Fitch Rates SAB Sukuk Limited’s Issuance Programme ‘A-‘/’F2’

Fitch Ratings recently announced the expected ratings for Saudi Awwal Bank’s (SAB) new trust certificate issuance program, demonstrating SAB’s strong financial standing and dedication to Sharia-compliant investment. The program, managed by SAB Sukuk Limited (SSL), has a maximum issuance size of USD 3 billion.

Fitch has assigned an expected long-term rating of ‘A-(EXP)’ and a short-term rating of ‘F2(EXP)’ to the senior unsecured certificates issued under this program. These ratings highlight SAB’s stability and the bank’s commitment to providing secure, Sharia-compliant financial products to its investors.

Key Highlights of the SAB Sukuk Issuance

SAB Sukuk Limited, established in the Cayman Islands, operates as a special-purpose vehicle created specifically for facilitating this issuance program. The ratings Fitch has assigned are contingent on the final review of the documents that are in line with the information provided thus far. The certificates under this program will be senior unsecured, reflecting Fitch’s view that the potential default of these certificates would equate to default by SAB itself.

Rating Drivers and Underlying Assumptions

The assigned ratings mirror SAB’s Long-Term Issuer Default Rating (IDR) of ‘A-’ and Short-Term IDR of ‘F2’. This alignment is driven by SAB’s Government Support Rating (GSR) of ‘a-’, which underpins the bank’s financial stability. Fitch expects the default of the senior unsecured certificates to signify a default of SAB, given the high correlation between the bank’s ratings and the new Sukuk program.

A significant aspect of Fitch’s assessment is SAB’s role in ensuring that the certificates are adequately backed. SAB’s responsibilities under the transaction documents, including the service agency agreement and the master murabaha agreement, are crucial in maintaining the program’s integrity. For instance:

• Service Agency Agreement: SAB is obligated to ensure that sufficient funds are available for periodic distributions to certificate holders. It must take measures to avoid any shortfalls and ensure timely and full payment of principal and profits.
• Master Murabaha Agreement: In the event of a default or dissolution, SAB is required to make deferred sale price payments immediately. This includes purchasing rights, titles, and interests in the relevant assets.
• Tangibility Ratio: The transaction documents stipulate that the tangibility ratio—defined as the ratio of the value of tangible assets to the total Wakala portfolio value—must remain above 50%. If it falls below 33%, it triggers a put option for certificate holders, impacting the tradability and listing of the certificates.

Recent Developments and Financial Insights

As of the latest update, SAB has maintained a strong liquidity profile, which supports its ability to manage the sukuk obligations effectively. For the anticipated USD 1 billion new issuance, SAB has secured a pool of tangible assets valued at over USD 550 million, achieving a tangibility ratio of 55%. This strong asset base underscores the bank’s capacity to uphold its sukuk commitments even in the face of potential challenges.

Fitch’s ratings are also influenced by the program’s structural features, including negative pledge provisions and cross-acceleration clauses. The proceeds from the Sukuk issuance will be used for general corporate purposes, enhancing SAB’s operational flexibility and financial stability.

Potential Rating Changes

The ratings of the SAB Sukuk Limited’s certificates are sensitive to changes in SAB’s Long-Term IDR. A downgrade of SAB’s IDR would likely lead to a corresponding downgrade of the SSL program and its certificates. Conversely, an upgrade in SAB’s IDR would result in a positive adjustment for the Sukuk ratings. Factors affecting these changes include SAB’s adherence to its obligations under the sukuk structure and any adjustments in the roles outlined in the transaction documents.

Legal and Compliance Considerations

The issuance is governed by a mix of English law, Saudi Arabian law, and Cayman Islands law. Fitch’s ratings reflect their belief in SAB’s commitment to meet its obligations, though they do not provide opinions on the enforceability of transaction documents under these legal frameworks.

Fitch Ratings’ assignment of ‘A-(EXP)’ and ‘F2(EXP)’ to SAB Sukuk Limited’s trust certificate issuance program underscores Saudi Awwal Bank’s (SAB) robust financial health and the high level of investor confidence in its sukuk offerings.

With strong liquidity, a substantial asset base, and a meticulously structured sukuk program, SAB is excellently positioned to manage its new issuance effectively and sustain investor trust. This rating not only reflects SAB’s commitment to Sharia-compliant investment structures but also assures investors of the bank’s capacity to meet its financial obligations, making it a reliable choice for secure, Sharia-compliant investments.