OREANDA-NEWS. Fitch Ratings has affirmed the Islamic Corporation for the Development of the Private Sector (ICD)'s Long-term foreign currency Issuer Default Rating (IDR) at 'AA' with a Stable Outlook. The Short-term IDR has been affirmed at 'F1+'. Fitch has also assigned Hilal Services Ltd's (Hilal) proposed Medium Term Notes Programme, a 'AA(EXP)' expected rating, in line with ICD's IDR of 'AA'.

ICD's ratings reflect the strong support of the bank's key shareholders.

The final rating on Hilal's programme is contingent on the receipt of final documents conforming to the information already received.

KEY RATING DRIVERS
The affirmation of ICD's IDRs reflects the following key rating drivers:

ICD is a subsidiary of the Islamic Development Bank (IsDB). They share some services like IT infrastructure and premises, and IsDB has three representatives on ICD's board of directors. ICD's ratings are driven by support from key shareholders, IsDB (AAA/Stable) and Saudi Arabia (AA/Negative), which owned 45.6% and 18.2% of capital, respectively, as of end-October 2015. As a result of the upcoming capital increase, IsDB's share-ownership will be diluted to 35% by 2020. However, Saudi Arabia and IsDB will remain key shareholders, with a combined 53% of the share capital.

Unlike most multilateral development banks (MDB), ICD has not issued callable capital. Although there has been a proven track record of liquidity support by IsDB, there is no legally binding support mechanism to address capital shortages. Fitch therefore considers propensity to support to be weaker than peers' and factors this into the ratings.

ICD's portfolio includes equity participations and loans to the private sector. The latter are expected to rise at a fast pace, with a focus on South and South East Asia and Africa. This will improve the geographical diversification of the portfolio, which is currently concentrated in the Middle East and Central Asia. Outstanding loans and equity stakes should grow by about 23% per year in the next three years.

To support the rapid expansion in operations, ICD shareholders have launched a substantial capital increase in 2015 (USD1bn, comprising paid-in capital), that will be spread over four years starting in January 2017. Fitch consequently expects the equity to asset ratio to remain above 45%. Also, at end-2015, the bank will for the first time tap the debt market via a debut Sukuk issue. Internal capital adequacy requirements set the minimum Basel II capital ratio at 35%. As of end-2014, this ratio was 42%.

Credit risk is ICD's key intrinsic rating weakness. The average rating of the loan portfolio is 'B+' and, at 12.7% (end-2014), the loan impairment ratio is one of the highest among multilateral development banks. However, it has improved over the past two years (21.5% in 2012) and should further decrease as risk management is strengthened. Fitch also expects in the medium term a reduction in risk concentration, driven by the rapid increase in the portfolio size and the geographical diversification of operations.

ICD's liquidity has weakened over the past two years, with short-term assets covering only 56% of short term debt at end-2014. The treasury portfolio is of low credit quality, largely made of bank placements in banks of weak and medium credit quality. However, ICD is committed to improving the quality of its treasury assets, and the funds raised by the end-2015 debt issue will help replenish the liquidity reserve.

The expected rating for Hilal's proposed Medium Term Notes Programme reflects the following key rating drivers:

The Sukuk rating is driven solely by ICD's IDR of 'AA', due to the Sukuk's structure and documentation, which include the following features:

ICD has undertaken and shall be unconditionally and irrevocably obliged to purchase the outstanding portfolio on the maturity date and/or following the occurrence of a dissolution event pursuant to the purchase undertaking deed and the relevant ICD purchase agreement.

The purchase price payable by the ICD pursuant to each of the purchase agreement or sale agreement will be an amount equal to (a) the aggregate face amount outstanding of the trust certificate; and (b) the amount of accrued but unpaid periodic distribution amounts of the relevant series on such date together with any additional amounts required to be paid in respect of this relevant series.

Prior to each periodic distribution date in respect of the trust certificates, the revenues generated by the portfolio (in the form of income derived from the Assets) will be paid into an account of the trustee in accordance with the service agency agreement and the agency agreement, in an aggregate amount up to the then applicable periodic distribution amount payable to the certificate holders. However, , pursuant to a guarantee issued by ICD in favour of the trustee, ICD will guarantee to the trustee the punctual performance of any and all payment obligations arising or falling due under or in respect of the assets constituting the portfolio in order to enable timely payment of profit amounts due to certificate holders under the trust certificates.

ICD's guarantee will only cover periodic distribution.

ICD's payment obligations pursuant to the programme documents and transaction documents are direct, unsubordinated and unsecured obligations and rank pari passu, without any preference or priority, with all other unsecured obligations (other than subordinated obligations, if any) of ICD from time to time outstanding.

Fitch also notes that the Sukuk programme does not benefit from a cross-default provision, although in view of ICD's rating, we do not consider this a material weakness.

The programme documents (with the exception of the corporate services agreement and the share declaration of trust will be governed by English law. The corporate services agreement and the share declaration of trust will be governed by the laws of the Cayman Islands. Fitch does not express an opinion on whether the relevant transaction documents are enforceable under any applicable law. However, Fitch's rating on the certificates reflects the agency's belief that ICD would stand behind its obligations.

Furthermore, by assigning ratings to the programme and certificates to be issued under it, Fitch does not express an opinion on the programme structure's compliance with sharia principles.

Fitch has given no consideration to any underlying assets or any collateral provided, as we understand that the issuer's ability to satisfy payments due on the certificates will ultimately depend on ICD satisfying its unsecured payment obligations to the issuer under the transaction documents.

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are evenly balanced. However, the following developments could result in a rating action:
- The introduction of a predictable and legally binding support mechanism could trigger positive rating action.
- A weakening of capacity to support evidenced by a downgrade of IsDB's ratings or a multi-notch downgrade of Saudi Arabia's ratings would lead to a downgrade of ICD, as would a weakening in Fitch's perception of the propensity to support by key shareholders.
- The rating of the programme will be influenced by changes in ICD's Long-term IDR. A downgrade of ICD's IDR would result in a downgrade of Hilal's ratings.

KEY ASSUMPTIONS
Fitch assumes that the combined share-ownership of IsDB and Saudi Arabia in ICD will remain above 50% until at least 2020.

Fitch does not consider foreseeable improvements in ICD's intrinsic quality are likely to lead to an upgrade in the medium term, given the dominance of shareholder support as a driver of the ICD's ratings.