Ratings downgrades in Egypt raises questions over sovereign Sukuk issuance (By IFN)

Ratings downgrades in Egypt raises questions over sovereign Sukuk issuance

Daily Cover

EGYPT: Protracted political turmoil and a risky investment environment has caused a string of ratings downgrades across Egypt’s banks, sovereign bonds and sovereign ratings since the end of January, with the latest downgrades involving the standalone credit assessments of the National Bank of Egypt, Bank Misr, Banque Du Caire, Commercial International Bank and the Bank of Alexandria. According to Moody’s, the banks were downgraded by one notch due to increased risk involving the banks’ growing exposure to government securities; renewed weakness in operating environment and the weakening capacity of Egyptian authorities to support government-owned banks. The country, which saw its ratings drop from ‘B’ to ’B-plus’ and its sovereign bond ratings fall a notch to ‘B3’ from ‘B2’, is also currently in the thick of finalizing its Sukuk draft law and has mentioned plans to issue a sovereign Sukuk in the second quarter of this year. However, the latest downgrades have raised some questions on the viability of the sovereign issuance, and investor sentiment towards the country and the proposed papers. Speaking to Islamic Finance news, an Islamic finance partner at a Malaysian-based law firm said: “Generally speaking, a ratings downgrade is never good for the issuer. This could most likely affect the current Sukuk plans, as it will affect the Sukuk’s premium and pricing. Therefore, it is possible that any plans could be delayed right now until the ratings are revised at a higher level.” “The papers are a reflection of the creditworthiness of the issuer and it may affect the thinking of the investor; causing the offering value to dip. These days, investors are a lot more particular about ratings, and institutional investors especially have to fulfill the investment criteria and parameters. As such, their investment mandate will not allow them to invest in papers which are below a certain rating,” he added. At the end of last month, it was reported that Citibank and Credit Agricole have expressed interest in supporting the country’s debut Sukuk issuance, while the IDB have also allocated US$6 billion in investments into the country once its Sukuk law is finalized.