their position and protection if the sukuk turned bad. In most asset-based sukuk, the asset is merely used to structure the transaction and not transferred to the investors perse. The sukuk investors therefore become unsecured creditors via a purchase undertaking that requires the issuer to repurchase the assets in the case of default. In the case of asset-backed sukuk, the assets sold to the special-purpose vehicle (SPV ) are used to su ppor t th e sukuk and the investors have recourse to this asset, i.e. the sale to the SPV protects them from the claims of the issuer's other creditors. How ever, it is also important to note that investors protection varies depending on the Shariah structure adopted; a sukuk transaction may not only be based on one Shariah contract, but could comprise several Shariah contracts in a single issuance. The more common sukuk structures include Bai Bithaman Ajil, Murabahah, Musharakah, Mudharabah and Ijarah.