Fitch Ratings assigns ‘BBB’ to Philippines’ maiden Sukuk bonds

Fitch Ratings headquarters in New York, February 6, 2013. REUTERS/Brendan McDermid/Files

Credit watcher Fitch Ratings has given a “good credit quality” rating to the Philippines’ proposed maiden issuance of US-dollar denominated Sharia-compliant or Sukuk bonds.

In its rating action commentary, Fitch Ratings said it assigned a “BBB” rating to the government’s Sukuk bonds.

A “BBB” rating or “good credit quality” indicates that expectations of default risk are currently low and the capacity for payment of financial commitments is considered adequate.

However, adverse business or economic conditions are more likely to impair this capacity.

On Monday, the Department of Finance (DOF) launched a series of investor calls in Asia, Europe, Middle East, and the United States for the benchmark-sized US dollar-denominated Sukuk offering with a tenor 5.5 years.

A benchmark-size offering typically means at least $500 million, but the exact offering size remains undetermined.

Finance Secretary Benjamin Diokno earlier said the Philippines is eyeing to raise $1 billion through the sale of Sukuk bonds.

Sukuk is a financial instrument that complies with Islamic laws, by circumventing the traditional concept of interest through tying it with tangible assets or properties. Holders of Sukuk bonds receive portions of earnings generated from tied assets.

The DOF said the Sukuk offering will be the government’s maiden issuance of Islamic law-compliant financial instrument.

The Sukuk bond certificates will be issued by the Philippines through the Sukuk Trust —a special purpose trust formed under Philippine law and administered by the Land Bank of the Philippines-Trust Banking Group.

In its rating action, Fitch Ratings said the “BBB” rating for the Philippines’ Sukuk offering “is driven solely by the Philippines’ Issuer Default Rating (IDR), which we affirmed at ‘BBB’ with a Stable Outlook in November 2023.”

“This reflects our view that a default of the senior unsecured obligations would reflect a default of the Philippines, in accordance with our rating definitions,” the credit watcher said.

“We have not considered any underlying assets or collateral provided when assigning the rating, as we believe the issuer’s ability to satisfy payments due on the proposed Sukuk will ultimately depend on the government satisfying its unsecured payment obligations to the issuer under the transaction documents, as described in the offering memorandum and other supplementary documents,” it said.

Fitch Ratings, however, said that the risks on the credit rating of Sukuk bonds could arise from “reduced confidence in strong, stable medium-term economic growth and continued adherence to sound economic policies” as well as “failure to gradually reduce government debt/GDP ratio, for example, due to slowing fiscal consolidation to support growth.”

Moreover, the credit watcher said that significant deterioration in foreign-currency reserves and the country’s net external debt position, for example, due to more persistent current account deficits than currently forecast.—AOL, GMA Integrated News

This article Fitch Ratings assigns ‘BBB’ to Philippines’ maiden Sukuk bonds was originally published in GMA News Online.