Fitch assigns 'A+' rating to Saudi Arabia's Sukuk
Fitch Ratings has assigned a final rating of 'A+' to Saudi Arabia's trust certificate programme and US dollar-denominated sovereign global certificates (Sukuk) issued through KSA Sukuk Limited under the programme.
The rating is in line with the expected rating assigned on 4 April 2017 and with Saudi Arabia's Long-Term Issuer Default Rating (IDR) of 'A+' with a Stable Outlook.
KSA Sukuk Limited, registered in the Cayman Islands, is the issuer and trustee and has been incorporated solely for the purpose of the Sukuk transaction. The Sukuk is a hybrid Mudharaba-Murabahah structure.
The Sukuk issuance rating is driven solely by Saudi Arabia's Long-Term IDR, which stands at 'A+' with a Stable Outlook following a downgrade on 22 March 2017. The Sukuk issuance rating is based on Fitch's view that a default of these senior unsecured obligations would reflect a default of Saudi Arabia in accordance with the agency's rating definition.
Fitch has not considered any underlying assets or collateral provided, as we believe the issuer's ability to satisfy payments due on the certificates will ultimately depend on the Saudi government satisfying its unsecured payment obligations under the transaction documents described in the prospectus and other supplementary documents.
In addition to the government's propensity to ensure repayment of the obligations of KSA Sukuk Limited, Fitch believes it would also be required to ensure full and timely repayment of KSA Sukuk Limited's obligations due to its roles and obligations under the Sukuk structure and documentation, especially—but not limited to—these features: on each periodic distribution date, the deferred sale price under each subsequent Murabahah transaction will be payable by Saudi Arabia as the purchaser, which will be sufficient to make payment of each periodic distribution amount payable under that series of trust certificates; on the scheduled dissolution date, the deferred sale prices, due under the initial Murabahah transaction and the then outstanding subsequent Murabahah transaction, will become immediately due and payable and will be sufficient to fund the dissolution amount specified in the final terms and any due but unpaid periodic distribution amounts payable under that series of trust certificates.
Fitch understands that the government of Saudi Arabia's payment obligations associated with the trust certificates are direct obligations of the Government of Saudi Arabia and rank pari passu with all other unsecured external indebtedness of the government of Saudi Arabia.
The Sukuk issuance includes a negative pledge provision that is binding on the government of Saudi Arabia, as well as financial reporting obligations, covenants, government event and cross acceleration terms with other external indebtedness.
Certain aspects of the transaction will be governed by English law, while other aspects will be governed by the laws of Saudi Arabia. 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 the government would stand behind its obligations.
Under the final terms, the Saudi Fund for Development is expected to purchase 5 per cent of the issued tranches of trust certificates and hold such US Retention Interest on an ongoing basis for so long as required by the US Risk Retention Rules. Such retention obligation will commence as of the initial issue date.
Sukuk rated under the programme are rated as originator-backed (or "asset-based"), which are based on the credit characteristics of the Sukuk described in Fitch's Criteria for Rating Sukuk (published 16 August 2016). Fitch's approach to rating originator-backed Sukuk structures is driven solely by the originator's rating (in this case Saudi Arabia), relying on the clarity and strength of the contractual documentation binding Saudi Arabia to the Sukuk obligations, which is explained above. Fitch's Criteria for Rating Sukuk does not apply to "asset-backed" Sukuk, which rely on underlying collateral and assets.
Fitch does not typically regard a deal's risk retention structure as a credit factor. However, Fitch will continue to monitor the evolution of Sukuk structures, including but not limited to credit risk retention, and will communicate the rationale and implications should our approach change.
When assigning ratings to the Sukuk issuance, Fitch does not express an opinion on its compliance with Shari'ah principles.