Moody’s assigns stable outlook for SEC’s proposed sukuk

Moody's Investors Service yesterday assigned a provisional (P)A1 rating to the proposed issuance of trust certificates (or sukuk) by Saudi Electricity Global SUKUK Company 2 (SEGSC2), a special purpose vehicle of Saudi Electricity Company (SEC). The outlook on the rating is stable.
Moody's will remove the rating's provisional status upon the satisfactory review of the final documentation.
Moody's considers the sukuk, which follows the structure of an ijara transaction, to be a senior unsecured obligation. The rating agency's assignment of a provisional (P)A1 rating to the sukuk is in line with SEC's long-term issuer rating and reflects (1) the ultimate obligation of SEC to ensure that the periodic distribution amount is always maintained and (2) the existence of a purchase undertaking, which implies that certificate/sukuk holders ultimately rely on the creditworthiness of SEC for repayment when the trust is dissolved. Certificate holders have no security, lien or pledge over any of the leased assets. Under the structure, SEC acts as servicing agent and lessee.
According to the terms of the sukuk, SEC will issue the securities through SEGSC2.
Upon issuance, the sukuk holders will pay the proceeds of the transaction to SEGSC2, which will in turn pay an equivalent amount to SEC under the purchase agreement for the leased assets. sukuk holders will periodically earn an amount that reflects the rent due in respect of the ijara agreement.
Payment obligations under the various documents — especially under the ijara agreement and purchase undertaking — will be direct, unconditional, unsecured and general obligations of SEC and rank at least pari passu with all other unsecured, unsubordinated and general obligations of the company. At maturity or upon a dissolution event, SEC is required by means of the purchase undertaking to fully repay, including any unpaid and accrued periodic distribution amount, the aggregate face value of the certificates/sukuk.
The purchase undertaking contains a change-of-control clause in the event of (1) the government of the Kingdom of Saudi Arabia ceasing to own more than 50 percent of the shares of SEC or ceasing to control SEC, either directly or indirectly; or (2) SEC itself ceasing to own more than 50 percent of the shares of a principal subsidiary or ceasing to control a principal subsidiary. Other dissolution events include total loss, default on payment, and insolvency among other contractual obligations. The terms and conditions of the sukuk include a negative pledge and a cross-default clause that captures material subsidiaries with certain carve-outs.
The purchase agreement and underlying sale substitution agreements for each undertaking will be governed by the laws of Saudi Arabia, whereas the following will be subject to the jurisdiction of the English courts: The agency agreement, the declaration of trust, the ijara agreement, the substitution undertaking, the purchase undertaking, the sale undertaking, the servicing agency agreement and the subscription agreement. All obligations are assumed to be legally valid, binding and enforceable. The provisional rating of the proposed certificates assumes that the final transaction documents will not be materially different from the draft legal documentation reviewed by Moody's.
While Moody's does not opine on the transaction's compliance with Shariah law, it would expect a recognized Shariah Board to examine the structure and pronounce that the structure and the mechanism of the transaction are acceptable within the principles of Shariah prior to closing.
SEC's A1 rating is mainly supported by its low business risk profile. The company enjoys a dominant domestic market position as the integrated and exclusive electricity provider in Saudi Arabia, either directly or through independent power purchasers in which it owns a stake. The regulatory environment remains highly supportive, although not as developed or contractually beneficial as other Gulf Cooperation Council jurisdictions, given the absence of total cost recovery principle.
SEC's baseline credit assessment, which measures its standalone financial strength, is underpinned by the government's proven track record of substantial support for the company. Moody's expectation is that SEC will continue to receive such support. This support is mainly provided in the form of (1) a favorable procurement cost structure, as SEC sources its fuel needs exclusively from Saudi Aramco, the state-owned national oil company of Saudi Arabia, an arrangement that has been based on a non-cash settlement basis since inception; (2) recurrent support for SEC's capital structure (notably via gradual transfers of accrued Saudi Aramco payables to a government account). Based on the government's proven track record of support, Moody's expects that it will remain a primary provider of funds to SEC through committed government soft loans totaling SR 81.0 billion, of which SR 40.2 billion had been utilized as of Dec. 31, 2012.
The stable outlook reflects Moody's expectation that there will be no material adverse changes in the framework under which SEC currently operates, and that future initiatives to be taken by SEC and the government would adequately adjust the company's capital structure to prevent imbalances.