Moody's Investors Service says that the investors in three rated Malaysian sukuk (Islamic bonds) are ultimately dependent on the creditworthiness of the corporates backing the sukuk.
These three rated instruments do not have any material asset-backed or equity features and therefore share the same credit risk as other senior unsecured obligations of the underlying corporates.
Moody's reiterated its conclusions in an analysis of the sukuk issued by three Malaysian corporates: national oil company Petroliam Nasional Berhad (Petronas, A1 stable), cellular telecommunications provider Axiata Group Berhad (Baa2 stable), and conglomerate Sime Darby Berhad (A3 stable).
The analysis is available in a just-released report titled "Petronas, Axiata, Sime Darby: A Comparison of Three Malaysian Corporate Sukuk."
"Certificate holders of the three sukuk ultimately rely on the creditworthiness of the corporates backing them to ensure that both the periodic distribution and dissolution or redemption amounts are paid when due," says Simon Wong, a Moody's Vice President - Senior Credit Officer, and co-author of the report.
"In other words, these payment obligations rank pari passu with Petronas', Axiata's and Sime Darby's other certificates and other senior unsecured obligations of the respective company," adds Wong.
"Certificate holders are further protected by negative pledge provisions to prevent structural subordination of the sukuk obligation that would result in the sukuk having lower priority of claim in an event of default," says Rachel Chua, a Moody's Associate Analyst.
"There are also cross-default provisions between the sukuk and the firms' other debt obligations," adds Chua, who is the other co-author of the report.Moody's report says, all three sukuk apply an 'Al-Ijarah' asset lease structure, in which the three firms sell the beneficial ownership of the sukuk assets to a special purpose vehicle that is funded by certificate holders.
A crucial credit feature is that all three firms buy back the beneficial ownership upon the maturity of the sukuk, providing repayment of principal. In addition certificate holders have no priority recourse to the sukuk assets in the event of a default of the corporate.
The Moody's report also examines the additional features provided by Axiata's hybrid sukuk -- such as the trustee having title ownership of airtime vouchers that can be sold in the event of default -- and concludes that these features do not affect the rating of the sukuk, because the ratingultimately remains dependant on Axiata's underlying credit quality.
According to research firm Dealogic, Malaysia dominates the global corporate sukuk market, accounting for 78% of total bonds issued last year. These bonds have tripled in issuance value to $19 billion between 2010 and 2012.