Link to Fitch Ratings' Report: Rating SukukAug 16 - Fitch Ratings has updated its Rating Sukuk criteria. The updated do
not contain any significant changes and will have no impact on existing ratings.
These criteria apply to originator-backed (also called asset-based) sukuk
structures, in which investors rely upon direct support features (i.e.,
repurchase agreements and liquidity arrangements) as well as upon the
originator/issuer's ability to generate profits with the assets. The criteria do
not apply to asset-backed sukuk, which rely on the underlying collateral.
The report outlines Fitch's approach to rating sukuk, which are often referred
to as "Islamic bonds" and represent undivided shares in the ownership of
tangible assets, including the assets of particular projects or investment
activities, and usufruct (the right to use the assets). Sukuk constitute a
beneficial ownership interest, not a debt. Each holder is entitled to an agreed
return and will bear any losses in proportion to the certificates owned.
Fitch analyses the structure of the underlying transaction(s) to understand and
evaluate the contractual cash flows. Sukuk are typically structured around
contractual arrangements formulated according to Islamic law ("sharia") and have
been developed as an alternative to traditional debt instruments. Sukuk are
based on traditional Islamic contract structures such as ijara (similar to
Instead of interest, which is unacceptable under sharia law, an investor
receives a share of the profits generated by the underlying assets being
financed. Fitch believes that these instruments can be rated, and, although the
contractual structures referred to above add to the apparent complexity, the
agency's current rating methodologies and rating scales can accommodate this.
In the case of originator-backed/asset-based sukuk, Fitch looks through the
structure of the sukuk to ensure that there is recourse to the originator of the
transaction. The rating is benchmarked to the rating of the originator and, in
the case of a senior unsecured obligation, the rating would typically be in line
with the originator's Issuer Default Rating.
Ratings assigned to sukuk do not imply any confirmation that the sukuk are
sharia-compliant. While there is broad agreement on sharia principles, there are
differences of interpretation which the agency would not be in a position to
anticipate or assess.
While the report focuses on Fitch's recent experience, Islamic finance is in
continuous evolution. Fitch will continue to monitor developments and will
review its criteria to reflect any future changes.
The report entitled 'Rating Sukuk' is available at www.fitchratings.com and
replaces the report of the same name dated 16 August 2011.Additional information is available on www.fitchratings.com