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Fitch Updates Criteria for Rating Sukuk
This criteria report describes Fitch's approach to assigning and maintaining ratings for new and existing originator-backed sukuk issues, respectively. These criteria apply to originator-backed (or asset-based) sukuk structures, where investors rely on obligor direct support features and contractual commitments built into the documentation. These criteria apply globally to corporates, financial institutions, sovereigns, supranationals, public finance, insurers and global infrastructure. They do not apply to asset-backed sukuk, which rely on underlying collateral.
Fitch's analytical assumption under these criteria is that the structure of the sukuk and the underlying transaction(s) provides for full recourse to the originator - as with a conventional bond issue - and the sukuk rating is driven solely by the originator's rating. There remains a lack of legal precedents in terms of effective enforcement in many jurisdictions where sukuk issuance is prevalent. It therefore remains uncertain whether certificate holders will be able to enforce their contractual rights in local courts.
Sukuk analysis and ratings will reflect Fitch's view that the default of these senior unsecured obligations under the legal structure and sukuk documentation would reflect default of the entity in accordance with Fitch's rating definitions. Ratings assigned to sukuk do not imply any confirmation that the sukuk are sharia-compliant.
It is also possible for sukuk to be structured as subordinated, short-term or secured claims. If so, they will be rated as such in accordance with Fitch's established criteria, with the ratings again benchmarked to the IDR or the issuer's Viability Rating (VR) where the case dictates.
Sukuk do not have a standard structure and each structure may involve different underlying contractual arrangements. As a result, each structure has to be reviewed individually to assess whether it complies with these criteria.
Fitch will monitor the evolution of sukuk structures, and where such developments lead the agency to modify its approach, the agency will communicate the reasons for, and the consequences of, such modifications to market participants.
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