RATING APPROACH
RATING APPROACH
TO SUKUK: TO SUKUK:
A MARC
PERSPECTIVE
A MARC
PERSPECTIVE
MALAYSIAN RATING CORPORATION BERHAD
Company No.: 364803 V
RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
(November 2008)
Contact:
Milly Leong
Chief Rating Officer
[email protected]
+603 2092 5398
www.marc.com.my
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RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
OVERVIEW
MARC regards ‘Sukuk’ as certificates of investment. Our view of Sukuk falls in line with that of
the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) which
defines Sukuk as certificates of equal value representing undivided shares in ownership of
tangible assets, usufruct (legal right to derive profit from property), and services or in the
ownership of the assets of particular projects or special investment activity’. Depending on the
basic structure of the Sukuk, the Sukuk can exhibit characteristics of debt and/or equity or
asset-backed securities if securitisation elements are present.
Since 2001, MARC has also been assigning Islamic Sukuk ratings to fixed income Sukuk
issuances. In common with MARC’s conventional debt and Islamic debt rating scales, the longterm Sukuk rating scale comprises eight rating categories ranging from 'AAAIS' to 'DIS', while
the short-term rating scale ranges from 'MARC-1IS' to 'MARC-DIS'. The differentiated Sukuk
rating scale is consistent with our view that Sukuk are supposed to represent ownership
interests in underlying asset(s) and the resulting returns from the asset(s).
Prior to AAOIFI’s pronouncement on Sukuk in February 2008, equity participation Sukuk based
on Mudarabah and Musyarakah contracts have typically been configured in a manner which
provides recourse to the borrower/originator through an undertaking to repurchase the
underlying assets at a price representing the face value of the Sukuk at maturity or following
an event of default. Shortfalls in periodic distribution amounts are similarly covered by the
originator/borrower in the event insufficient returns are generated by the Sukuk assets. The
pre-determined periodic distribution and redemption amounts for all MARC-rated Sukuk have
allowed us to use conventional corporate debt, project finance or structured rating
methodology to rate these transactions. AAOIFI’s February 2008 pronouncement on Sukuk has
far-reaching implications for the structuring of Syariah-compliance Sukuk as well as the rating
approach for future structures.
AAOIFI’S PRONOUNCEMENT ON SUKUK
In late 2007, Chairman of the AAOIFI board of scholars, Sheikh Mohammed Taqi Usami
declared that some 85% of outstanding Sukuk had failed the Syariah-compliance test on the
basis that they were ‘asset-based’ rather than ‘asset-backed’ with the guaranteed return of the
face value of the Sukuk on maturity and in the absence of a transfer in asset ownership to
Sukukholders. The rating agencies, MARC included, have long recognised the distinction
between ‘asset-based’ and ‘asset-backed’ Sukuk, as indicated by their selective application of
asset-backed securities rating methodology to Sukuk transactions.
A more detailed pronouncement was issued by the AAOIFI in February 2008 which establishes
stricter guidelines for the issuance of Sukuk as summarized below:
1)
Sukuk issuances have to be backed by real assets, the ownership of which has to be
legally transferred to Sukukholders in order to be tradable;
2)
Sukuk must not represent receivables or debts, except in the case of a trading or
financial entity selling all its assets or a portfolio with a standing financial obligation, in
which, some debts owing by third parties, incidental to physical assets or usufruct, are
unintentionally included;
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RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
3)
The Manager of the Sukuk is prohibited from extending “loans” to make up for the
shortfall in the return on the assets, whether acting as a Mudarib (investment manager),
or Sharik (partner) or Wakil (agent);
4)
Guarantees to repurchase the assets at nominal value upon maturity with the exception
of Sukuk Al-Ijarah (leaseback) structures are also prohibited; and
5)
Closer scrutiny of documentation and subsequent execution of the transaction is required
of Syariah Supervisory Boards (SSBs).
A predictable outcome of the stricter principles for Sukuk issuance would be an increasing
trend towards securitisation, and perhaps emergence of variable-income Sukuk which reflect
risk participation in project outcomes or asset performance. The performance of post-AAOIFI
pronouncement Sukuk issuances will depend less on the creditworthiness of the
originator/borrower and more on the performance of the assets or project as in the case of
asset-backed securities or non-recourse project financing. MARC views infrastructure projects
generating predictable cashflows as appropriate for risk participation Sukuk based on
Mudarabah and Musyarakah contracts. These include mature toll roads, water treatment
facilities and certain power projects.
MARC believes that there will be eventually a need to differentiate fixed-income from variableincome Islamic financial instruments from a rating perspective, particularly in light of the
differences in the degree of security of principal and predictability of financial returns. The
rating opinion which we provide on fixed-income Sukuk issues focuses on timely payment. In
the case of variable income financial instruments, we believe that the investment quality should
take precedence over the likelihood of full and timely payment given the predominant equity
characteristics of such instruments.
MARC’S GENERAL RATING GUIDELINES FOR SUKUK
The analytical components in the rating of a Sukuk transaction are:
1) Analysis of the basic structure of the Sukuk – MARC’s evaluation of a Sukuk structure
revolves around its structuring intent, i.e. whether an issue is structured as an assetbacked transaction (in which case it would reflect the performance of the securitised
assets) or to achieve a flow-through of the rating of the originator/borrower or third-party
obligor(s) or guarantor to the Sukuk. The structure of the Sukuk will have significant
impact on the risk profile of the Sukuk and determines the rating methodology to be used
(conventional corporate and project finance rating methodology or asset-backed
methodology).
2) Assessment of key transaction parties - MARC considers the roles of key participants in the
transaction: originator/borrower, lessee(s) or obligor(s), guarantor(s), contractor,
servicer/back-up servicer as well as the credit quality of each participant and ability to
perform their roles, and the corresponding implications of such for the risk profile of the
Sukuk. A shadow rating may be performed on key participants where MARC believes their
credit quality to be an important driver of the rating of the Sukuk issued.
3) Asset and cashflow analysis – This analysis is the most important driver of the ratings
assigned to ‘asset-backed’ and non recourse or limited recourse project finance Sukuk.
Some Sukuk are structured with external liquidity support and/or reserve accounts to
mitigate interim deficiencies in returns from the assets. Alternatively, the deficiency may be
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RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
a direct and irrevocable obligation of the originator as Manager of the Sukuk, as in existing
‘asset-based’ Sukuk transactions. The valuation of the asset(s) forms an important part of
MARC’s review where redemption of Sukuk is to be partially or wholly derived from
refinancing or disposal of the asset(s) to third parties.
4) Assessment of credit enhancement and structural protections – MARC assesses the internal
credit enhancements such as reserve accounts, payment waterfalls and collateral value in
addition to external credit support which may be provided by the originator/borrower or
third party guarantor(s).
5) Legal analysis – The perfection of legal interest in the underlying assets and the insulation
of the assets from insolvency or reorganization of the originator/seller are important not
only in the context of any securitisation but also from the perspective of any secured
financing. The terms under which the Sukuk are issued may specify certain ‘trigger’ events
that, if they occur, would cause the transaction to be wound down. These could include
failure of the lessee to make required lease payments under a Sukuk Al-Ijarah structure,
and certain events of insolvency and default connected with the lessee. In Sukuk structures
involving a SPV issuer, MARC will consider the bankruptcy remoteness of the SPV and the
limitations on the business activities of the SPV.
Syariah-compliance is fundamental to the issuance of Sukuk, and sets the issuance of Islamic
capital market instruments apart from conventional debt instruments. Reflecting this view, the
domestic regulatory framework for the issuance of Islamic securities in Malaysia requires the
appointment of Syariah advisers to advise on all aspects of Islamic securities and to ensure
compliance with applicable Syariah principles and relevant resolutions and rulings made by the
Securities Commission’s Syariah Advisory Council. MARC opines that Syariah compliance is
generally adequately addressed by the appointed Syariah panel of the issuer’s lead arranger(s)
and financial advisors.
SUKUK STRUCTURES RATED BY MARC
MARC has rated a total of 47 issuances of RM-denominated Sukuk since 2001 with an
aggregate value of RM11.57 billion as well as the ground-breaking USD368.0 Million Sukuk AlIjarah issuance by First Global Sukuk Inc in 2001 (under MARC International, a subsidiary of
MARC). First Global Sukuk Inc was the first USD-denominated Sukuk issuance involving a
corporate, Kumpulan Guthrie Berhad. The complete listing of Sukuk issues rated by MARC to
date is provided in Appendix B. In this section of our methodology report, key highlights of
Sukuk transactions we have rated are provided.
I.
Sukuk Al-Ijarah Structure
MARC has rated a number of Sukuk Al-Ijarah structures, all of which have involved an
issuer SPV, usually a wholly-owned subsidiary of the Seller of the assets. The SPV
funds the purchase of the assets by issuing Sukuk which represents beneficial
ownership in the assets. The assets are leased to entities affiliated to the Seller or to
the Seller in exchange for periodic rental payments which are matched to the periodic
distributions under the Sukuk. The Seller issues a Purchase Undertaking to repurchase
the SPV’s interest in the asset on maturity or any interim date at a pre-determined
price. At maturity or on a dissolution event, the SPV sells the asset(s) back to the Seller
and redeems the Sukuk.
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RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
a)
Asset-based Sukuk Al-Ijarah
Ingress Sukuk Berhad (Ingress Sukuk), a SPV issuer of RM160.0 million Sukuk
Al-Ijarah Programme (current issue rating: AIS/MARCWatch Negative), is a
wholly-owned subsidiary of Ingress Corporation Bhd (Ingress). Ingress Sukuk
was incorporated as a SPV to facilitate the sale and leaseback of certain
identified assets for the Sukuk Al-Ijarah issuance. The Sukukholders hold
undivided proportionate beneficial ownership of the assets. Ingress is
principally an investment holding company with subsidiaries primarily involved
in automotive components manufacturing, with increasing exposure in power
engineering and railway electrification and to a smaller extent, the oil and gas
sector. A purchase and sale undertaking is exercisable by both Ingress and
Ingress Sukuk for the redemption of the Sukuks at the maturity of the issuance
or upon occurrence of a dissolution event or an event of default to repay any
outstanding balance. The Sukuk Al-Ijarah was rated at the same level as the
rating on the lessee. The rating is indistinguishable in terms of priority with
conventional debt-based financing at Ingress’ level. Additionally, under the
terms of the Sukuk issuance, certain financial covenants have to be complied
with at group level (Ingress).
Exhibit 1: Ingress Sukuk Berhad Transaction Structure
Sukukholders
Periodic and dissolution
distribution amount
Sukuk Proceeds
INGRESS
CORPORATION
BERHAD
[as Seller]
Assets
Net Proceeds
INGRESS
SUKUK
BERHAD
[Issuer]
Leases back
assets and sells
on dissolution
event
INGRESS
CORPORATION
BERHAD
[as Lessee]
Periodic lease
payments and
exercise price
Issuer will transfer assets to Obligor/Lessee in exchange for Exercise Price, the
proceeds of which will be used for Sukuk redemption on occurrence of
Dissolution Event, Event of Default or at maturity of the lease.
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RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
b)
Asset-backed Sukuk Al-Ijarah
A bankruptcy remote special purpose vehicle, ABS Logistics Berhad (ABS
Logistics) issued Sukuk under a programme which consisted of RM100.0
million nominal value Class A, RM20.0 million nominal value Class B and
RM40.0 million nominal value of Class C Senior Sukuk, RM44.5 million nominal
value Class D Mezzanine Sukuk and RM95.5 million nominal value Class E
Subordinated Sukuk. (The Class D and Class E Sukuk are unrated.) ABS
Logistics acquired a portfolio of 23 warehouses from integrated logistics
provider, Tiong Nam Logistics Holdings Berhad (Tiong Nam) and/or its
subsidiaries for RM191.5 million. It then entered into an Ijarah (lease)
agreement with Tiong Nam Logistics Solutions (TNLS) for a period of up to ten
years.
Periodic distributions and capital repayments on the Sukuk are funded by
monthly Ijarah rentals made by the lessee during the tenure of the transaction
as well as the proceeds from either the repurchase of the properties via a call
option exercised by the lessee or sale of the properties to third parties prior to
the final legal maturity. The call option’s exercise price will be the higher of the
market value of the properties and the aggregate amount required to redeem
all the outstanding Senior Sukuk and any accrued profit.
The securitised properties comprising of 23 industrial warehouses located in
seven states, had an estimated occupancy rate of 82.7% at the time of MARC’s
September 2008 review. The portfolio is exposed to moderate concentration
risk with its top ten tenants contributing 32.0% of its total rental revenue. The
Ijarah rentals are, however, fixed for the purposes of the transaction
irrespective of the actual rental collections at TNLS which would be a function
of rental rates in the warehouse market as well as actual occupancy rates at
the 23 warehouses.
The approach taken to rate ABS Logistics’ Class A, Class B Senior Sukuk was
firstly to estimate the net cash flow (NCF) that could be generated by the
securitised properties on a sustainable basis, looking through property market
cycles. Once the sustainable cashflow was determined, MARC applied a
capitalization rate of 10% to arrive at the DCF valuation of the property. The
DCF valuation was then used to size the Class A and Class B Senior Sukuk
tranches, based on applicable loan-to-value (LTV) limits for the target rating
levels of AAAIS and AAIS respectively. The decision to apply asset-backed
methodology was predicated on elements of securitisation being present in the
transaction, including the ‘true-sale’ of the warehouses and the option to sell
the properties to third parties. The rating of the Class C Senior Sukuk,
meanwhile, reflects an unconditional and irrevocable guarantee provided by
Malayan Banking Berhad.
The amortising structure of the Sukuk significantly reduces refinancing risk
with projected LTVs for Class A and B Senior Sukuk Ijarah reducing to 25.3%
and 37.9% respectively at maturity. Of the RM100.0 million of Class A Senior
Sukuk, RM60.0 million is expected to be paid down prior to its final legal
maturity. Including the projected reserve account balance of RM3.55 million
and collection account balance of RM11.3 million at the end of year 10, the net
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RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
amount of Class A and Class B exposed to refinancing risk prior to their
respective final legal maturity will be a modest RM45.2 million.
MARC also carried out a shadow rating on Tiong Nam consistent with our
guidelines for property-backed transactions in which there is a single
seller/lessee or the lessees are affiliated to the seller. MARC requires the lessee
to be rated at least A- for any structure that has AAA tranche(s).
Exhibit 2: ABS Logistics Berhad Transaction Structure
Senior
Sukukholders
Mezzanine
Sukukholders
Sukuk Proceeds
Warehouses
Tiong Nam
Logistics Berhad
and subsidiaries
[Sellers]
Subordinated
Sukukholders
Periodic
distributions
ABS
LOGISTICS
BERHAD
[SPV Issuer]
Net Proceeds
Leases assets
Tiong Nam
Logistics
Solutions
[Lessee]
Monthly Ijarah
rentals
Call option to
purchase assets
II.
Sukuk Al-Musyarakah Structures
MARC has also rated a number of Sukuk-Musyarakah transactions, the majority of
which have involved SPV issuers. In Malaysia, the application of the Musyarakah
structure can be found in a wide range of Sukuk transactions including receivablesbacked issuances, project financing and contract financing. The typical transaction
configuration of Sukuk Musyarakah in our rating universe is as follows: Investors enter
into one or a series of Musyarakah ventures (partnership agreements) between
themselves to finance the Musyarakah venture. The Musyarakah venture could take
the form of undertaking a construction contract or supplying contracted equipment and
services in return for deferred payments or financing the construction of assets in
return for a fixed stream of lease payments or deferred payments.
The Musyarakah appoints the issuer to carry out the venture in an agent’s capacity and
to receive the capital contribution in Musyarakah. The issuer issues Sukuk Musyarakah
in return for the capital contributions. The issuer could be a SPV or the corporate itself.
Where the issuer is a SPV and the transaction involves the financing the construction of
assets, there could be a back-to-back arrangement with a corporate related to the SPV
to construct the asset. Upon completion of construction, which would be funded from
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RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
the Sukuk issuance proceeds, the assets will be leased to the corporate with the lease
payments sized to cover the return on the Sukuk and principal repayment of the Sukuk
on the scheduled dissolution date of the respective Musyarakah ventures. The
corporate also irrevocably undertakes to purchase the Sukuk upon occurrence of a
scheduled dissolution or dissolution event. MARC has also rated a transaction in which
the completed asset would be sold to the corporate in exchange for deferred
payments.
a)
Sukuk Musyarakah without Purchase Undertaking
Matang Highway Sdn Bhd (Matang), a wholly-owned subsidiary of Zecon
Berhad (Zecon), was established with a single purpose to undertake the
issuance of RM70.0 million Sukuk Musyarakah (rated AA-IS/Stable). The
proceeds from the Sukuk were used to refinance Zecon’s existing debts and to
finance working capital requirements for the turnkey contract awarded by
Jabatan Kerja Raya Sarawak (JKR Sarawak) to Zecon for the design and
construction of a highway linking Kuching City to the State of Sarawak’s
proposed new Federal Administrative Centre (FAC) (Matang Route Project).
Matang and Zecon entered a Mudarabah arrangement under which Matang
acts as capital provider for the turnkey contract and Zecon, as the
entrepreneur. Sukukholders invest in trust assets comprising Matang’s rights,
entitlements, benefits and interest under the turnkey contract, the designated
accounts under the proposed issue structure and other permitted investments.
Cashflows generated from construction under the turnkey contract funds profit
payments and capital repayments under the fully amortising three-year Sukuk.
The rating and rating outlook on the Sukuk Musyarakah are based on the
credit quality of the sole obligor, JKR Sarawak, and the continuing performance
of Zecon under the turnkey contract. MARC’s assessment of obligor credit
quality took into consideration the prompt payment record of JKR Sarawak
under the turnkey contract and the implicit government support for the Federal
Government-approved project. Consideration was given to protective
covenants under the proposed issue structure and the designated accounts
capture construction receipts in respect of the turnkey contract. Unlike other
earlier Sukuk Musyarakah structures rated by MARC, this financing structure is
essentially non-recourse to the originator of the trust assets. This, as well as
the moderate credit standing of its originator/shareholder, Zecon, which is also
the contractor for the Matang Route Project were moderating factors for the
rating. Additionally, the Musyarakah venture bears the risk of construction cost
overruns which MARC believes to be satisfactorily addressed by the margin of
safety built into the contract price.
The project scope has undergone some revision from the time it was originally
awarded in July 2002. In August 2007, project was revised to comprise two
phases, OMR and the Revised Matang Route (RMR). The first phase, OMR, is 1
18-km stretch which carries a fixed contract price of RM201.21 million while
RMR, the second phase, is a 13.4-km stretch with a fixed contract price of
RM124.15 million. Construction progress on the highway as at the time of our
initial rating was assessed to be supportive of the overall construction schedule
of the project and the scheduled completion dates of December 2008 for the
OMR and March 2011 for the RMR.
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RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
Exhibit 3 : Matang Highway Transaction Structure
Musyarakah Venture
Mudarabah Venture
Assignment of contractual
rights to SPV
Trustee
Issues
Sukuk
Musyarakah
Sukuk
Investors
Agent
Matang
SPV Issuer
[Rabb al-mal]
Finances
project
Zecon
[Mudarib]
Performance of
project
Project
Sukuk
Proceeds
Remittance of
construction
receipts
Profit
payment
and capital
repayment
JKR
Sarawak
[Obligor]
Designated
Accounts
b)
Receivables-backed Sukuk Musyarakah
Musyarakah One Capital Berhad’s (Musyarakah One) RM2.5 billion Sukuk
Musyarakah Programme provides an example of a receivables-backed sukuk
issuance rated on the basis of the credit quality of the sole obligor, the
Government of Malaysia (GOM). The receivables backing the sukuk constitute
irrevocable and unconditional obligations of the GOM.
Musyarakah One is a special purpose vehicle incorporated for the purpose of
issuing sukuk musyarakah to finance the acquisition of receivables from TIME
Systems Integrators Sdn. Bhd. (TSI). Under the RM2,500 million Sukuk
Musyarakah Programme (the Programme), government receivables generated
from TSI’s supply contracts may be sold to Musyarakah One via an absolute
legal assignment, on a periodic basis. Investors in the Sukuk Musyarakah are
beneficial owners of the receivables.
The receivables comprise the rights, title, interests and benefits to the GOM’s
payment obligations to TSI, pursuant to the contract and letter(s) of award to
supply teaching equipment and for the provision of related services to various
schools and certain government areas (if any), from time to time, in
implementing a programme for teaching Science and Mathematics in English.
Subsequent to each delivery of equipment and/or services, the GOM issues a
Sijil Utama, which stipulates the contract sum payable by the GOM as well as
the repayment schedule in respect of the contract sum, which will be on a
deferred payment basis. The Sijil Utama represents the GOM’s irrevocable and
unconditional obligation to pay the agreed contract sum in accordance with the
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RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
stipulated schedule without any right of set-off or provision for acceleration in
the event of default under the Programme.
Sukukholders are not exposed to performance risk as receivables are
securitized subsequent to delivery, installation, testing and commissioning of
teaching equipment. In addition, the GOM does not have the right to set-off
any claims against the securitized receivables. The payment profile for the
Sukuk mirrors the payments from the GOM under the Sijil Utama.
Exhibit 4 : Musyarakah One Transaction Structure
Government of
Malaysia
[Obligor]
Direct
payment to
designated
account
Supply of
teaching
equipment
and services
Time Systems
Integrators
[Originator]
Holds Security on
behalf of Sukuk
Musyarakah holders
Profit and Capital
Repayment
Sale of Deferred
Receivables
Musyarakah One
[SPV Issuer]
Issues
Sukuk
Musyarakah
Sukukholders
Proceeds
Provision and
repayment of
bridging loan
Bridging
Lenders
c)
Sub-lease backed Sukuk Musyarakah
Under the Putrajaya Holdings Sdn Bhd's (PjH) up to RM1.5 billion Nominal
Value Sukuk Musyarakah Medium Term Notes Programme (rated AAAIS
/Stable), a Musyarakah Venture was formed to invest in the trust asset
comprising PjH's rights, entitlements and benefits under a sub-lease
agreement with the Government of Malaysia (GOM) in relation to 15 blocks of
fully completed government buildings referred to as Parcel E.
PjH is the concessionaire and developer of Putrajaya, Malaysia's Federal
Administrative Capital. Under a concession agreement and supplemental
concession agreement with the GOM, PjH has a contractual obligation to
construct government buildings in return for a 25-year lease of the buildings
and land. The buildings and land are sub-leased to the GOM upon completion
for a corresponding 25-year period for specified rental income streams with
provisions for upward revision of rental. Maintenance of the buildings will be
undertaken and borne entirely by the GOM.
PjH holds the trust asset on trust absolutely for itself and consequently for the
Sukukholders. The latter are entitled to one off distributions and/or periodic
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RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
distributions from the sub lease payments from the GOM based on a preagreed ratio. Should the sub-lease payments from the GOM fall short of the
expected return, PjH has to cover shortfalls. The Sukukholders shall pay any
return above the expected return to PjH, the appointed manager of the
Musyarakah Venture, as incentive fee.
PjH also provides a purchase undertaking to purchase the sukuk from the
trustee upon occurrence of a scheduled dissolution or dissolution event. MARC
assigned a AAAIS rating to the Sukuk issuance on the basis of the contractual
lease rentals payable by the GOM (rated AAA) in respect of Parcel E, and PjH's
senior unsecured debt rating of AAA. The latter’s rating was underpinned by
PjH's strong earnings and cash flow generating ability as well as superior
financial flexibility derived from its majority ownership by Petroliam Nasional
Berhad (Petronas) through KLCC (Holdings) Sdn Bhd and Khazanah Nasional
Berhad, considerable unutilized standby credit lines and healthy cash and bank
balances.
Exhibit 5 : Putrajaya Holdings Transaction Structure
Investor
Investor
Investor
Musyarakah Venture
between the Investors
Trustee
Sukuk
Periodic distributions
and capital repayment
Income
from the
Venture
Issue
Proceeds
Putrajaya
Holdings Sdn
Bhd
[Issuer]
Musyarakah capital
Shortfall in
expected
return on
Sukuk
Purchase
Undertaking
Sub-lease of
buildings
The Venture
[Investment in
Trust Asset]
Sub-lease
rentals
Government of
Malaysia
[Obligor/Sublessee]
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RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
CONCLUSION
Conceptually, Sukuk are investment instruments which are intended to promote risk and
reward sharing in the performance of the underlying asset(s), project or venture into which
Sukukholders have invested. Earlier forms of Sukuk behaved more or less like conventional
fixed income instruments reflecting investors' modest risk appetite during the developmental
stages of Islamic finance. With the growing maturity of the Islamic finance sector, greater
acceptance of the true spirit of Islamic finance and the momentum created by AAOIFI's
Pronouncement, MARC is confident that future Sukuk issuances will promote more equitable
sharing of risk between the Sukuk investors and the borrower.
We expect the elimination of purchase undertakings by the originator/promoter in the
transaction structure in the Mudharabah and Musyarakah-based Sukuk issuances post-AAOIFI
pronouncement will spur the need for rating opinions on investment quality as opposed to
default risk. It is expected that the performance of such issuances will depend less on the
creditworthiness of the originator/underlying borrower and more on the performance of the
assets or project as in the case of asset-backed securities or non-recourse project financing.
Depending on the cashflow characteristics of the asset, the Sukuk may have to be structured
as a variable-income instrument with the flexibility to defer returns and absorb losses as
dictated by the performance of the asset(s) or project. The predominant equity characteristics
of such instruments will create the need for rating opinions on overall investment quality,
focusing on the degree of security of principal and predictability of financial returns as opposed
to the likelihood of timely and full payment. Back in 2001 and following consultation with our
Syariah Advisory Panel, MARC introduced a rating product based on investment quality in
anticipation for the emergence of variable-income risk participating Islamic financial
instruments.
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RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
APPENDIX A – SUKUK RATING SCALE
RATING SYMBOLS & DEFINITIONS
ISLAMIC CAPITAL MARKET INSTRUMENT RATINGS - ISLAMIC SUKUK
(ASSET-BASED INSTRUMENTS)
LONG-TERM RATINGS
MARC’s Long-Term Ratings are assigned to non-ringgit denominated Sukuk issuances with maturities of more than one
year. These ratings specifically assess the likelihood of timely payment of the instrument issued under the various
Islamic asset-based financing contract(s).
Investment Grade
AAAIS Extremely strong ability to make payment on the instrument issued under the Islamic asset-based financing
contract(s).
AAIS
Very strong ability to make payment on the instrument issued under the Islamic asset-based financing
contract(s). Risk is slight with degree of certainty for timely payment marginally lower than for instruments
accorded the highest rating.
AIS
Strong ability to make payment on the instrument issued under the Islamic asset-based financing
contract(s). However, risks are greater in periods of business and economic stress than for instruments with
higher ratings.
BBBIS
Adequate ability to make payment on the instrument issued under the Islamic asset-based financing
contract(s). Vulnerable to moderately adverse developments, both internal and external.
Non-Investment Grade
Uncertainties exist that could affect the ability to make timely payment on the instrument issued under the
BBIS
Islamic asset-based financing contract(s).
BIS
Significant uncertainty exists as to timely payment on the instrument issued under the Islamic asset-based
financing contract(s). Slight adverse developments could impair ability to make timely payment.
CIS
Possesses a substantial risk of default, with little capacity to address further negative changes in financial
circumstances.
DIS
Failed to make scheduled payment on the instrument issued under the Islamic asset-based financing
contract(s).
Notes : Long-Term Ratings from AA to B may be modified by the addition of a plus (+) or minus (-) suffix to show relative
standing within the major rating categories. Bank-guaranteed issues will carry a suffix (bg), corporate-guaranteed a suffix (cg)
and for all other supports a suffix (s) when such guarantees or supports give favourable effect to the assigned rating.
SHORT- TERM RATINGS
MARC’s Short-Term Ratings are assigned to non-ringgit denominated Sukuk issuances with original maturities of one
year or less, and are intended to assess the likelihood of timely payment of the instrument issued under the various
Islamic asset-based financing contract(s).
Investment Grade
Extremely strong capacity to make timely payment on the instrument issued under the Islamic assetMARC-1IS
based financing contract(s).
MARC-2IS
Strong capacity to make timely payment on the instrument issued under the Islamic asset-based
financing contract(s). Timeliness of payment is slightly susceptible to adverse changes in operating
circumstances and economic conditions.
MARC-3IS
Adequate capacity to make timely payment on the instrument issued under the Islamic asset-based
financing contract(s).
Moderately adverse changes in operating environment and economic
conditions may weaken financial capacity to make timely payment.
Non-Investment Grade
Vulnerable to non-payment of instrument issued under the Islamic asset-based financing contract(s).
MARC-4IS
Capacity to make payment on the instrument is dependent upon favourable business, financial and
economic conditions.
DIS
Failed to make scheduled payment on the instrument issued under the Islamic asset-based financing
contract(s).
Notes : Short-Term Ratings will also carry a suffix (bg) for bank-guaranteed issues, (cg) for corporate guaranteed issues
and an (s) for all other supports when such guarantees or supports give favourable effect to the assigned rating
Subscript ‘IS’ for Long-Term and Short-Term Ratings denotes an Islamic Sukuk (Asset-based Instruments).
The rating symbols and definitions above have been approved by the Shariah Council of MARC
Page 13 of 16
RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
APPENDIX B – LIST OF SUKUK RATINGS BY MARC
Issuer / Issue Description
Announced
Long-Term
(Initial Rating)
A-IS
Issue Size
RM/million
USD368.0 mil
FIRST GLOBAL SUKUK INC.
Sector: Property/Plantation
Instrument: 3 & 5 Years Serial Islamic Lease Sukuk Issuance
Dec-01
INGRESS SUKUK BHD
Sector: Industrial Products - Automotive
Instrument: 5 - 7 Years Sukuk Al Ijara Issuance Programme
Jun-04
A+IS
160.0
AMPLE ZONE BHD
Sector: Property
Instrument: 7 Years Sukuk Al-Ijarah
Feb-05
AAAIS
50.0
AMPLE ZONE BHD
Sector: Property
Instrument: 7 Years Sukuk Al-Ijarah
Feb-05
AAIS
13.3
AMPLE ZONE BHD
Sector: Property
Instrument: 7 Years Sukuk Al-Ijarah
Feb-05
AIS
75.0
MUSYARAKAH ONE CAPITAL BHD
Sector: Technology
Instrument: 5 Years Sukuk Musyarakah
Apr-05
AAAIS
566.6
CAGAMAS MBS BHD [2005-1]
Sector: Residential Mortgages
Instrument: 3 Years Asset-Backed Sukuk Musyarakah
Issuance
Jul-05
AAAIS
250.0
CAGAMAS MBS BHD [2005-1]
Sector: Residential Mortgages
Instrument: 5 Years Asset-Backed Sukuk Musyarakah
Issuance
Jul-05
AAAIS
215.0
CAGAMAS MBS BHD [2005-1]
Sector: Residential Mortgages
Instrument: 7 Years Asset-Backed Sukuk Musyarakah
Issuance
Jul-05
AAAIS
260.0
CAGAMAS MBS BHD [2005-1]
Sector: Residential Mortgages
Instrument: 10 Years Asset-Backed Sukuk Musyarakah
Issuance
Jul-05
AAAIS
515.0
CAGAMAS MBS BHD [2005-1]
Sector: Residential Mortgages
Instrument: 12 Years Asset-Backed Sukuk Musyarakah
Issuance
Jul-05
AAAIS
410.0
CAGAMAS MBS BHD [2005-1]
Sector: Residential Mortgages
Instrument: 15 Years Asset-Backed Sukuk Musyarakah
Issuance
Jul-05
AAAIS
400.0
ASSAR CHEMICALS SDN BHD
Sector: Infrastructure & Utilities - Oil & Gas
Instrument: 3 - 10 Years Serial Sukuk Musyarakah
Aug-05
AAAIS
150.0
IJN CAPITAL SDN BHD
Sector: Trading/Services - Healthcare
Instrument: 7 Years Sukuk Musyarakah
Aug-05
AAAIS
100.0
IJN CAPITAL SDN BHD
Sector: Trading/Services - Healthcare
Instrument: 7 Years and below Sukuk Musyarakah
Aug-05
AA+IS
109.0
MUSYARAKAH ONE CAPITAL BHD
Sector: Technology
Instrument: 2 Years Sukuk Musyarakah
Aug-05
AAAIS
103.6
KONSORTIUM LEBUHRAYA UTARA-TIMUR (KL) SDN BHD
Sector: Infrastructure & Utilities - Toll Road
Instrument: 13 Years Redeemable Secured Serial Bonds under
an Islamic Istisna Sukuk
Oct-05
A+IS
780.0
Page 14 of 16
RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
Issuer / Issue Description
Announced
Long-Term
(Initial Rating)
AAAIS
Issue Size
RM/million
160.0
SACOFA SDN BHD
Sector: Technology
Instrument: 4 - 9 Years Sukuk Istisna'
Nov-05
SARAWAK GATEWAY SDN BHD
Sector: Technology
Instrument: 10 Years Sukuk Ijarah
Nov-05
AAAIS
240.0
VASTALUX CAPITAL SDN BHD
Sector: Trading/Services - Oil & Gas
Instrument: 5 Years Sukuk Musyarakah
Dec-05
AA-IS
100.0
KWANTAS SPV SDN BHD
Sector: Plantation
Instrument: 9 Years Sukuk Ijarah
May-06
AAAIS
80.0
KWANTAS SPV SDN BHD
Sector: Plantation
Instrument: 9 Years Sukuk Ijarah
May-06
AAIS
15.0
KWANTAS SPV SDN BHD
Sector: Plantation
Instrument: 9 Years Sukuk Ijarah
May-06
A+IS
60.0
DURA PALMS SDN BHD
Sector: Plantation
Instrument: 8.5 Years Sukuk Al-Ijarah
Jun-06
AAAIS
100.0
DURA PALMS SDN BHD
Sector: Plantation
Instrument: 8.5 Years Sukuk Al-Ijarah
Jun-06
AAIS
90.0
DURA PALMS SDN BHD
Sector: Plantation
Instrument: 8.5 Years Sukuk Al-Ijarah
Jun-06
AIS
10.0
DIVERSIFIED VENUE SDN BHD
Sector: Property
Instrument: 13 Years Sukuk Al-Ijarah Master Programme
Aug-06
AAIS
200.0
ABS LOGISTICS BHD
Sector: Property
Instrument: 1 - 10 Years Senior Sukuk Ijarah
May-07
AAAIS
100.0
ABS LOGISTICS BHD
Sector: Property
Instrument: 10 Years Senior Sukuk Ijarah
May-07
AAIS
20.0
ABS LOGISTICS BHD
Sector: Property
Instrument: 5 Years Senior Sukuk Ijarah
May-07
AAAIS(bg)
40.0
CAGAMAS MBS BHD [2007-1]
Sector: Residential Mortgages
Instrument: 3 Years Sukuk Musyarakah
May-07
AAAIS
330.0
CAGAMAS MBS BHD [2007-1]
Sector: Residential Mortgages
Instrument: 5 Years Sukuk Musyarakah
May-07
AAAIS
255.0
CAGAMAS MBS BHD [2007-1]
Sector: Residential Mortgages
Instrument: 7 Years Sukuk Musyarakah
May-07
AAAIS
270.0
CAGAMAS MBS BHD [2007-1]
Sector: Residential Mortgages
Instrument: 10 Years Sukuk Musyarakah
May-07
AAAIS
400.0
CAGAMAS MBS BHD [2007-1]
Sector: Residential Mortgages
Instrument: 12 Years Sukuk Musyarakah
May-07
AAAIS
245.0
CAGAMAS MBS BHD [2007-1]
Sector: Residential Mortgages
Instrument: 15 Years Sukuk Musyarakah
May-07
AAAIS
320.0
CAGAMAS MBS BHD [2007-1]
Sector: Residential Mortgages
Instrument: 20 Years Sukuk Musyarakah
May-07
AAAIS
290.0
Page 15 of 16
RATING APPROACH TO SUKUK:
A MARC PERSPECTIVE
Issuer / Issue Description
Announced
ALAM MARITIM RESOURCES BHD
Sector: Infrastructure & Utilities - Oil & Gas
Instrument: 15 Years Sukuk Ijarah Medium Term Notes Facility
Jul-07
Long-Term
(Initial Rating)
AA-IS
Issue Size
RM/million
500.0
DRIR MANAGEMENT SDN BHD
Sector: Trading/Services - Transportation
Instrument: 3 Years 6 months Sukuk Ijarah Medium Term
Notes Programme
Dec-07
AAIS
180.0
DRIR MANAGEMENT SDN BHD
Sector: Trading/Services - Transportation
Instrument: 5 Years Sukuk Ijarah Medium Term Notes
Programme
Dec-07
AA-IS
160.0
TRADEWINDS PLANTATION CAPITAL SDN BHD
Sector: Plantation
Instrument: 6 - 10 Years Sukuk Ijarah
Dec-07
AAAIS
180.0
MNRB HOLDINGS BERHAD
Sector: Insurance Company
Instrument: 5 years Islamic Medium Term Notes Issuance
Programme
Dec-07
AAIS
200.0
TRADEWINDS PLANTATION CAPITAL SDN BHD
Sector: Plantation
Instrument: 4 - 7 Years Sukuk Ijarah
Dec-07
AA+IS
30.0
WESTPORTS MALAYSIA SDN BHD
Sector: Infrastructure & Utilities - Port/Airport
Instrument: 15 years Sukuk Musyarakah Medium Term Notes
Feb-08
AA+IS
800.0
STRATAVEST SDN BHD
Sector: Infrastructure & Utilities - Power
Category: Corporate Debt
Instrument: 10.5 Years Sukuk Ijarah
Mar-08
AA-IS
120.0
WCT ENGINEERING BHD
Sector: Construction
Instrument: 5 years Redeemable Sukuk with Warrants
Mar-08
AA-IS
300.0
PUTRAJAYA HOLDINGS SDN BHD
Sector: Property
Instrument: 24 Years Nominal Value Sukuk Musyarakah
Medium Term Notes Programme
May-08
AAAIS
1,500.0
TANJUNG LANGSAT PORT SDN BHD
Sector: Infrastructure & Utilities - Port/Airport
Instrument: 12 Years Sukuk Musyarakah
May-08
AA-IS
250.0
MATANG HIGHWAY SDN BHD
Sector: Construction
Instrument: 3 Years Sukuk Musyarakah
May-08
AA-IS
70.0
© 2008 Malaysian Rating Corporation Berhad
Page 16 of 16