S&P assigns ‘B’ long-term rating to proposed sukuk, unsecured notes

KARACHI: US financial service firm Standard and Poor’s (S&P) on Tuesday assigned preliminary ‘B’ long-term rating to the proposed dollar-denominated sukuk issuance by Pakistan, betting on the country’s repayment ability amid a need of foreign inflows.
S&P also assigned ‘B’ long-term foreign currency rating to the proposed benchmark sized US dollar-denominated senior unsecured notes issued by the country. S&P Global Ratings assigned the rating to the planned US dollar-denominated sukuk (trust certificates) issuance by The Third Pakistan International Sukuk Co., which is a public limited liability company.
“The preliminary ‘B’ issue rating on the trust certificates reflects the rating on Pakistan because the transaction fulfils our conditions for rating sukuk at the same level of its sponsor,” the rating agency said in a statement.
Topline Securities, in a report, said the government may raise the amount with pricing in the range of 5.5 to 7 percent for 5 to 10 years. “This will provide the much needed support to Pakistan’s foreign exchange reserves.”
In October last year, government raised one billion dollars through issuance of 5-year sukuk at a historic low rate of 5.5 percent. The country floated a 10-year Eurobond of $500 million at 8.25 percent in 2015. These bonds had S&P rating of B-.
S&P said Pakistan will provide sufficient and timely contractual obligations for the repayment of the periodic distribution amounts and the principal amount at the maturity of the sukuk or in the case of an early dissolution event through the lease agreement and the purchase undertaking.
“The obligations of Pakistan are irrevocable and unconditional,” it added. “These obligations will rank equally with Pakistan’s other unsecured and unsubordinated external indebtedness.”
The agency said under the sukuk legal documentation the country will undertake to cover all the costs related to the transaction “and we

assess as remote the risks that a total loss event jeopardises the full and timely repayments of the trust certificates.”
“Pakistan’s legal obligations under the sukuk terms and conditions might leave investors exposed to residual assets risks,” it added. “Pakistan has the obligation to ensure that the assets are covered by insurance and to make up any shortfall between insurance proceeds and the principal amount, under a total loss event scenario, unless it proves beyond any doubt that it has complied with its insurance obligations.”
It should be noted that Pakistan’s credit rating has remained stable or improved during the last few years. International credit rating agencies Moody’s, Fitch and S&P rate Pakistan B3 (stable), B (stable) and B (stable), respectively.
S&P, in a previous report, said it does not expect Pakistan’s external and fiscal situation to deteriorate materially from the current levels. The country’s economic prospects remain favourable, it added.