Moody’s Assigns (P)Caa1 To Pakistan’s Sovereign Sukuk

Moody’s Investors Service has assigned a provisional (P) Caa1 senior unsecured rating to the proposed US dollar Trust Certificates to be issued by The Second Pakistan International Sukuk Company Limited, a special purpose vehicle established in Pakistan, by the Islamic Republic of Pakistan.

“The Government of Pakistan’s Sukuk offering reflects the growing interest in Islamic capital markets as a source of sovereign funding and helps support its domestic Islamic Finance sector,” said Khalid Howladar, Global Head of Islamic Finance at Moody’s Investors Service. “

“Moody’s Caa1 government bond rating and stable outlook on Pakistan reflects the country’s large but moderating fiscal deficits as well as its stabilizing external liquidity position ” noted Anushka Shah, lead sovereign analyst for Pakistan. ” It also factors in high susceptibility to event risk, both on the political front and in terms of economic vulnerabilities that could arise,” she adds.

RATINGS RATIONALE

The (P)Caa1 rating assigned to the trust certificates is at the same level as Pakistan’s Caa1 issuer ratings. In Moody’s opinion, as the Sukuk certificate holders will effectively be exposed to the government’s senior credit risk and payment obligations represented by the securities to be issued by The Second Pakistan International Sukuk Company Limited are ranked pari passu with other senior, unsecured debt issuances of the Government of Pakistan. Moody’s expects to remove the provisional status of the rating upon the closing of the proposed issuance and a review of its final terms.

Moody’s also notes that its Sukuk rating does not express an opinion on the structure’s compliance with Shari’ah law.

Pakistan’s rating captures its structurally large, albeit moderating, fiscal imbalances and weak debt metrics relative to B-rated peers. The sovereign’s ‘Very Low’ institutional strength assessment reflects implementation risks associated with economic reforms. It also factors in high susceptibility to event risk, both on the political front and in terms of economic vulnerabilities that could arise, primarily from Pakistan’s reliance on bilateral and multilateral support.

Foreign reserves increased significantly this year, rising from $3.9 billion in January 2014 to $10.0 billion in July. However, muted growth in exports coupled with deterrents to capital inflows, such as delays in divestment and political uncertainty, have resulted in a slight decline to $9.3 billion in September.

A sustained stabilization in the external position hinges on the government’s commitment to reforms under its program with the International Monetary Fund (IMF). Pakistan has made steady progress in meeting reform benchmarks under the current, 36-month $6.8 billion Extended Fund Facility, which it signed in September 2013. So far, Pakistan has cleared three program reviews, most recently at the end of June, and received $2.2 billion of financial assistance. Future milestones in the reform program include reforms in the tax system, energy sector and in state-owned enterprise privatization. 

Pakistan has tapped Citigroup, Deutsche Bank, Dubai Islamic Bank and Standard Chartered to arrange  roadshows in the UAE, London and Singapore. A 144A-compliant, benchmark-sized Sukuk may follow, subject to market conditions.

Originally published on www.cpifinancial.net