Fitch Ratings adds new OIC countries for recovery ratings

Zawya

29-01-2025

Dubai/Toronto: Despite the inclusion by Fitch Ratings of five additional Organisation of Islamic Cooperation (OIC) countries to the Country Groups for the Country-Specific Treatment of Recovery Ratings, about 70% of OIC countries continue to remain categorised in Group D. This group consist of countries where recoveries given default range from average to poor, underscoring ongoing challenges in recovery projections. The total number of OIC countries reported now stands at 19.
In Fitch's Country Groups, the UAE and Qatar continue to have the highest classification among the now 19 covered OIC countries, in Group B where recoveries given default range from superior to poor. This is followed by Group C, where recoveries given default range from good to poor, and includes Saudi Arabia, Malaysia, Bahrain, and Oman. Countries in Group D include Turkiye, Egypt, Indonesia, Bangladesh, Morocco, Nigeria, Tunisia, Azerbaijan, Jordan, Kazakhstan, Uzbekistan, Gambia, and Sierra Leone. None of the 19 OIC countries are in Group A, where recoveries given default range from outstanding to poor.
Sukuk default rates globally are very low, at only 0.19% of all sukuk issued as of end-2024. This is due to the predominance of sovereigns and supranationals as sukuk issuers at 57% among Fitch-rated sukuk, followed by financial institutions at 17%. Fitch rates over 70% of the global outstanding dollar-denominated sukuk, with 81.3% being investment-grade and 91.3% of sukuk issuers maintaining Stable Outlooks.
There remains resolution uncertainty for both sukuk and bonds in many sukuk-issuing countries, due to the lack of precedents for default resolution and the still-developing nature of the debt capital markets. Additionally, the decisions of a court in one case will have no binding authority with respect to another case in many sukuk-issuing countries, including in the GCC.
No sovereign sukuk has defaulted to date, with most sukuk defaults linked to corporates, and some by financial institutions. Apart from few court-supervised sukuk default resolutions over the past five years, most sukuk defaults were resolved out of court, resulting in limited transparency on the final outcome.
The majority of sukuk issued to date globally are originator-backed (or asset-based) and senior unsecured, with sukuk investors generally having no rights of enforcement against the underlying trust assets. Secured sukuk could provide additional security for investors, and it is possible these could be rated above an issuer's senior unsecured debt ratings. However, we apply no notching uplifts for secured debt for Group D countries, wherein the majority of the reported Muslim-majority countries lie.
There is a lack of established securitisation markets in most major Islamic finance jurisdictions across both bonds and sukuk. However, this may change to some extent with the introduction and adoption of the AAOIFI Sharia Standard No. 62 on sukuk, which is in exposure draft format. Draft texts have featured provisions requiring the transfer of legal ownership of the underlying sukuk assets, and related risks, to sukuk holders, who would have recourse to these assets, among other areas. The impact will depend on the finalised standard, which jurisdictions and entities adopt it, and, most importantly, how it is incorporated into sukuk documentation.
Country Groups
Country Groups constrain the assignment of recovery ratings (RRs) and the upward notching of instrument ratings from Issuer Default Ratings (IDRs) to reflect less predictable range of recovery outcomes in certain jurisdictions based on country-specific factors. Countries are classified into four groups, each with different caps on instrument ratings and RRs.
Instruments by issuers in countries in group A can be assigned RRs up to 'RR1'; group B up to 'RR2'; group C up to 'RR3', and group D up to 'RR4'. The classing into groups is anchored on an assessment of each country's governance environment, leveraging three indicators reported by the World Governance Indicators project of the World Bank: Rule of Law, Regulatory Quality, Control of Corruption.
Fitch may apply a qualitative overlay to adjust downward the grouping of a country when we recognise material insolvency-specific factors, not reflected in the general governance assessment by World Governance Indicators project of the World Bank, that may have a significant influence on the predictability of insolvency outcomes within a jurisdiction.
Media Contact:
Matt Pearson
Senior Associate, Corporate Communications
Fitch Group, 30 North Colonnade, London, E14 5GN
E: [e-mail]