Tuesday 27, December 2016 by Robin AmlĂ´t

Moody's assigns (P)A3 to Africa Finance Corp's Sukuk certificates

Moody's Investors Service has assigned a provisional (P)A3 senior unsecured rating to the AFC Sukuk Company, a special purpose vehicle (SPV) established in the Cayman Islands by the Africa Finance Corporation (AFC).

“The AFC's milestone sukuk offering reflects the continued interest in Islamic capital markets as a source of funding in Sub-Saharan Africa,” commented Zuzana Brixiova, Vice President and Senior Analyst at Moody's Investors Service. “The Sukuk issuance diversifies AFC's investor base while proceeds will help the Corporation to respond even more effectively to a growing demand for infrastructure financing from its member countries.”

RATINGS RATIONAL

The (P)A3 rating assigned to the Sukuk certificates is at the same level as the long-term issuer rating of the AFC, as the Sukuk certificate holders will (i) effectively be exposed to the AFC's senior credit risk; (ii) not be exposed to the risk of performance of the portfolio assets relating to the certificates; (iii) will not have any preferential claim or recourse over the SPV's Assets, or rights to cause any sale or disposition of its assets except as expressly provided under the Transaction Documents; and (iv) only have rights against the AFC, ranking at least pari passu with all other present and future senior unsecured and unsubordinated obligations of the AFC as provided in the Transaction Documents.

Moody's also notes that its Sukuk rating does not express an opinion on the structure's compliance with Shari'ah law, and for this it refers to the Murahaba Agreement and other Transaction documents as well as related legal opinions as provided by the AFC. The proceeds of the Sukuk certificates will be used by the SPV (Issuer) to acquire a portfolio of assets (represented by certificates purchased on the Nasdaq Dubai Murabaha Platform). These certificates will then be sold to the AFC on a cost plus mark-up basis payable on deferred terms. AFC shall then onsell the certificates to the Nasdaq Dubai Murabaha Platform for the cost price of the certificates. The AFC will make periodic payments to the SPV in accordance with the Murahaba agreement during the tenor of the Sukuk certificate and one-time payment at redemption. If there is a shortfall between the amounts collected and the amounts due, then the AFC will pay further amounts to remedy such shortfall to avoid a dissolution event.

The AFC's A3 rating balances its sound capital adequacy and high liquidity with the challenges posed by a planned expansion that will likely expose it to economic and political risk. The MDB has had no non-performing loans and has only a small impairment provision on its balance sheet. Its stringent prudential ratios help reduce the credit risk stemming from its growing portfolio. This is reinforced by a sound, multi-layered risk management and governance framework. However, the AFC's member support is "Very low" as the shareholders' and borrowers' commitment to the organization is relatively weak. AFC's shareholders are not contractually committed to provide capital to the MDB in case of stress or liquidity challenges.

The outlook on AFC's A3 rating is stable. AFC's strong capital and liquidity positions should enable it to continue expanding its lending operations across Sub-Saharan Africa and withstand an occasional scenario of moderate market and/or credit risk that may arise along the way.

FACTORS THAT COULD LEAD TO AN UPGRADE

Upward pressure could develop on AFC's rating should it experience a continued rise in profitability without a deterioration of asset quality. Furthermore, over time, sustained strengthened (contractual) and broadened members' support as well as increasing the number of shareholders could also put upward pressure behind the rating.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Downward pressure could develop on AFC's rating should it experience a substantial shock to its capital adequacy, liquidity, or member support.  Applicable scenarios could include (1) an excessively rapid expansion in its loan book (or leverage) that results in a sustained spike in NPLs (or increasingly onerous debt service payments); or (2) a sustained deterioration in country or regional economic conditions that materially restricts AFC's access to market funding and/or support from key members, in case of need.

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