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Tuesday, March 06, 2018/ 01.25
PM / Fitch Ratings
Established structured finance (SF) markets are
likely to be more supportive of the development of asset-backed sukuk than the
largest Islamic finance markets, Fitch Ratings says. A key limitation on SF in
major Islamic finance jurisdictions is the absence of legal certainty and
precedent relating to some key SF principles.
UK-based Al Rayan Bank last month issued a GBP250
million deal, Tolkien Funding Sukuk No. 1, secured by prime UK home purchase
plans. HPPs are sharia-compliant instruments used to fund residential property
purchases.
The deal, which Fitch did not rate, suggests there
is potential for sharia-compliant SF to develop in the UK and other
jurisdictions where SF is already an established funding tool. How far this
happens will be determined by the level of investor appetite, originators'
desire to use sharia-compliant funding, and the potential growth of the
underlying assets, such as HPPs.
We think that developing asset-backed sukuk where
there is no pre-existing SF market would be much more challenging. This is
despite the fact that structuring techniques commonly used in SF may be sharia
compliant as the true sale of assets to an issuing SPV would be suited to the
core sharia principle of profit and loss sharing.
However, in the absence of an established SF
market, the question of whether the true sale would be effective and underpin
core securitisation principles will be untested. These principles include the
creation of legal, valid, binding and enforceable security interests,
bankruptcy remoteness, the use of perfection mechanisms to complete the
transfer of legal title prior to enforcement, and the recognition of foreign
law.
The vast majority of sukuk issued to date are
originator backed rather than asset backed, meaning that investor recourse to
the underlying assets is specifically excluded and they instead rely on
features designed to ensure an obligor's direct support and on contractual
commitments built into transaction documentation.
Even in an asset-backed sukuk where the assets did
constitute collateral, the local legal environment may hinder or prevent
significant, timely and predictable recoveries due to the absence of a clear
legal framework for enforcing creditor rights. We believe this is lacking in
many of the top 10 Islamic finance jurisdictions, unlike in developed SF
markets. This may be why most sukuk issued in the major Islamic finance markets
have been senior unsecured instruments.
It may also prevent Fitch from forming an opinion
on the enforceability of an investor's rights in relation to the underlying SF
assets regardless of whether an SF deal is sharia compliant or a conventional
SF instrument. We would typically rate asset-backed sukuk according to our
established structured finance criteria.
Sharia-compliant SF is likely to remain a niche
product even though the Islamic finance market will continue to grow globally -
new sukuk issuance with a maturity of more than 18 months from the GCC region,
Malaysia, Indonesia, Turkey and Pakistan grew by nearly 50% yoy in 2017.
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