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The Pakistan Credit Rating Agency The Pakistan Credit Rating Agency

The Pakistan Credit Rating Agency - PowerPoint Presentation

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The Pakistan Credit Rating Agency - PPT Presentation

PACRA Credit Ratings For Islamic Instruments May 0712 1 ADNAN AFAQ MD PACRA About PACRA 1 PACRA Pakistans first rating agency 1994 ID: 624205

amp risk sukuk credit risk amp credit sukuk rating ratings market world islamic pacra relative due tax agreed asset

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Slide1

The Pakistan Credit Rating Agency PACRA Credit Ratings For Islamic Instruments May 07’12

1

ADNAN AFAQ

MD PACRASlide2

About PACRA1. PACRA, Pakistan’s first rating agency – 1994 Banks AMC Insurance Refineries IPPs Corporate Sukuks2. JV : IFC + Fitch Ratings + Lahore Stock Exchange

3. To date + 1,500 rating opinions

Rated 85% of debt instruments in Pakistan

4. Recognized by Apex Regulators – Pakistan &

Bangladesh5. Development work for World Bank: Bond Market - NBFI sector6. We do: Risk Advisory, Specialized Training on Risk Management Corporate Governance Assessment (IFC model)

2Slide3

Development of Credit RatingsCoverage of rating agencies (~ 90% of World GDP)3Slide4

Why Credit Rating?Bank Deposits Tax Payers’ money Listed Companies InsuranceReal Estate ProjectsMutual Funds4WheneverPublic Moneyis investedDisclosure of Risk & Returnis imperative

Risk & Return Correlation

Transparency:

Independent view of riskSlide5

Why Credit Rating 5ManagementInvestorRegulators

Market condition

Market action/inaction

Not possible to

capture without quantification Matching of Risk & returnIdentify Risk FactorsEnterprise Risk levelSystemic RiskTransparencyRelative Position Greater Access to CapitalTimely ActionSlide6

Crux of Islamic FinanceTransaction must have real economic purposeNo undue speculation allowed [Gharar]No exploitation or sinful activities permittedUnderlying concept: Sharing of risks & rewardsRiba: Interest & other Unlawful gain are prohibited6Slide7

World Sukuk MarketsTotal Sukuk Size: $215 b outstandingSource: www.zawya.com 7Slide8

World Sukuk MarketsMain Players:Malaysia (60-70% of new issuances globally) Saudi ArabiaUAEPakistanLatest happenings Malaysia- Largest Islamic bond Plus highway $10bbnSaudi Arabia- rise in activity: Civil Aviation, Saudi bin Ladin SATORPSouth Africa- Treasury Sukuk proposition Thailand- Tax IncentiveOman- Infrastructure Sukuk proportionJapan- Changes in tax & stamp dutiesIreland

- Finance Bill 2010 facilitate Islamic Finances

Preparing Launch

Azerbaijan

KazakhstanAustraliaIndiaJapanSingaporeNigeriaIreland8Slide9

Resembles a conventional lease agreementLate payment charges paid to charityFinancier commissions the construction/manufacture of assetSimultaneous forward Ijara agreementSale of agreed asset at cost plus agreed profit marginProvides liquidity to the customerFunds entrusted with a corporate for use in pre-agreed business Profit & loss sharingSimilar to Mudaraba but this is an equity stakeProfit & loss sharingIntroduction to Sukuks9

Plural of

Sak

– meaning

‘certificates’ in ArabicBeneficial ownership interest in a tangible asset &/or resulting cash flows Risks associated with structure typeSlide10

Sukuk Ratings Rating looks through the structure of the Sukuk at the originator of the transaction.10

Step 1; Base rating = originator’s Rating

Step 2; Notching

[

Up –Down ] dependent on:Type of claim or underlying contract Ijara ensures predictable returns due to fixed rentals while Musharaka is equity-based and hence less predictableQuality of assets underlying the transactionMechanisms like reserves can further enhance creditSukuk rating will be IDR plus one or multiple notches depending on strength of afore-mentioned factorsSlide11

Credit Risk Assessment Pyramid11Relative PositioningMacro-Economic EnvironmentBusiness Life-cycle

Long-term Sustainability

Short-term Sustainability

11Slide12

Credit Ratings – An Introduction12Credit QualityRating CategoryExceptionally StrongAAAVery StrongAAStrong

A

Adequate

BBB

SpeculativeBBHighly SpeculativeBHigh Default RiskCDefaultDInvestment GradeSpeculativeRating Scale – To measure relative credit riskSlide13

Default…Failure to perform an obligations laid down in the agreementFailure to pay amounts due;Very strict adherence to covenants (promise) Brings Market DisciplineCreates Credit History13Slide14

Limitations of SukukEnforcement not ensured (lack of legal precedent) Interpretation may differences between Shariah and local courts2. Register able asset not always transferred to SPV:Due to Foreign ownership Cumbersome Expensive 14Slide15

Iranian Sukuk MarketSource: SEO Iran 15Slide16

AnyQ & A ??? Thank You!16