Sukuk Term Sheet Due-Diligence Checklist South Africa
A Sukuk label does not tell an investor what asset produces the return, which contracts connect the parties or what happens when cash flows fail. A term-sheet review should identify those mechanics before the investor compares yield with a conventional bond or another Sukuk.
This checklist is general education, not investment, tax, legal or Shariah advice. Review the final documents, current issuer information and the adopted Shariah standard with appropriately authorised professionals.
1. Identify the issuer and obligor
Record the special-purpose vehicle, operating obligor, guarantor and other material parties. Note the jurisdiction, legal form and relationship between them. The name on the certificate may not be the business responsible for the economic payments.
2. Name the Shariah structure
State whether the transaction uses Ijarah, Murabaha, Musharakah, Mudarabah, Wakala or a combination. Summarise the asset sale, lease, agency or partnership steps in plain language. Ask which contracts create the periodic distribution and redemption amount.
3. Verify the underlying assets
Identify the assets, services or ventures supporting the structure, their location, ownership and permitted use. Confirm whether investors obtain an ownership interest, beneficial interest or mainly contractual rights. Review substitution rights and what happens if an asset is destroyed or becomes unusable.
4. Distinguish asset-backed and asset-based risk
Determine whether investors have meaningful recourse to identifiable assets or primarily rely on the obligor’s promise. Read the enforcement and security provisions rather than relying on marketing language. The practical credit risk may still be concentrated in one operating entity.
5. Trace every cash flow
Map subscription proceeds, asset purchase, periodic distributions, fees, reserve accounts and redemption. Identify benchmark-linked calculations and who bears shortfalls. A familiar benchmark does not by itself determine whether the underlying contracts are Shariah-compliant.
6. Review purchase undertakings
Understand who must buy assets at maturity or after default and how the price is calculated. Ask whether the undertaking changes the commercial risk of the stated partnership or agency structure. Obtain the Shariah rationale applied to the actual documents.
7. Test default and enforcement
List default events, grace periods, acceleration rights, voting thresholds, trustee powers and investor remedies. Note cross-defaults and whether enforcement occurs in more than one jurisdiction. Model a late-payment and insolvency scenario.
8. Check ranking and security
Record where investors rank against secured lenders, senior unsecured creditors and other Sukuk holders. Identify collateral, guarantees and limitations. A high-level statement that certificates are senior may not describe the position of every transaction party.
9. Assess liquidity
Check listing venue, market makers, typical trading size, settlement, price sources and transfer restrictions. A listed instrument can still trade infrequently. Match liquidity to the family’s likely holding period and cash needs.
10. Review Shariah governance
Retain the Shariah pronouncement, named board or adviser, methodology, use-of-proceeds controls, breach process and ongoing reporting. Confirm whether secondary trading rules depend on the composition of underlying assets.
11. Calculate total cost and tax
Record issue price, distributions, accrued amounts, platform, custody, foreign-exchange and transaction costs. Ask a registered tax practitioner to analyse distributions, disposals, withholding and foreign-tax consequences for the actual owner.
12. Keep a decision file
Store the term sheet, final offering document, financial statements, rating information, legal and Shariah materials, fee schedule and approval record. Note the investment purpose, position limit, review trigger and responsible person.
Official starting points
Practical outcome: the investor should be able to explain the parties, assets, contracts, cash flows, recourse, default process, liquidity, Shariah evidence and total cost before investing.
