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