By Babu Das Augustine, Banking Editor
Dubai: Rating agency Standard & Poor’s has a positive view of the new requirements for Sharia governance and disclosures proposed by the AAOIFI, however, analysts also see some unintended risks for the sukuk market from the proposed new standards.
The proposal to keep the special-purpose vehicle (SPV) issuing the sukuk totally independent from the sponsor, in effect requires the effective transfer of the underlying assets to it.
Most sukuk issued to date are based on contractual obligations of their sponsors. But if AAOIFI’s proposal is implemented, the market might depart from this common practice and shift toward sukuk where repayment is based largely on the underlying assets themselves, including recourse to them under scenarios of default.
“In our view, the market appetite for such instruments is yet to be demonstrated. Therefore, two points that require clarification are the mechanisms of recourse of investors in case of sukuk resolution and whether it would still be acceptable to issue sukuk where repayment relies solely on the contractual obligations of sponsors,” said Mohammad Damak, S&P’s global head of Islamic Finance.
AAOIFI proposal requires the appointment of an eligible and reliable trustee that understands and demonstrates compliance with Sharia and is independent and objective. Analysts see these requirements as a potentially disruptive change because currently the SPV issuing the sukuk generally acts as the trustee of the transaction. The SPV generally has no history of operations and is incorporated solely for the purpose of participation in the transaction.
AAOIFI’s proposal requires the absolute transfer of the assets to the SPV in a manner that creates a legal impediment for the sponsor or its creditors to have any legal rights over the assets in the event of bankruptcy of the sponsor.
“We are of the view that this requirement is contrary to market practices where the sponsor of the sukuk itself usually owns the SPV. The risks related to conflicts of interest are usually dealt with through the delegation of authority to an independent party. We believe that if the AAOIFI proposal is implemented as proposed, it could raise roadblocks for sovereign sukuk issuance as it might appear to be a disguised privatisation,” said Damak.