PARIS (Standard & Poor's): Standard & Poor's Ratings Services said today it assigned a 'BB' issue rating on proposed sukuk certificates to be issued by Bereket Varlik Kiralama Anonim Sirketi (the issuer), a special purpose company (SPC) with Albaraka Turk Katilim Bankasi (Albaraka Turk; BB/Negative/B; Turkey national scale trAA-/--/trA-1) as the obligor and managing agent.
The 'BB' rating on the proposed sukuk certificates is based on the 'BB' long-term counterparty credit rating on Albaraka Turk and the draft documentation of the planned issuance dated Nov. 20, 2011 received from the bank. The rating on the proposed certificates mainly reflects Albaraka Turk's irrevocable undertaking to purchase the assets held by the issuer at the redemption date of the sukuk at the exercise price which will be equal to the aggregate face value of certificates outstanding. This obligation will also rank pari passu with all the bank's other senior unsecured obligations.
Under this transaction, the issuer will hold the property of the sukuk assets for the benefit of the certificate holders. The issuer will invest at least 51% of the proceeds received from the issuance of the sukuk certificates in a pool of selected real estate assets owned by Albaraka Turk, namely its headquarters and 19 branches, and the remaining amount in a pool of non-real-estate-based assets, receivables from Albaraka Turk's customers known as murabaha, for a period of time corresponding to the duration of the sukuk. The issuer, as "the lessor", will lease back the real estate assets to Albaraka Turk, as "the lessee" for a period equal to the lifetime of the transaction. Albaraka Turk will then make lease payments every six months to the issuer. These lease payments will serve as the sole basis for the periodic distribution payments payable on the certificates, as the pool of non-real-estate-based murabaha assets will not contribute to the periodic distributions to the certificate holders.
The structure does not include a stand-by liquidity facility, which would otherwise kick in if Albaraka Turk failed to make a lease payment to the issuer to fund the periodic distribution amount due. However, non-payment would force the issuer to redeem the certificates early in compliance with the terms of the purchase undertaking included in the structure. We believe that failure on the part of Albaraka Turk to fulfill its periodic rental payment obligations would also be detrimental to its reputation, business, and ratings.
On the dissolution of the SPC at the sukuk's maturity date or earlier in the event of an early termination, Albaraka Turk undertakes to purchase assets held by the issuer at the exercise price. This payment will fund the dissolution distribution amount that is payable to the certificate holders, and be equal to the aggregate face amount of certificates outstanding.
Albaraka Turk has indicated it is using this sukuk to raise funds for general purposes in accordance with Sharia principles.
The ratings on Albaraka Turk reflect our view of the bank's good track record in Turkey's participation banking market, adequate funding coming from a strong but short-term deposit base, and limited market risk.
Weaknesses for the ratings are the high-risk operating environment in the Republic of Turkey (foreign currency ratings BB/Positive/B; local currency ratings BBB-/Positive/A-3; Turkey national scale trAA+/--/trA-1), the bank's small size and market share, and above-average credit risk owing to its large exposure to small and midsize enterprises (SMEs) and the construction sector. In addition, rapid loan growth constrains the bank's capitalization.
If final documentation differs substantially from the draft version, the rating on the sukuk certificates could be changed. This report does not constitute a recommendation to buy, hold, or sell the certificates.
RELATED CRITERIA AND RESEARCH
- Standard & Poor's Approach To Rating Sukuk, Sept. 17, 2007
- Glossary Of Islamic Finance Terms, Jan. 7, 2008
- Criteria: Financial Institutions: Banks: Banks: Rating Methodology And Assumptions, Nov. 9, 2011
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