Moody’s assigns (P)Caa1 to Pakistan’s sovereign sukuk

Moody’s assigns (P)Caa1 to Pakistan’s sovereign sukuk

Singapore, November 25, 2014 — Moody’s Investors Service has today assigned a provisional (P) Caa1 senior unsecured rating to the proposed US dollar Trust Certificates to be issued by The Second Pakistan International Sukuk Company Limited, a special purpose vehicle established in Pakistan, by the Islamic Republic of Pakistan.

“The Government of Pakistan’s sukuk offering reflects the growing interest in Islamic capital markets as a source of sovereign funding and helps support its domestic Islamic Finance sector,” commented Khalid Howladar, Global Head of Islamic Finance at Moody’s Investors Service. ”

“Moody’s Caa1 government bond rating and stable outlook on Pakistan reflects the country’s large but moderating fiscal deficits as well as its stabilizing external liquidity position ” notes Anushka Shah, lead sovereign analyst for Pakistan. ” It also factors in high susceptibility to event risk, both on the political front and in terms of economic vulnerabilities that could arise,” she adds.

RATINGS RATIONALE

The (P)Caa1 rating assigned to the trust certificates is at the same level as Pakistan’s Caa1 issuer ratings. In Moody’s opinion, as the sukuk certificate holders will effectively be exposed to the government’s senior credit risk and payment obligations represented by the securities to be issued by The Second Pakistan International Sukuk Company Limited are ranked pari passu with other senior, unsecured debt issuances of the Government of Pakistan. Moody’s expects to remove the provisional status of the rating upon the closing of the proposed issuance and a review of its final terms.

 

Moody’s also notes that its sukuk rating does not express an opinion on the structure’s compliance with Shari’ah law.

 

Pakistan’s rating captures its structurally large, albeit moderating, fiscal imbalances and weak debt metrics relative to B-rated peers. The sovereign’s ‘Very Low’ institutional strength assessment reflects implementation risks associated with economic reforms. It also factors in high susceptibility to event risk, both on the political front and in terms of economic vulnerabilities that could arise, primarily from Pakistan’s reliance on bilateral and multilateral support.

 

Foreign reserves increased significantly this year, rising from $3.9 billion in January 2014 to $10.0 billion in July. However, muted growth in exports coupled with deterrents to capital inflows, such as delays in divestment and political uncertainty, have resulted in a slight decline to $9.3 billion in September.

 

A sustained stabilization in the external position hinges on the government’s commitment to reforms under its program with the International Monetary Fund (IMF). Pakistan has made steady progress in meeting reform benchmarks under the current, 36-month $6.8 billion Extended Fund Facility, which it signed in September 2013. So far, Pakistan has cleared three program reviews, most recently at the end of June, and received $2.2 billion of financial assistance. Future milestones in the reform program include reforms in the tax system, energy sector and in state-owned enterprise privatization.

 

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

 

REGULATORY DISCLOSURES

 

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

 

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

 

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.