The assignment of the final rating is contingent on the successful issuance of the sukuk and final documents materially conforming to information already reviewed.
KEY RATING DRIVERS
The Tier 2 certificates' expected rating is one notch below Kuveyt Turk's 'B+' Long-Term Foreign-Currency IDR (LTFC IDR). We include zero notches for incremental non-performance risk, reflecting that the terms of the certificates do not provide for loss absorption on a going concern basis. We only include one notch for loss severity, reflecting our view that institutional support (as reflected in the bank's LTFC IDR) somewhat mitigates losses, also incorporating that the bank's LTFC IDR is already capped at 'B+', one notch below the sovereign, reflecting our view that government intervention risk, which would impede the bank's ability to service its FC obligations, is more likely than a sovereign default.
Kuveyt Turk's LTFC IDR is driven by institutional support from its higher rated parent, Kuwait Finance House (A+/Negative). We use the LTFC IDR as the anchor rating for the certificates as we believe that potential extraordinary institutional support is likely to flow through to the bank's subordinated certificate holders. Our view of support is based on Kuveyt Turk's strategic importance to its parent, ownership, integration and role within the wider group. Our assessment of Kuveyt Turk's Standalone Credit Profile, which is at the same level as its support-driven LT IDR, is undermined by exposure to heightened operating environment risks.
Fitch has given no consideration to any underlying assets or any collateral provided under the transaction, as we believe that the issuer's ability to satisfy payments due on the certificates will ultimately depend on Kuveyt Turk satisfying its unsecured payment obligations to the issuer under the transaction documents.
In addition to the bank's propensity to ensure repayment of the sukuk, in Fitch's view Kuveyt Turk would be required to ensure full and timely repayment of KT21 T2's obligations due to its various roles and obligations under the sukuk structure and documentation, especially, but not limited to, the features below:
- Pursuant to the servicing agency agreement, Kuveyt Turk as servicing agent will ensure sufficient funds are available to meet the periodic distribution amount payable by the trustee under the certificates on the periodic distribution date. Fitch notes that Kuveyt Turk can take other measures to ensure that there is no shortfall and that funding of the principal payment and the portfolio income is paid in full, and in a timely manner.
- In respect of the Tier 2 certificates, upon the occurrence of any dissolution event, if requested in writing by the holders of at least 25% of the aggregate face amount of the certificates, or by extraordinary resolution, the trustee or the delegate will exercise its rights under the purchase undertaking and the sale and substitution undertaking against Kuveyt Turk and/or institute proceedings for Kuveyt Turk to be declared bankrupt or insolvent, or for there otherwise to be a subordination event, or for Kuveyt Turk's winding-up, dissolution or liquidation, and prove in the winding-up, dissolution or liquidation of Kuveyt Turk.
- On the scheduled dissolution date or upon a dissolution event, (i) the aggregate amounts of deferred sale price then outstanding pursuant to the Murabaha agreement, if any, will become immediately due and payable; and (ii) KT21 T2, acting as trustee will have the right, under the purchase undertaking, to require Kuveyt Turk to purchase all of the trustee's rights, ownership interests, benefits and entitlements in, to and under the wakala assets at the relevant exercise price.
- The outstanding deferred sale price and the exercise price together are intended to fund the dissolution distribution amount payable by the trustee on the scheduled dissolution date, which should equal the sum of the aggregate outstanding face amount of certificates; plus all accrued and unpaid periodic distribution amounts in respect of the certificates.
- Kuveyt Turk's payment obligations in relation to any amount payable in respect of the subordinated Tier 2 sukuk will be direct, unsecured and subordinated obligations to claims in respect of senior obligations, and will at all times rank at least equally with all other subordinated unsecured obligations but in priority in respect of junior obligations.
- If a non-viability event occurs that results in the sukuk certificates being fully written down, the certificate holders' rights to the trust assets will automatically be deemed to be irrevocably and unconditionally cancelled and the certificates will be cancelled and not restored under any circumstances, irrespective of whether the amounts have become due and payable prior to the date of the non-viability event write-down date.
- The transaction documents include an obligation for Kuveyt Turk to ensure that at all times following the issuance date, the tangibility ratio is greater than 50%, meaning that at least 50% of wakala assets (based on portfolio value) must be formed of eligible tangible assets. Failure of Kuveyt Turk to comply with this obligation does not constitute an obligor event, but the service agent must nonetheless take steps to restore the tangibility ratio to over 50%. If the ratio falls below 33%, this would constitute an obligor event.
Fitch expects the tangibility ratio to be maintained at above 50% over the life of the transaction, facilitated by Kuveyt Turk's extensive asset base. For the purpose of this issuance, the bank has identified a pool of about USD230 million of eligible assets, equal to an initial tangible ratio of about 66%. The bank's total pool of eligible assets includes USD1.5 billion of Turkish sovereign sukuk (August 2021) and USD900 million of ijara financing (June 2021), implying strong coverage of the tangibility ratio requirement based on the planned USD350 million issuance size. In addition, Kuveyt Turk has adequate FC liquidity, meaning it should be able to repay the sukuk in full in case of a breach of the tangibility ratio (not our base case).
Certain aspects of the transaction will be governed by English law while others are governed by the laws of Turkey and Cayman Islands. Fitch does not express an opinion on whether the relevant transaction documents are enforceable under any applicable law. However, Fitch's rating on the certificates reflects the agency's belief that Kuveyt Turk would stand behind its obligations.
The intended transaction does not contain physical tangible real estate assets, so no total loss event has been included.
When assigning ratings to the certificates to be issued, Fitch does not express an opinion on the certificates' compliance with sharia principles.
The certificates' rating is sensitive to changes in Kuveyt Turk's LTFC IDR. The rating may also be sensitive to changes to the roles and obligations of Kuveyt Turk under the sukuk's structure and documents. The certificates' rating is also sensitive to a change in notching should Fitch change its assessment of loss severity or relative non-performance risk.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of Kuveyt Turk's LTFC IDR would result in an upgrade of KT21 T2's Sukuk rating. Positive rating action on Turkey's LT IDR or Outlook would likely lead to similar action on the bank's LT IDR. A material improvement in Turkey's external finances or a marked increase in its net FX reserves position, resulting in a significant reduction in our view of government intervention risk in the banking sector, could lead to an upgrade of the bank's LTFC IDR.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of Kuveyt Turk's LTFC IDR would result in a downgrade of KT21 T2's Sukuk's rating. The LTFC IDR is primarily sensitive to Fitch's view of government intervention risk in the banking sector and could be downgraded if we assess this risk as having increased. Negative rating action on the sovereign would likely lead to similar action on the bank.
A reduced likelihood of institutional support from KFH could also put downward pressure on the rating, but the LTFC IDR would only be downgraded if the bank's VR was simultaneously downgraded.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
© Press Release 2021