According to Moody’s definition, asset-backed ṣukūk are those whose “investors enjoy asset-backing; they benefit over some form of security or lien over the assets, and are therefore in a preferential position over other, unsecured creditors. In other words, in the event the issuer were to default or become insolvent, the noteholders would be able to recover their exposure by taking control of and ultimately realising the value from the asset(s). It also requires the element of securitisations to be present―true sale, bankruptcy remoteness and enforceability of security. On the other hand, asset-based ṣukūk are those for which “the originator undertakes to repurchase the assets from the issuer at maturity of the Sukuk, or upon a pre- defined early termination event, for an amount equal to the principle repayment. In such a repurchase undertaking, the true market value of the underlying asset (or asset portfolio) is irrelevant to the Sukuk noteholders, as the amount is defined to be equivalent to the notes. In this case, noteholders have no special rights over the asset(s) and rely wholly on the originator’s creditworthiness for repayment, either from internal sources or from its ability to refinance. For further details, see ISRA Research Paper; Parallels between Asset-Backed Ṣukūk and Securitization (IRP8).
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