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Fitch Rates Ras Al Khaimah's RAK Capital Upcoming Trust Certificates 'A(EXP)'
October 7, 2013 / 3:02 PM / 4 years ago

Fitch Rates Ras Al Khaimah's RAK Capital Upcoming Trust Certificates 'A(EXP)'

LONDON/BANGKOK/HONG KONG, October 07 (Fitch) Fitch Ratings has assigned RAK Capital's forthcoming issue of USD trust certificates (sukuk) an expected senior unsecured 'A(EXP)' rating. The sukuk will be issued under RAK Capital's certificates issuance programme under which total issuance may be up to a maximum USD2bn equivalent. The final rating is contingent on the receipt of final documents conforming to the information already received. RAK Capital is a special purpose company incorporated in the Cayman Islands whose sole purpose is to participate in transactions of this type. The rating reflects Fitch's judgement that the sukuk can be considered an unconditional, unsubordinated and general obligation of the Government of Ras Al Khaimah (RAK), ranking equally with RAK's other senior unsecured obligations. The rating is therefore in line with RAK's 'A' Long-Term foreign currency Issuer Default Rating, on which the Outlook is Stable Fitch last affirmed RAK's ratings on 5 April 2013. KEY RATING DRIVERS The ratings balance the benefits of RAK's membership of the UAE and its low debt and strong fiscal current surplus against weaknesses in the macro policy environment and in data quality. - RAK benefits from the UAE's highly rated operating and external environment, which is underlined in a Country Ceiling of 'AA+', and supported by Abu Dhabi's (AA/Stable) oil income and wealth. External finances do not constrain RAK's rating at the current level. Potential exceptional support from the Federal Government (FG), were it to be needed, is not factored into the ratings. - The government is small with fiscal revenue at less than 20% of GDP. Most basic public services and infrastructure are provided directly by the FG, relieving RAK from many of the obligations of a normal sovereign. - Gross debt ratios are significantly lower than 'A' category medians. Gross debt rose slightly in 2012 but at 23.7% of GDP is less than half the current peer group median. On current borrowing plans, debt could fall below 20% of GDP in 2014. In the absence of a developed domestic capital market, debt is mostly (85%) foreign currency and externally issued. - RAK runs a current budget surplus (excluding capex and financial investments). It was 6.5% of GDP in 2012, equal to the decade average. Planned investment can be financed without incurring deficits or net new debt. - Debt management has improved and debt has fallen since 2009, when a heavy investment programme as well as support for SOEs in the wake of the Dubai crisis caused debt to peak at 31% of GDP. Debt is now largely centralised and the government compiles quarterly financial statements for the overall public sector. Although sovereigns usually report at the central or general government level, for RAK, where SOE revenues and performance are crucial to fiscal and economic development, this provides assurance that SOEs are well managed and will not over-borrow. - Reliance on revenue from fee and lease income means revenue can be highly volatile. SOEs contribute almost 60% of budget revenue, although their activities are diversified. - GDP growth is estimated by Fitch at an average 4.5% over the past three years, exceeding 'A' category peers. However, national accounts data are weak and lack of other high frequency data make tracking the economy difficult. The government is devoting more resources to data provision, but is hampered to some extent by weaknesses at the FG level. - Monetary policy is a federal responsibility. The long-standing peg to the USD has brought stability, but real interest rates have been negative for a prolonged period and have at times fuelled speculative activity. Inflation is generally higher and more volatile than peers. - Like other sovereigns in the region, voice and accountability and institutional checks on the executive are weak compared with peers. However, a newly created executive council will help institutionalise decision-making and reduce reliance on individuals. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. - Improved macro-economic data that would help monitor the progress of RAK's business model in raising per capita incomes and job creation may result in a positive rating action. - Lower debt and strengthened fiscal buffers would be beneficial for the ratings, given past volatility of revenue streams. By contrast, a weakening in public finances not associated with capital projects and if sustained for a prolonged period would bring downward rating pressure. KEY ASSUMPTIONS - The current political and financial relationships linking individual emirates within the UAE federal system are assumed to be maintained. In particular, no weakening of support from the FG and Abu Dhabi for the smaller emirates is envisaged - No challenge to the rule of the royal family or the current succession - RAK is in a volatile region and its rating factors in existing tensions and conflicts which are assumed to continue but not materially worsen. However, there is a risk that the UAE could become entwined in hostilities in the event of an Israeli and/or US military strike on Iran. The impact on RAK in such a scenario is assumed to be limited. In particular, prolonged closure of the Straits of Hormuz is regarded as a low probability event. Contact: Primary Analyst Richard Fox Senior Director +44 20 3530 1444 Fitch Ratings Ltd 30, North Colonnade London E14 5GN Secondary Analyst Paul Gamble Director +44 20 3530 1623 Committee Chairperson Douglas Renwick Senior Director +44 20 3530 1045 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Rating Sukuk' dated 9 August 2013, are available at Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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