UAE. Standard & Poor's Ratings Services said today that it assigned its 'A' issue rating to the proposed sukuk trust certificates to be issued late November, subject to investor demand, by ADCB Islamic Finance (Cayman) Limited, a special purpose company (SPC) of Abu Dhabi Commercial Bank (ADCB; A/Stable/A-1).
The 'A' rating on the proposed sukuk trust certificates is based on the 'A' long-term counterparty credit rating on ADCB.
The rating on the five-year US$750 million trust certificates reflects ADCB's irrevocable undertaking to purchase the assets held by the issuer at the redemption date of the sukuk. ADCB's sukuk obligation will also rank pari passu with all other senior unsecured obligations of ADCB.
In addition, the sukuk prospectus stipulates that in the event that the returns generated by the sukuk assets (defined as the wakala and mudaraba assets) are insufficient on any periodic distribution date to fund the periodic distribution amount due, ADCB shall use the balances in the relevant reserve account to close the gap.
Also, if sufficient funds are not available in the reserve accounts, we are of the view that ADCB will make a liquidity facility available to ADCB Islamic Finance (Cayman) Limited in the amount of the shortfall, which is Sharia compliant (in accordance with Islamic principles). We note that the wording of the prospectus does not explicitly provide a legally binding commitment under Sharia law, as this may be construed as contrary to the said law.
ADCB has indicated that the purpose of this sukuk is to enable it to raise funds in accordance with Sharia law, and use them for general funding purposes.
Under this transaction, the issuer will hold the property of the trust assets, in a trust capacity for the benefit of the certificate holders. The proceeds received from the issuance of the trust certificates will be invested in Sharia-compliant assets, for a period of time corresponding to the duration of the sukuk. This pool of assets may be complemented by the managing agent with other Sharia-compliant investments.
The yields generated by the pool of underlying assets will be collected by ADCB as the managing agent, for the wakala assets, and, specifically as mudarib for the mudaraba assets and will serve as the basis for the periodic distribution payments payable on the trust certificates.
On dissolution of the trust, which can take place at the maturity date of the sukuk or earlier because of dissolution events occurring, in accordance with the prospectus ADCB will undertake irrevocably to purchase assets held by the issuer, which will fund the dissolution distribution amount that is payable to the certificate holders, and which will be equal to the principal of the sukuk.
The ratings on ADCB continue to derive support from our view of its strong capitalization, adequate funding and liquidity, as well as the business and strong financial benefits from having the government of the Emirate of Abu Dhabi (AA/Stable/A-1+), through the Abu Dhabi Investment Council (ADIC; not rated), as its majority shareholder.
In our view, ADCB's financial profile improved over the last year. Constraining rating factors include a still fragile economic environment, and high lending concentrations that notably leave the bank vulnerable to potential unexpected rises in credit risk cost.
Our analysis is based on the interim transaction information made available by the bank to us as of Nov. 9, 2011. This information is posted in conjunction with the planned issuance of the sukuk (trust certificates) by ADCB Islamic Finance (Cayman) Limited, a special purpose company (SPC) incorporated in the Cayman Islands, which will enter into a purchase agreement with ADCB.
The rating assigned to the trust certificates is based on draft documentation. Should final documentation differ substantially from the draft version, the rating on the proposed sukuk trust certificates could be changed.
Note: This report does not constitute a recommendation to buy, hold, or sell the certificates.