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Moody's assigns (P)A3 to Sharjah's sovereign Sukuk

September 1, 2014

Moody's Investors Service, has assigned a provisional rating of (P)A3 to the proposed US dollar Trust Certificates to be issued by Sharjah Sukuk Limited, a special purpose vehicle established in the Cayman Islands by the Government of Sharjah. The payment obligations associated with these certificates are direct obligations of the Government of Sharjah.

"The Government of Sharjah's debut Sukuk offering reflects the growing interest in Islamic finance as a source of sovereign funding," commented Khalid Howladar, Global Head of Islamic Finance at Moody's Investors Service. "

"Moody's A3 government bond rating and stable outlook on Sharjah is primarily supported by the emirate's very strong fiscal and government debt position, which benefits from the emirate's membership in the United Arab Emirates" notes Steffen Dyck, lead sovereign analyst for Sharjah.

The (P)A3 rating assigned to the Trust Certificates is at the same level as the long-term local-currency and foreign-currency issuer ratings of the Government of Sharjah, as the Sukuk certificate holders will (i) effectively be exposed to Sharjah's senior credit risk; (ii) not be exposed to the risk of performance of the Portfolio Assets relating to the Certificates; (iii) will not have any preferential claim or recourse over the Trust Assets, or rights to cause any sale or disposition of the Trust Assets except as expressly provided under the Transaction Documents; and (iv) only have rights against the Government of Sharjah, ranking pari passu with other senior unsecured obligations as provided in the Transaction Documents.

Moody's also notes that its Sukuk rating does not express an opinion on the structure's compliance with Shari'ah law.

Moody's says that the credit strength of the emirate is primarily supported by its very strong fiscal and government debt position. Aided by a competitive manufacturing sector, Sharjah's credit strength is also supported by the relatively higher degree of economic diversification -- compared to the rest of the United Arab Emirates (UAE, Aa2 stable) and countries in the Gulf Cooperation Council (GCC). Moody's also notes the benefits conferred by Sharjah's membership in the UAE federation.  However, given the small size of the emirate's economy and its economic linkages with the rest of the UAE, Sharjah is exposed to macroeconomic volatility. Institutional weaknesses are also manifested in a low degree of transparency from a statistical system that has limited coverage of economic data.

Moody's observes that Sharjah's government debt is low but rising. The rating agency also notes that the emirate's debt repayment ability is constrained by a narrow revenue base, characterized by the absence of value-added tax, sales or income taxes. Government revenues rely on receipts from the oil and gas sector, customs duties, and proceeds from land sales, but with only limited hydrocarbon reserves and projected declines in oil production.

Furthermore, Moody's notes the risk that the Sharjah government's balance sheet could be negatively affected by (1) any widening of fiscal deficits which lead to an unsustainable government debt build-up; and (2) a material deterioration in the financials of Sharjah's government-related issuers.

In Moody's view, Sharjah's government finances benefit significantly from the emirate's membership in the federation of the UAE, because the federal Ministry of Finance funds a large portion of public services for UAE nationals directly from its own budget, including defence and a basic level of education and healthcare; this spending is then supplemented by the Sharjah government. In particular, Moody's notes further credit-positive prospects relating to the successful completion of the government's current Public Finance Modernization Programme -- including deficit reduction and stabilisation of the government debt ratio.

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Source: CPI Financial

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