Luxembourg– The payment obligations associated with these certificates are direct obligations of the Government of Luxembourg, and, as such, carry a rating in line with the sovereign.
The (P)Aaa rating assigned to the trust certificates is in line with the long-term issuer rating of the Government of Luxembourg. This credit assessment reflects the fact that Sukuk certificate holders will (1) effectively be exposed to the Government of Luxembourg’s senior credit risk; (2) not be exposed to the risk of performance of the Lease Assets relating to the Certificates; (3) 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 (4) only have rights against the Government of Luxembourg, ranking pari passu with other senior unsecured obligations as provided in the Transaction Documents.
This rating action concerns a new rating solicited by the Government of Luxembourg for a sukuk issuance that was not in the market at the time that the sovereign release calendar was published in December 2013, and is therefore being released on a date not listed in that publication. Moody’s expects to assign a definitive rating upon the closing of the proposed issuance and a review of its final terms. The rating agency also notes that its Sukuk rating does not express an opinion on the structure’s compliance with Shari’ah law.
Moody’s highlights that in July, the Parliament of Luxembourg passed a bill that authorised the government to issue its first Sukuk, using tangible real-estate assets. “The issuance will enable the government to diversify the investor base for government debt, reinforce Luxembourg’s position as an important financial centre and encourage the development of Islamic finance in Luxembourg” says Lucie Villa, an AVP-analyst in Moody’s sovereign team. The financial sector is critical for the Luxembourg economy, accounting for a quarter of gross value added and about 12% of employment.
The proceeds of the Sukuk certificates will be used by Luxembourg Treasury Securities SA to acquire a portfolio of real-estate ‘Ijara’ assets from the government. During the length of the maturity of the Sukuk certificates, it will lease the properties to the government and the rental income it receives will be paid to investors (Sukuk certificate holders). Upon maturity of the Sukuk, Luxembourg Treasury Securities SA will sell back the leased assets to the Government of Luxembourg and will pay back the certificate holders with the proceeds from the sale. The government of Luxembourg is liable for any shortfalls in distribution amounts or in case of Total Loss Event.
In Moody’s view, the Aaa ratings of the Government of Luxembourg are supported by: (1) the country’s high level of wealth and relatively strong growth prospects, which balance the economy’s small size and its reliance on the financial sector; (2) strong institutions and political stability; as well as (3) sound fiscal and debt metrics.
The (P)Aaa rating of the Sukuk programme is aligned with the Government of Luxembourg’s Aaa issuer rating. Therefore, the rating on the Sukuk instrument will move in tandem with the Government of Luxembourg’s issuer rating.
Downward pressure on the Government of Luxembourg’s ratings could develop from: (1) a large increase in the government’s debt burden; and/or (2) reduced government’s financial buffers, since the small size of the economy limits its ability to take on significant quantities of additional debt.
Originally published on www.cpifinancial.net