Garuda - announced that it will continue to defer the periodic distribution payment. The ongoing coronavirus pandemic remains the major risk to Garuda’s recovery and to that of other Indonesian-based sukuk issuers, with defaults of on-shore corporate sukuk peaking at 4.2% in 2020 (2019: 0.6%).
The country’s bankruptcy regime is difficult to navigate and its legal system lacks precedent of sukuk default treatment. Similar countries under this group are those where the law is not supportive of creditor rights or where significant volatility in the application of law and legal enforceability of any claim limits the practical chances of recovery or greatly increases the volatility of recovery prospects.
Court supervised debt moratorium and bankruptcy proceedings for sukuk are rare - given the intricacies of making such applications in the domestic religious court, as opposed to the commercial court. Indonesian law states that religious courts have authority in resolving Islamic financial disputes. However, in practice, these can be settled in commercial courts should both parties agree. Religious courts are frequently used to settle simpler retail transactions, while commercial courts typically adjudicate on complex commercial disputes, as litigants consider the officials to be more competent in ruling on such matters.
Sukuk default - by PT Berlian Laju Tanker Tbk in 2012 was resolved through the commercial court and resulted in a restructuring plan. Islamic financing defaults among financial institutions have been treated similarly to conventional loan defaults from what we have observed so far. Out-of-court restructuring of on-shore public sukuk generally follows similar treatment to bonds and includes maturity extensions and the deferral of periodic distributions.
Most international sukuk issued - so far create an economic effect similar to conventional bonds, with most sukuk instruments resembling debt obligations; for instance, ijara and murabaha structured sukuk. However, a number of local corporate sukuk that missed payments in 2019 and 2020 were based on mudharaba contracts, which have equity-like or profit-and-loss sharing features. These distinctions could complicate creditor or sukuk-holder treatment and affect their recourse, debt ranking and recoveries upon issuer default. The issuers that missed sukuk periodic payments included state-owned enterprise, PT Indah Karya (Persero), and real-estate developer, PT Prima Jaringan.
English law - Sukuk issued on the international capital markets are typically governed by English law and are subject to the jurisdiction of the courts of England or other courts that are recognized by international law and jurisdiction. However, part of the documentation and any judgement would also be governed and reviewed by the courts where the originator is domiciled and enforceability would be restricted by local laws.
Court supervised debt moratorium and bankruptcy proceedings for sukuk are rare - given the intricacies of making such applications in the domestic religious court, as opposed to the commercial court. Indonesian law states that religious courts have authority in resolving Islamic financial disputes. However, in practice, these can be settled in commercial courts should both parties agree. Religious courts are frequently used to settle simpler retail transactions, while commercial courts typically adjudicate on complex commercial disputes, as litigants consider the officials to be more competent in ruling on such matters.
Sukuk default - by PT Berlian Laju Tanker Tbk in 2012 was resolved through the commercial court and resulted in a restructuring plan. Islamic financing defaults among financial institutions have been treated similarly to conventional loan defaults from what we have observed so far. Out-of-court restructuring of on-shore public sukuk generally follows similar treatment to bonds and includes maturity extensions and the deferral of periodic distributions.
Most international sukuk issued - so far create an economic effect similar to conventional bonds, with most sukuk instruments resembling debt obligations; for instance, ijara and murabaha structured sukuk. However, a number of local corporate sukuk that missed payments in 2019 and 2020 were based on mudharaba contracts, which have equity-like or profit-and-loss sharing features. These distinctions could complicate creditor or sukuk-holder treatment and affect their recourse, debt ranking and recoveries upon issuer default. The issuers that missed sukuk periodic payments included state-owned enterprise, PT Indah Karya (Persero), and real-estate developer, PT Prima Jaringan.
English law - Sukuk issued on the international capital markets are typically governed by English law and are subject to the jurisdiction of the courts of England or other courts that are recognized by international law and jurisdiction. However, part of the documentation and any judgement would also be governed and reviewed by the courts where the originator is domiciled and enforceability would be restricted by local laws.
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