Vinay Ahuja (Partner, Head of Indonesia Practice and Head of Regional Banking & Finance Practice) and Sri Ningsih (Senior Legal Consultant) were recently quoted in an article published by the International Financial Law Review (“IFLR”): Garuda’s sukuk default will set a legal precedent.
A sukuk is a sharia law compliant bond-like instrument commonly used in the Islamic world by businesses, generally involving the direct ownership of assets and related interests.
In this article, Vinay, Sri and other industry experts discuss Garuda Indonesia’s payment default on its USD 500 million sukuk. With the airline’s finances still taking a hammering due to the coronavirus pandemic, Garuda Indonesia announced that it could not distribute coupon payments after a 14-day grace period. Garuda’s capitalization structure, the deal’s shariah law elements and insufficient regulatory protections afforded to sukuk holders all point to a long and complex process lying ahead.
Vinay, underlining the potential complications currently facing Garuda under Indonesia’s legal framework on sukuks observed: “The Garuda sukuk is unrated and not backed by any government or financial guarantee, it therefore does not receive a guarantee from the Indonesian government for the payment of its interest or principal investment.”
The experts variously comment that there is a clear lack of legal precedents and certainty surrounding this default and as Vinay points out “Indonesian laws have several instruments regulating state sukuks, commonly known as SSNS, where the issuer of the sukuk is the Indonesian government, but regulations specifically for corporate sukuks are very lacking. Even the capital markets, as a broader subject itself, still lack sufficient regulations concerning dispute resolution mechanisms.”