Sukuk, often referred to as Islamic bonds, have gained significant popularity

in global financial markets over the past decade. However, like any other financial
instrument, sukuk can face default risks due to various factors, such as economic
downturns, issuer-specific challenges, or unforeseen events. In the event of a default,
it becomes necessary to explore alternative approaches to restructure the defaulted
sukuk. This essay will discuss some of the available alternatives in restructuring
defaulted sukuk, considering both Islamic finance principles and conventional
restructuring methods.

1. Negotiated Workout:
One of the primary approaches to restructuring defaulted sukuk is through a
negotiated workout. This involves constructive discussions between the issuer and
sukuk holders to reach a consensus on revised terms and conditions. The process may
include modifying payment schedules, extending maturity periods, or adjusting profit
rates to align with the issuer's current financial situation. This approach allows for
flexibility and customization, ensuring a mutually agreed-upon solution that respects
the principles of Islamic finance, such as fairness and transparency.

2. Debt-to-Equity Conversion:
Another alternative is a debt-to-equity conversion, which involves converting
the defaulted sukuk into equity instruments or shares in the issuing entity. This
approach allows sukuk holders to become partial owners of the issuer, sharing both
the risks and potential rewards. Debt-to-equity conversions can help alleviate the
financial burden on the issuer, strengthen its capital structure, and provide an
opportunity for sukuk holders to participate in the issuer's future growth prospects.

3. Asset Restructuring:
In cases where the issuer's financial distress is linked to specific assets, an
asset restructuring approach may be employed. This involves a comprehensive
evaluation of the issuer's assets and liabilities, followed by strategic decisions to
reorganize and optimize the asset portfolio. By divesting non-performing or
underperforming assets and focusing on core assets, the issuer can improve its
financial position and potentially fulfill its obligations towards sukuk holders. Asset
restructuring aims to enhance the value and quality of the issuer's assets, facilitating
the recovery of funds for sukuk holders.

4. Sale and Leaseback:

Sale and leaseback is another viable alternative in restructuring defaulted
sukuk. This approach involves the sale of assets by the issuer to a third-party investor,
followed by a lease agreement wherein the issuer continues to use the assets while
making lease payments. The funds generated from the asset sale can be used to repay
the sukuk holders partially or entirely, thereby reducing the default risk. The lease
payments serve as a source of income for the investor and allow the issuer to regain
control over the assets once its financial situation improves.

5. Sukuk Buyback:
A sukuk buyback strategy entails the issuer repurchasing the defaulted sukuk
from the market at a discounted price. By doing so, the issuer can reduce its
outstanding debt and potentially improve its creditworthiness. This approach requires
the issuer to have access to additional liquidity or external financing to facilitate the
buyback. The repurchased sukuk can be subsequently restructured or retired,
providing a potential avenue for the issuer to regain market confidence and reestablish
its financial stability.

The conclision, when faced with defaulted sukuk, it is crucial to explore

alternative approaches for restructuring that align with Islamic finance principles and
promote fairness for all parties involved. Negotiated workouts, debt-to-equity
conversions, asset restructuring, sale and leaseback, and sukuk buybacks are some of
the alternatives available. Each approach presents unique advantages and challenges,
and the choice of method depends on the specific circumstances of the issuer and the
sukuk holders. Successful restructuring of defaulted sukuk not only helps resolve
financial difficulties but also reinforces the credibility and resilience of Islamic
finance in the global market.