Wednesday 28, June 2017 by Georgina Enzer

Fitch Rates Bank Jambi's First Sukuk Issuance 'A(idn)'

Fitch Ratings Indonesia has assigned a National Long-Term Rating of 'A(idn)' to PT Bank Pembangunan Daerah Jambi's (Bank Jambi, A(idn)/Stable) proposed Sukuk issuance.

The proposed issuance of MTN Shari'ah Mudharabah I Bank Jambi Tahun 2017 is Bank Jambi's first Sukuk issuance, with a total amount of IDR 120 billion and a maturity of three years from the issuance date. Proceeds from the issue will be used to support the bank's Shari'ah financing growth.

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

The proposed Sukuk is rated at the same level as Bank Jambi's National Long-Term Rating as the risk of default of this senior unsecured obligation is aligned with that of Bank Jambi's in accordance with Fitch's rating definitions.

For this Sukuk issuance, the rating also takes into account the Sukuk's structure and documentation, which include the following features:
- The Sukuk will represent Bank Jambi's unsecured obligations and will rank pari passu with all its other unsecured obligations. The payment obligations under the transaction documents will be direct, unconditional, and irrevocable.
- The amount payable will be the aggregate of the Sukuk's outstanding face amount plus any accrued and unpaid periodic distributions.
- On any periodic distribution date, Bank Jambi will pay the Sukuk holders revenue sharing from the revenues generated from its rupiah financing portfolio, which is intended to be sufficient to fund the periodic distribution amounts payable by Bank Jambi.
- If the Sukuk ceases to be a Shari'ah security, it will be declared in default and will immediately mature and become repayable.

The Sukuk transaction will be governed by Indonesian law. Fitch does not express an opinion on whether the relevant transaction documents are enforceable under Indonesian law, but considers Bank Jambi's intentions to support its Sukuk obligations. Fitch's rating on the Sukuk reflects the agency's belief that Bank Jambi will stand behind its obligations. When assigning ratings to issuances, Fitch does not express an opinion on the structure's compliance with Shari'ah principles.

Bank Jambi's rating reflects Fitch's view that the bank is important to the regional government of Jambi province on Sumatra island. Bank Jambi is owned by the government of Jambi province (26.80 per cent), and by the governments of various municipalities (17.39 per cent) and the governments of various regencies (55.81 per cent) in Jambi province. Although Bank Jambi is a small bank in the Indonesian banking industry (0.1 per cent of system assets at end-2016), it has a strong franchise in Jambi (around 20 per cent market share by assets) and has an important role in supporting development in the region. Based on its regional significance, Fitch expects potential, albeit limited, extraordinary support from the central government due to its lower systemic importance compared with other larger banks in Indonesia.

Any changes in the bank's National Rating would affect the issue rating.

Downward rating pressure on the bank's National Rating may arise from a weakening of the central government's ability or propensity to provide extraordinary financial support to Bank Jambi. However, Fitch believes this to be a remote prospect in the near to medium term. Deterioration in the bank's standalone financial profile is unlikely to impact its National Ratings, as its rating is driven by expectation of support from the government.

Upside potential for the bank's National Rating may arise if Fitch is of the view that the bank's importance to the local economy has increased, such that the central government has greater propensity to provide extraordinary financial support to Bank Jambi. Upside potential may also arise from considerable improvement in the bank's standalone profile, such as if it successfully closes the gap with its larger Indonesian peers in terms of the size of operations, assets and risk management, while maintaining sound asset quality, high core capitalisation and healthy profitability with predominantly low-cost funding base. However, Fitch views this as unlikely to happen into the medium term.

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