Moody’s Investors Service Monday affirmed the A1 long-term issuer rating of Saudi Electricity Company (SEC) and the A1 ratings on the trust certificates (sukuk) issued under Saudi Electricity Global SUKUK Company and Saudi Electricity Global SUKUK Company 2.
Concurrently, Moody’s has assigned a provisional (P)A1 rating to the proposed sukuk issuance by Saudi Electricity Global SUKUK Company 3 (SEGSC3), a special purpose vehicle of SEC. The outlook on the ratings is stable.
Moody’s issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody’s preliminary credit opinion regarding the transaction only.
Upon a conclusive review of the final documentation, Moody’s will endeavor to assign a definitive rating to the notes. A definitive rating may differ from a provisional rating.
Moody’s considers the sukuk, which follows the structure of an Ijarah 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 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 SEGSC3. Upon issuance, the sukuk holders will pay the proceeds of the transaction to SEGSC3, 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 Ijarah agreement.
Payment obligations under the various documents – especially under the ijarah 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 agreement and underlying sale 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 ijarah agreement, the
substitution undertaking, the purchase undertaking, the sale undertaking and the servicing agency 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 long-term issuer rating is mainly supported by its low business risk profile in conjunction with the high support provided by the government of Saudi Arabia. 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.
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.
A rating upgrade is unlikely in the medium term, given the company’s substantial investment plans and the anticipation of rising commercial debt, as well as the absence of an explicit government guarantee that would prevent, in our view, SEC’s ratings being on par with that of the
sovereign. However, a sovereign upgrade could also trigger an upgrade of SEC’s ratings.
Any events — however unlikely — that would constitute a step-change in government regulatory policy toward SEC could result in the company’s final rating being lowered closer toward its BCA level. This could include the government calling on cash dues, which Moody’s does not
The current ratings assume that SEC’s low risk business profile, supported by its fully integrated operations, will be maintained, although some organizational unbundling may be expected over the medium term. The implementation of a more aggressive form of ownership unbundling could have negative implications for the company’s underlying credit profile.
Any change in Moody’s current high support assumption or a downgrade of the sovereign rating could also negatively impact ratings. Finally, if the company’s standalone metrics weaken to an extent which compromises the standalone strength of the business, the A1 final rating could also come under pressure.