Moody’s Investors Service and Fitch Ratings have assigned Philippines’ first US dollar-denominated, 5.5-year sukuk bonds with good ratings, the same as the sovereign issuer ratings.
Moody’s tagged the sukuk issuance with a “Baa2” rating while Fitch placed a “BBB” on the maiden bonds. Both have “stable” outlook.
Moody’s said the Shari'ah-compliant trust certificate or sukuk issuance will “constitute direct, unconditional and unsubordinated obligations of the Government of the Philippines (the issuer)” and thus assigned with a medium grade and moderate credit risk rating with some speculative characteristics.
The benchmark-size issuance which is at least $500 million "will be issued by a special purpose vehicle (ROP Sukuk Trust) and will "rank pari passu with all of the issuer's current and future senior unsecured external debt obligations,” Moody’s noted, following the government’s announcement on Nov. 27 of the inaugural sukuk transaction.
Moody's also said that its ratings "do not express an opinion on the structures' compliance with Shari'ah law.”
As for Fitch, its sukuk's rating is driven solely by the Philippines' Issuer Default Rating (IDR), which it affirmed at “BBB” with a stable outlook.
“This reflects our view that a default of the senior unsecured obligations would reflect a default of the Philippines, in accordance with our rating definitions,” it said.
Fitch did not consider any underlying assets or collateral provided as they “believe the issuer's ability to satisfy payments due on the proposed sukuk will ultimately depend on the government satisfying its unsecured payment obligations to the issuer under the transaction documents, as described in the offering memorandum and other supplementary documents.”
Meanwhile, Moody’s “Baa2” rating is accompanied by a stable outlook as well amid a recovering economy post-pandemic and “stabilization and eventual reversal of the deterioration in fiscal and debt metrics.
Moody’s reiterated that the sovereign rating was given due to the country’s “high potential growth and moderate government debt”.
It continues to note that the Philippines has “sustained strong access to domestic and international funding markets, a stable banking system and ample foreign-currency reserves to weather global capital flow volatility.”
It added however that structural credit challenges continue to come from the “low per capita income” and “constraints to the quality of institutions which stand in contrast to strong policy effectiveness, as well as very highly negative exposure to physical climate risks.”
While Moody’s assigned the Philippines with a “Baa2” sovereign rating, S&P Global has an equivalent of “BBB+” and a “BBB” by Fitch Ratings. All three credit ratings are investment grade with stable outlook which means there is a low probability of a change in ratings in the near term or in the next 12 months.
Meanwhile, the Bangko Sentral ng Pilipinas (BSP) said the debut of the Philippine sukuk bonds will “mark an important footprint in the development of the country’s Islamic capital market and finance ecosystem.”
“This will send a strong signal that the Philippine economy is ready to accommodate Islamic finance investors and players. This will also generate the push for the domestic market to explore private sukuk issuances to boost the country’s capital market,” said the BSP in a report.
The central bank said issuance of a sovereign sukuk will also provide Islamic banks with more liquidity, investment requirements and become a growth driver of Islamic finance in the Philippines.
So far, since the Islamic Banking Law was approved in 2019, the BSP has only approved one conventional bank that applied for an Islamic banking unit. To date, the only established Islamic bank in the country is the government-owned Al Amanah Islamic Investment Bank.
“Opportunities from sukuk issuances for Islamic banks in the country are anticipated,” said the BSP.
As per Section 6-c of the Islamic Banking Law, Islamic banks are allowed, upon obtaining prior Monetary Board approval, to issue sukuk and other Shari’ah-compliant funding instruments for their operations or capital requirements.
“Other prudential policies covering sukuk issuances are still in the pipeline,” said the BSP. Both the BSP and the Securities and Exchange Commission are crafting “relevant and responsive regulatory framework on sukuk,” it added.
Citing the 2023 Islamic Financial Services Industry Stability Report of the Islamic Financial Services Board, the BSP said sukuk dominates the Islamic capital market segment, accounting for $830 billion or 25.6 percent of the $3.2 trillion global Islamic financial services industry in 2022.
“Notably, 50 percent of overall sukuk issuances are sovereigns, which may utilize them as a funding source or to refinance maturing debt or shore up foreign reserves. Meanwhile, the combined share of the government and the financial sector accounts for 86 percent of global sukuk issuances,” said the BSP.