Creditworthiness of corporate entities determine investor confidence as Sukuk becomes more mainstreamed - IFN

Creditworthiness of corporate entities determine investor confidence as Sukuk becomes more mainstreamed

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MALAYSIA: Parallel to the credit risk of each company, three Malaysian corporate Sukuk have been assigned a stable outlook by Moody’s. The companies’ Sukuk Ijarah program each amounting to US$1.5 billion issued by Petroliam Nasional (Petronas), Axiata Group and Sime Darby were rated at ‘A1’, ‘Baa2’ and ‘A3’, respectively. All three issuances which do not have any material asset-backed or equity features were rated on par with the company’s senior unsecured obligations, indicating that certificate holders ultimately rely on the creditworthiness of the corporates backing the Sukuk. This projection was elucidated in a research report by Moody’s entitled, ‘Petronas, Axiata, Sime Darby: A Comparison of Three Malaysian Corporate Sukuk.’ Simon Wong, Moody’s vice president-senior credit officer and co-author of the report, noted that the dependant investor reliance on creditworthiness is to ensure that both the periodic distribution and redemption amounts are paid when due. Another vital credit feature is that the beneficial ownership will be re-purchased by the firms upon maturity of the Sukuk and certificate holders have no priority recourse to the Sukuk assets in an event of a dissolution or default. According to Dealogic, global corporate issuance of Sukuk tripled between 2010-12 to US$19 billion, with Malaysia accounting for 78% of the total issuance in 2012. S&P recently released a report saying that Sukuk have the potential to grow and join the mainstream market due to increasing investor appetite. Although Islamic bonds may still seem as an alternative means of investment, the GCC and Asian Sukuk markets are becoming more interdependent as the number of cross-border transactions pick up. S&P forecasted that new Sukuk issuances worldwide would exceed US$100 billion this year as sovereign and quasi-sovereign entities enter the market raising funds for infrastructure and economic growth. Evidently, liquidity levels are improving as large and more frequent issuances emerge demonstrating the acceptance of Sukuk as a mainstream debt instrument.