PRESS RELEASE: Fitch Ratings: Fitch Ratings has updated its Rating Sukuk criteria. Existing ratings are not affected by the update.
This criteria report describes Fitch’s approach to originator-backed (also called asset-based) sukuk structures, in which investors rely on obligor direct support features. Fitch’s sukuk analysis, as with a conventional bond issue, is driven solely by the originator’s rating, in addition to the clarity and strength of the contractual documentation binding the originator to the sukuk. Without the necessary documentation, in line with Fitch criteria, sukuk could be considered subordinated, or Fitch may choose not to rate the notes at all.
It is also possible for sukuk documentation to be structured as subordinated, short-term or secured claims, and if so they will be rated as such in accordance with Fitch’s established criteria, with such ratings being benchmarked to the IDR of the financial institution, corporate or sovereign. These criteria do not apply to asset-backed sukuk, which rely on underlying collateral.
There remains a lack of legal precedents in terms of effective enforcement in many jurisdictions where sukuk issuance is prevalent. As such, it remains uncertain whether certificate holders will be able to enforce their contractual rights in local courts. Similarly, any opinion from sharia scholars may not be enforced by international and local courts, which may be free to make their own interpretation of sharia law. Scholars may also change their view.
Fitch does not express an opinion on whether the relevant transaction documents are enforceable under any applicable law. However, the agency considers the originator’s intention to support the sukuk and their obligations. Hence Fitch’s rating for the sukuk reflects the agency’s assessment that the originator would stand behind their respective obligations under the documentation.
Sukuk do not have a standard structure and each structure may involve differing underlying contractual arrangements. As a result, each structure has to be reviewed individually to assess whether it fits with the agency’s criteria. Fitch believes that these instruments can be rated, and although the contractual structures add to their complexity, this can be accommodated by the agency’s current rating methodologies and rating scales.
Fitch will monitor the evolution of sukuk structures, particularly towards an increasing acceptance of originator-backed sukuk, or towards an increased focus on asset-backed sukuk with greater reliance on underlying assets and cash flows. Where such developments lead Fitch to modify its approach, the agency will communicate the reasons for, and the consequences of such modifications to market participants.