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Bahrain - A proposed Islamic finance standard could upend sukuk structures, potentially leading to restructurings, according to S&P Global Ratings.
The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)’s Sharia Standard 62, if adopted, could give issuers with financial difficulties a new tool to renegotiate existing sukuk, the ratings firm said in a report.
AAOIFI is a Bahrain-based standard setting body for the Islamic finance industry.
Sukuk defaults are rare, particularly for those denominated in hard currencies. But the proposed standard could change that dynamic, said S&P analyst Mohamed Damak.
“Companies with unsustainable debt levels or liquidity issues could use the change in Sharia requirements as an argument to restructure their outstanding sukuk.”
While new standards typically don’t affect existing contracts, Sharia Standard 62’s adoption could lead to differing treatment of sukuk holders in default scenarios compared to other creditors.
The ultimate treatment of sukuk holders would depend on the underlying assets and their ability to liquidate them. S&P expects some instances of restructuring, especially for companies facing financial distress.
However, issuers are likely to avoid restructuring based on Sharia changes to maintain market access and avoid triggering cross defaults.
As of August 15, 2024, nine per cent of S&P-rated sukuk were speculative-grade.
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