Rating Action Commentary
ֳ Assigns Philippines' Proposed USD Sukuk 'BBB' Rating
Mon 27 Nov, 2023 - 4:53 AM ET
ֳ - Hong Kong - 27 Nov 2023: ֳ has assigned the Philippines' proposed US dollar trust certificates (sukuk), issued through ROP Sukuk Trust, a 'BBB' rating.
ROP Sukuk Trust, which is administered by Land Bank of the Philippines - Trust Banking Group, is a legal entity in the Philippines set up solely for the purpose of participating in the transactions to which it is a party. It is also the trustee.
Key Rating Drivers
The proposed sukuk's rating is driven solely by the Philippines' Issuer Default Rating (IDR), which we affirmed at 'BBB' with a Stable Outlook in November 2023. This reflects our view that a default of the senior unsecured obligations would reflect a default of the Philippines, in accordance with our rating definitions.
We have not considered any underlying assets or collateral provided when assigning the rating, as we believe the issuer's ability to satisfy payments due on the proposed sukuk will ultimately depend on the government satisfying its unsecured payment obligations to the issuer under the transaction documents, as described in the offering memorandum and other supplementary documents.
We also believe the government would be required to ensure full and timely repayment of ROP Sukuk Trust's obligations due to the government's various roles and obligations under the sukuk structure and documentation, especially, but not limited to, the following features in the sukuk:
- Pursuant to the service agency agreement, the state, as servicing agent, will ensure sufficient funds are available to meet the periodic distribution amounts payable by the trustee under the certificates on each periodic distribution date. The state can take other measures to ensure that there is no shortfall and that the payments of principal and periodic distribution are paid in full, and in a timely manner.
- On any dissolution or default event, the trustee will have the right under the purchase undertaking to require the state, as obligor, to purchase all of its rights, title, interests, benefits and entitlements in, to and under certain eligible assets in consideration for payment by the obligor of the exercise price. The outstanding deferred sale price payable by the obligor under the master murabaha agreement and the exercise price payable under the purchase undertaking together are intended to fund the dissolution distribution amount payable by the trustee under the certificates. The dissolution distribution amount equals the sum of the outstanding face amount of such certificates, plus all accrued but unpaid periodic distribution amounts in respect of such certificates.
- The payment obligations of the state under the transaction documents are direct, unconditional, unsubordinated and unsecured obligations of the Philippines, which at all times rank at least equally with all of its other present and future unsecured and unsubordinated external indebtedness from time to time outstanding.
- The sukuk documentation includes an obligation for the state to ensure that at all times the tangible asset ratio is more than 50%. Failure of the Philippines to comply with this obligation shall not constitute an obligor event. However, if the tangible asset ratio falls to 50% and below but stays above 33%, the services agent will take the steps (in consultation with the sharia advisor) required to ensure the tangible asset ratio is restored to more than 50%. ֳ expects the state would maintain the tangible asset ratio at above 50% throughout the tenor of the sukuk given the sovereign's large pool of tangible assets, which make it unlikely it would run out of useable assets to comply with the tangible asset ratio requirement.
- In the occurrence of a total loss event, and unless the underlying assets are replaced, the certificates will be redeemed in whole at an amount equal to the dissolution distribution amount.
The sukuk documentation includes cross-default and cross-acceleration clauses, dissolution events, obligor events, and a negative pledge provision that is binding on the government.
Certain aspects of the transaction will be governed by English law, while others will be governed by Philippine law. We do not express an opinion on whether the relevant transaction documents are enforceable under any applicable law. However, the rating for the proposed sukuk reflects our belief that the government will stand behind its obligations.
We do not express an opinion on compliance with sharia principles when assigning ratings to sukuk certificates.
The following ESG issues represent key rating drivers for the proposed sukuk:
The Philippines has an ESG Relevance Score of '5' for Political Stability and Rights as well as for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. This reflects the high weight World Bank Governance Indicators (WBGIs) have in our proprietary sovereign rating model. The Philippines has a medium WBGI ranking at the 40th percentile.
Other key rating drivers for the Philippines can be found in the rating action commentary dated 10 November 2023.
The rating on the proposed sukuk is sensitive to any changes in Philippines' Long-Term Foreign-Currency IDR, which has the following rating sensitivities as per the aforementioned rating action commentary. The ratings are also sensitive to any changes to the roles and obligations of the Philippines under the sukuk's structure and documents.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Macro: Reduced confidence in strong, stable medium-term economic growth and continued adherence to sound economic policies.
- Public Finances: Failure to gradually reduce government debt/GDP ratio, for example, due to slowing fiscal consolidation to support growth.
- External: Significant deterioration in foreign-currency reserves and the country's net external debt position, for example, due to more persistent current account deficits than currently forecast.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Macro: Even stronger medium-term growth than currently forecast, and continued adherence to sound macroeconomic policies, supporting convergence of GDP per capita towards peer levels.
- Public Finances: Sustained reductions in government debt/GDP and debt/revenue ratios to levels significantly below the 'BBB' category median, for example, due to reforms to broaden the revenue base or gains in spending efficiency that do not undermine the growth outlook.
- Structural: Strengthening of governance standards towards those of the rating-category peer median, or sustained convergence of GDP per capita towards peer levels.
Date of Relevant Committee
09 November 2023
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The ESG profile is in line with that of Philippines. For more information on ֳ's ESG Relevance Scores, visit .
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Country Ceiling Model, v2.0.0 (1)
- Debt Dynamics Model, v1.3.2 (1)
- Macro-Prudential Indicator Model, v1.5.0 (1)
- Sovereign Rating Model, v3.14.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Philippines | EU Endorsed, UK Endorsed |