Fitch Ratings has expanded its Country Groups for the Country-Specific Treatment of Recovery Ratings (RRs) by including five additional members of the Organisation of Islamic Cooperation (OIC), bringing the total number of covered OIC countries to 19. Despite this expansion, around 70% of these countries remain classified in Group D, a category where recoveries in the event of default range from average to poor. This indicates continued challenges in recovery prospects for many OIC nations.
Among the 19 OIC countries, the UAE and Qatar maintain the highest ratings in Group B, where recoveries can range from superior to poor. Countries like Saudi Arabia, Malaysia, Bahrain, and Oman are placed in Group C, where recovery outcomes vary from good to poor. However, many of the OIC countries, including Egypt, Turkey, Indonesia, and others, are in Group D, highlighting the ongoing difficulties faced by these nations in ensuring favorable recovery outcomes. Notably, none of the OIC countries are in Group A, where recovery outcomes range from outstanding to poor.
Despite the challenges reflected in recovery ratings, the global sukuk market remains relatively stable, with default rates for sukuk at just 0.19% as of the end of 2024. This is largely attributed to the prevalence of sovereign and supranational issuers, which constitute 57% of Fitch-rated sukuk, followed by financial institutions at 17%. Over 70% of the global outstanding dollar-denominated sukuk are rated by Fitch, with a substantial portion (81.3%) classified as investment-grade and 91.3% maintaining a Stable Outlook.
However, there is still considerable uncertainty surrounding default resolution in sukuk-issuing countries due to the lack of precedents and the developing nature of debt capital markets. While most sukuk defaults have been resolved outside of court, a few court-supervised defaults in the past five years have raised questions about the transparency and consistency of resolution mechanisms.
The majority of sukuk issued are asset-backed or originator-backed, with investors typically having no enforcement rights over the underlying assets. The development of secured sukuk could offer additional protections for investors and potentially receive higher ratings than unsecured debt. However, Fitch applies no uplifts for secured debt in Group D countries, where the majority of OIC nations are categorized.
The introduction of the AAOIFI Sharia Standard No. 62, which is currently in draft form, could have a significant impact on the market, as it requires the transfer of legal ownership of underlying sukuk assets to sukuk holders. The full effects of this standard will depend on its finalization and adoption, as well as how it is incorporated into sukuk documentation.
Fitch’s Country Groups are designed to account for the specific challenges faced by certain countries when determining recovery ratings for sukuk and other instruments. Countries in Group A can have recovery ratings up to ‘RR1’, while Group B countries can reach up to ‘RR2’, Group C up to ‘RR3’, and Group D up to ‘RR4’. These groupings are based on an assessment of each country’s governance environment, using indicators from the World Bank’s World Governance Indicators, which cover Rule of Law, Regulatory Quality, and Control of Corruption.
Fitch may also apply qualitative adjustments to a country’s grouping, depending on specific insolvency-related factors that could influence the predictability of recovery outcomes in that jurisdiction.
