(The following statement was released by the rating agency)
March 19 - Standard & Poor’s Ratings Services said today that it assigned its ‘AA-’ long-term issue rating to the proposed U.S. dollar ijara trust certificates to be launched by Saudi Electricity Global SUKUK Co., a special purpose vehicle incorporated in the Cayman Islands. The notes benefit from a purchase undertaking provided by Saudi Electric Co. (SEC; AA-/Stable/--) and are designed to cover any payment shortfall in a timely manner and to redeem the full value of the notes at maturity. The purchase undertaking, if triggered, is designed to lead to an irrevocable, and unconditional payment obligation by SEC for the benefit of the certificate holders. In addition, we understand that SEC’s payment obligations under the purchase undertaking are unsubordinated and unsecured obligations and rank equally with all of SEC’s other unsecured obligations (except those that may be preferred by provisions of law that are both mandatory and of general application, according to the documentation). Consequently, we equalize the rating on the notes with the long-term rating on SEC, reflecting our expectation that the notes rank pari passu with the company’s other unsecured obligations.
Saudi Electricity Global SUKUK Co., as the issuer and trustee, has indicated it will invest the proceeds of the trust certificates to purchase Sharia-compliant ijara assets from SEC, which it will subsequently lease back to SEC. The payments from SEC to the issuer will be based on periodic distribution payments (profit payments) that can cover debt service obligations of the issuer toward the noteholders over the term of the notes. Certificate holders, while having a beneficial interest in the trust that holds the ijara assets, do not, however, have any direct recourse to the ijara assets.
Upon maturity of the certificates or the occurrence of a dissolution event (including, but not limited to payment of the principal value of certificates at maturity, winding up, insolvency, bankruptcy of the issuer, cross default), the trustee, acting on behalf of certificate holders, is entitled to exercise a purchase undertaking requiring SEC to purchase the assets at a price covering the aggregate face amount outstanding of the certificates and accrued and unpaid periodic distribution amounts, according to the terms of the offering.
Standard & Poor’s has not evaluated whether the trust certificates are Sharia compliant. The rating solely represents our opinion about the likelihood of full and timely repayment of the certificates issued.
The ratings on SEC reflect Standard & Poor’s view of the company’s “satisfactory” business risk profile and its “significant” financial profile.
SEC’s business risk profile benefits from the company’s quasi monopoly on generation and a monopoly on transmission and distribution, with minimal, if any, competition over the next several years at least. In addition, we factor in the strong forecast growth in electricity demand as well as ongoing government support.
These credit strengths are offset, in our view, by SEC’s financial risk profile which is affected by negative free cash flows, which we expect to persist until at least 2015. Other weaknesses include regulatory risk affecting the company’s three key business segments, leading to weak profitability, and uncertainty relating to payables owed to oil company Saudi Aramco that continue to accrue on SEC’s balance sheet.
As of Dec. 31, 2011, the company expected to invest about Saudi Arabian riyal (SAR) 151 billion from 2012 to 2014, although management considers some of this capital expenditure to be discretionary. Under our base-case scenario, this will cause gradual weakening in SEC’s financial metrics.
-- Standard & Poor’s Approach To Rating Sukuk, Sept. 17, 2007
-- Glossary Of Islamic Finance Terms, Jan. 7, 2008
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009