PARIS: Standard & Poor's Ratings Services said today that it has assigned a preliminary 'BBB+' issue rating on sukuk trust certificates to be issued on May 27, 2011, by SIB Sukuk Company II Ltd., a special purpose company (SPC) with Sharjah Islamic Bank (SIB; BBB+/Stable/A-2) as the obligor and managing agent.
The 'BBB+' rating on the sukuk trust certificates is based on the 'BBB+' long-term counterparty credit rating on SIB. The rating on the five-year $400 million trust certificates reflects the irrevocable undertaking to purchase the assets held by the issuer at the redemption date of the sukuk at a predefined price. This obligation of SIB pertaining to sukuk redemption will also rank pari passu with all other senior unsecured obligations of SIB. This is the key rating factor. In addition, in the event that the returns generated by the sukuk assets (and investments complementing the assets) are insufficient on any periodic distribution date to fund the periodic distribution amount due, the managing agent shall use any amounts standing to the credit of the reserve account and, if insufficient funds are available in the reserve account, the managing agent may make a Sharia-compliant liquidity facility available to SIB Sukuk Company II Ltd. (the trustee) in the amount of the shortfall.
We understand there is technically no legally-binding obligation for SIB to provide such liquidity for Sharia-compliant reasons. That said, we take comfort from the fact that SIB is irrevocably committed to buy the underlying assets at nominal price at redemption, and by the fact that not extending such a facility would trigger a default and have a dramatic impact on the bank's business.
The purpose of this 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 trust certificates will be invested in non-real-estate based ijara (lease financing) assets, for a period of time corresponding to the duration of the sukuk. This pool of assets may be complemented by the managing agent with other Sharia-compliant investments, although not exceeding 49% of the principal amount.
The yields generated by the pool of underlying assets will be collected by SIB as the managing 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 exercise price, which will fund the dissolution distribution amount that is payable to the certificate holders, and which will be equal to the principal of the sukuk.
The ratings on SIB are supported by its very strong capitalization, adequate funding and liquidity, as well as the business and strong financial benefits from having the government of the Emirate of Sharjah (not rated) as its largest shareholder. In our view, SIB's financial performance has shown sound resilience to the regional economic downturn so far, while improving its funding profile. We expect SIB to navigate out of the crisis with a relatively unscathed financial profile. Constraining rating factors include a still fragile economic environment and high single-name concentrations that notably leave the bank vulnerable to potential unexpected rises in credit risk cost.
This presale report is based on information as of May 6, 2011, and is posted in conjunction with the planned issuance of a sukuk (trust certificates) by SIB Sukuk Company II Ltd., a special purpose company (SPC) incorporated in the Cayman Islands, which will enter into a purchase agreement with SIB.
The rating assigned to the trust certificates is preliminary, and based on draft documentation.
Should final documentation differ substantially from the draft version, the rating on the sukuk trust certificates could be changed. This report does not constitute a recommendation to buy, hold, or sell the certificates.
RATINGS LIST
New Rating
SIB Sukuk Company II Ltd.
Senior Unsecured* BBB+(prelim)
*Obligor: Sharjah Islamic Bank
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Press Release 2011
