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Tue 27 Nov 2007 01:18 AM

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Legal questions hinder Islamic project finance

Uncertainties must be tackled if investment grade ratings to be awarded, agency says.

Islamic finance could make a major contribution towards funding up to $1 trillion of infrastructure projects over the next decade, however, legal uncertainties must be ironed out before investment-grade ratings can be awarded, Standard & Poor's said in a new report.

Challenges relating to Sharia compliance and the enforceability of creditor’s rights in local courts need to be overcome, S&P said in a new Credit FAQ which examines the complex financial structures of two recent sukuk issues and the potential for future projects to achieve investment-grade ratings.

'Project Finance Sukuk' looks at the most frequent questions S&P receives relating to rating activity, credit quality and recovery prospects for finance projects in the Middle East.

S&P has over the past 18 months assigned ratings to two project finance transactions featuring asset-based Islamic debt, or ‘sukuk’; DP World, rated A+/Stable/A-1, and National Central Cooling (Tabreed), rated BBB/Stable/--.

Credit analyst Karim Nassif said in a statement: “Legal title over the assets being financed is not effectively available for either DP World or Tabreed and as such, lenders’ security is weaker than we would expect for standard project financings.”

“There is no distinct separation between the project owner's financial troubles and the project itself. Under both sukuk, full bankruptcy remoteness is yet to be tested and there is no diversification of counterparty risk as typically seen with project financings” he added.

Tabreed and DP World sukuk achieved investment-grade ratings for their structural features such as enhancement and sovereign support rather than the economic fundamentals underlying the transaction.