S&P: How Rating Methodologies Apply to Islamic Bonds

 S&P: How Rating Methodologies Apply to Islamic Bonds

LONDON — Sept. 15, 2003

Standard & Poor’s–The provisions of Islamic debt instruments may add levels of complexity to ratings analysis, but longstanding methodologies and rating scales are sufficiently broad so far to incorporate the varied features of Islamic debt financing, Standard & Poor’s Ratings Services said in a report published today.

“Islamic financing largely centers on asset-backed approaches and sometimes involves a degree of risk-sharing more commonly borne by equity investors,” said Standard & Poor’s credit analyst Kristel Richard.

“In practice, however, as illustrated in the ‘sukuk’ (Islamic bonds) that Standard & Poor’s has rated, binding guarantees and other contractual obligations can place transactions firmly in the debt category.”

Standard & Poor’s credit rating analysis focuses on the specifics of the transaction, the robustness of the associated contracts, and any special features indicating that the underlying borrower will treat the obligation as it would direct, unsecured, commercial financial obligations.

Standard & Poor’s has rated three sovereign sukuk, issued by the Kingdom of Bahrain (foreign currency A-/Stable/A-2; local currency A/Stable/A-1), the Federation of Malaysia (foreign currency BBB+/Stable/A-2; local currency A+/Stable/A-1), and the State of Qatar (A+/Stable/A-1).

All three sukuk were designed in accordance with Islamic principles on the provision and use of financial services and products. Standard & Poor’s also rates the Islamic Development Bank (foreign currency AAA/Stable/A-1+) and other financial institutions that provide Islamic banking and insurance services.

It expects to rate more Islamic debt instruments, and of different types, over the near term.

The report, entitled “Rating Sukuk–How Rating Methodologies Apply to Islamic Debt Financing”, was published today and is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit analysis system, at www.ratingsdirect.com.

It can also be found on Standard & Poor’s public Web site at www.standardandpoors.com, by clicking on Credit Ratings Criteria in the left-hand toolbar.

SOURCE: http://tyo.ca/islambank.community/modules.php?op=modload&name=News&file=article&sid=4028