Standard & Poor’s Ratings Services has assigned its ‘BBB+’ issue rating to the proposed sukuk trust certificates to be issued on April 2, 2013, by SIB Sukuk Company III Limited, a special purpose company (SPC). Sharjah Islamic Bank (SIB, BBB+/Stable/A-2) is the obligor and service agent.
The proposed trust certificates will be issued under the $1.5 billion Trust Certificate Issuance Programme, to which we have also assigned a ‘BBB+’ rating.
“We base the ‘BBB+’ rating on the proposed sukuk trust certificates on the ‘BBB+’ long-term counterparty credit rating on SIB. The rating on the proposed trust certificates reflects the irrevocable undertaking to purchase the assets held by the issuer at the redemption date of the sukuk at the portfolio exercise price, as defined under the purchase undertaking agreement,” S&P in a statement said.
“SIB’s obligation to redeem the sukuk will also rank pari passu with all its other senior unsecured obligations of SIB, which is the main rating factor underpinning our rating on the proposed sukuk. In addition, in the event that the returns generated by the underlying portfolio of assets are insufficient on any periodic distribution date to fund the amount due, the service agent shall use any amounts standing to the credit of the income reserve collection account and, if insufficient funds are available in the reserve account, the service agent may either provide Sharia-compliant funding to SIB Sukuk Company III Limited (the trustee) or procure Sharia-compliant funding from a third-party to be paid to the trustee, in each case in the amount required to ensure that there is no shortfall. We understand there is technically no legally-binding obligation, for Sharia-compliant reasons, for SIB to provide such liquidity. That said, we view positively that SIB is irrevocably committed to buy the underlying assets at the portfolio exercise price at redemption, and that not extending such facility would trigger a default and have a pronounced impact on the bank’s reputation, liquidity, and business position,” it added.
The purpose of this proposed sukuk is to allow SIB to raise funds in accordance with Sharia (Islamic principles), and use them for general funding purposes.
“Under this transaction, the issuer will hold the property of the trust assets, in a trust capacity for the benefit of the certificate holders. The proceeds received from the issuance of the proposed trust certificates will be invested in Sharia-compliant assets, for a period of time corresponding to the duration of the sukuk,” it added.
The yields generated by the pool of underlying assets will be collected by SIB as the service agent of the assets, and will serve as the basis for the periodic distribution payments payable on the trust certificates.
“On dissolution of the trust, which can take place at the maturity date of the sukuk or earlier because of dissolution events occurring, SIB will undertake irrevocably to purchase assets held by the issuer at the agreed portfolio exercise price, which will fund the dissolution distribution amount that is payable to the certificate holders, and which will be equal to the sum of the aggregate outstanding amount of the certificates on the relevant dissolution date, an amount equal to all accrued and unpaid periodic distribution amounts (if any) relating to the certificates and an amount equal to the sum of any outstanding amounts repayable in respect of any liquidity facility and any service agency liabilities.”
“The ratings on SIB continue to derive support from its very strong capitalization, adequate funding and liquidity, and the business and strong financial benefits from having the government of the Emirate of Sharjah (not rated) as its largest shareholder. Constraining rating factors include a geographic footprint limited to the Emirate of Sharjah, high-single name lending concentrations, and albeit improving, challenging operating conditions, still fragile economic environment and high single-name concentrations that notably leave the bank vulnerable to potential unexpected rises in credit risk cost.”
This report does not constitute a recommendation to buy, hold, or sell the proposed sukuk trust certificates.