RAM Ratings assigns AAA(s) preliminary rating to Malaysia's first SRI sukuk programme

Published on 23 April 2015

RAM Ratings has assigned an AAA(s)/stable preliminary rating to Ihsan Sukuk Berhad's (Ihsan) RM1 billion Sukuk Ihsan Programme. Ihsan is a trust-owned company established for the sole purpose of raising capital to support the corporate and social responsibility efforts of Khazanah Nasional Berhad – the promoter of this exercise. As the issuer, Ihsan will raise funds under the Islamic principle of Wakalah Bi Al-Istithmar and/or other Islamic principles to be determined. The initial issue of Sukuk Ihsan will be based on the Islamic principle of Wakalah, where proceeds will be used to purchase eligible sukuk investments. Khazanah will, in turn, use the proceeds to fund Shariah-compliant eligible sustainable and responsible investment (SRI) projects, as provided in the SRI framework introduced in the Securities Commission's revised sukuk guidelines published in August 2014.

In assessing the credit risks associated with Sukuk Ihsan, RAM had considered Khazanah's role as the sukuk holders’ counterparty in the transaction structure. Khazanah, as the sub-wakeel for Ihsan (which is the wakeel for the sukuk holders) - will invest the proceeds in either Shariah-compliant tangible assets or Shariah-compliant commodities purchased and sold under the principle of Murabahah (Commodity Murabahah Investment), with at least 33% of the sukuk proceeds invested in tangible assets.

The AAA(s) rating is supported by Khazanah's role as the obligor under the purchase undertaking to buy the sukuk holders' interests in sukuk investments, as well as its commitment to make deferred payments pursuant to the Commodity Murabahah Investment in order to fully meet the obligations under the sukuk programme. While we recognise that Khazanah's credit profile fully backs the sukuk obligations, investors should take note that they remain exposed to the performance of the underlying SRI project.

Notably, the Sukuk Ihsan repayments will be  dependent on the SRI project’s performance. Unlike a fixed-income instrument with fixed maturities and profit rates, the repayment of the Sukuk Ihsan will depend on the eligible SRI project's ability to meet identified key performance indicators. If the SRI project successfully achieves the pre-agreed outcome, investors will not recover their original investment amount; the nominal value or accreted value (where applicable) of the Sukuk Ihsan will be mandatorily reduced in accordance with a pre-defined formula. The assessment will be performed by an independent auditor, and the adjustment calculated prior to the scheduled dissolution date of the Sukuk Ihsan. Furthermore, the Sukuk Ihsan holders can also (wholly but not partially) waive their rights, benefits and entitlements as investors by selling their sukuk holdings to Khazanah at a nominal consideration. Sukuk holders are entitled to exercise their option to waive on either the issuance date of the relevant sukuk or such points after the issuance date, but prior to the maturity of the said sukuk.

We highlight that the rating of the Sukuk Ihsan does not measure nor indicate the likelihood of the eligible SRI project meeting its pre-agreed targets. As such, it does not reflect the risks associated with the possible reduction of the nominal value (or accreted value, where applicable) of the sukuk, as provided for under the terms of the Sukuk Ihsan Programme. RAM will reassess the rating if there is any variation to the Islamic principles applied. At this point, RAM has yet to review the transaction and issue documents for the Sukuk Ihsan programme. Therefore, the assigned rating is only preliminary at this juncture; the final rating will be subject to our satisfaction with the final transaction documents.

Khazanah is a strategic investment fund owned by the Government of Malaysia (GOM). Save for 1 share held by the Federal Lands Commissioner, the entire equity interest in Khazanah is directly or indirectly owned by the Minister of Finance Inc. We therefore consider Khazanah as being very closely linked to the GOM. Based on our criteria for government-linked entities, Khazanah’s rating and the corresponding outlook are in line with those of the GOM, and are likely to shift in tandem with any movement in the sovereign’s rating and outlook.

Media contact
Siew Suet Ming
(603) 7628-1171
suetming@ram.com.my