(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the ‘saA-’ issue rating on the Saudi Arabia national scale assigned to the Senior Unsecured Sukuk 2nd tranche of SAR150mn issued by Bidaya Home Finance (BHF) under its SAR1bn Sukuk issuance programme. The Outlook for the rating remains Stable.
The issue rating reflects CI’s assessment of BHF’s fundamental credit strength and general repayment capacity since the transaction does not contain any structural credit enhancements, and BHF’s payment obligations under the transaction documents constitute direct, unconditional, unsubordinated and unsecured obligations of the Company that rank pari passu with its other unsubordinated and unsecured financial obligations.
Under the transaction documents, BHF has entered into a combination of a mudaraba agreement for 51% of Sukuk proceeds (to be invested in the Sharia compliant business of the Company), and a commodity murabaha agreement for the remaining 49% of the proceeds.
BHF’s payment obligations include covering periodic distribution amounts from the income generated by the mudaraba assets and meeting the principal due at maturity by paying the murabaha deferred sale price for a portfolio of Sharia compliant commodities (which will equal up to 100% of the Sukuk’s face value), as well as by liquidating the mudaraba assets.
Although BHF has secured funding lines, the proportion of the financings that was encumbered at end-March 2022 was 45%. As a result, CI believes that the degree of effective subordination at this point is insufficient to warrant a downward notching of the issue rating. Furthermore, CI expects the share of encumbered assets to decline in the short term given BHF’s intention to progressively replace existing secured bank lines with unsecured Sukuk debt.
The rating is mainly supported by BHF’s sound capital base together with low leverage (for an NBFI) and the still modest non-performing financing leases (NPFL) ratio. BHF’s prospects are seen as a supporting factor given its developing franchise in the rapidly growing Saudi home finance market. Also supporting the rating are the significant government stake in the Company’s capital (BHF was founded by the Saudi government and other shareholders with the goal of establishing a national home financing solution for the KSA), and the resulting good access to government-related home financing business. Despite the priority given to boosting home ownership in the KSA as part of the Kingdom’s National Transformation Programme (NTP) 2030, the likelihood of extraordinary support in the event of need is deemed to be only moderate as the KSA government does not have a majority stake in BHF.
The main factors constraining the rating are the comparatively small balance sheet size and the Company’s relatively short track record. Also constraining the rating are the inadequate liquidity coverage of short-term debt owing to structural maturity mismatches and low financing loss reserve (FLR) coverage. However, the low FLR coverage is mitigated by BHF’s solid effective coverage ratio together with the existence of good collateral, including government guarantees on a large portion of the portfolio. In addition, the rating is constrained by still modest – albeit improving – profitability, which is due to moderate fee income generation, high operating expenses, and significant risk charges.
BHF is one of the largest NBFIs providing home finance on a Sharia compliant basis in the KSA. After five years of rapid cumulative financing lease (FL) growth, BHF has gained a small market share in residential home financing. BHF also offers servicing of FLs for third parties through government backed programmes that support home-ownership. Despite its relatively short track record, BHF has developed an established franchise and is well-regarded in the local market. The home financing market is expected to continue to record sustained growth over the next 3-5 years given pent-up demand for housing and the demographics of the Saudi population. BHF is in a position to capitalise on the growth potential of the local home financing market. Notwithstanding fast growth and the resultant increase in term debt, BHF’s leverage remains one of the lowest seen among NBFIs rated by CI and is expected to remain so in the short term.
Asset quality remains satisfactory, subject to only adequate loss absorption capacity. The NPFL ratio (net of deferred income) has been maintained at a low level, reflecting prudent origination and underwriting standards. At the same time, concentrations by individual borrower have remained low – a reflection of the nature of BHF’s business model. Although FLR coverage declined to a low level following IFRS 9 implementation, this in part reflects the existence of good collateral. The latter, in turn, produces a satisfactory financing-to-value ratio. Similarly, the utilisation of the Mortgage Guarantee Scheme (MGS), launched by the government in 2018 to provide new lending to lower income earners, also supports recoverability given that an important share (21%) of the portfolio bears a government guarantee of 80% of the balance due in case of default. Similarly, a further 9% of FLs benefit from other government-backed schemes such as the subsidy programme that funds a part of monthly payments and the down payment that subsidises a portion of the latter. BHF’s effective coverage ratio remained solid, reflecting its sound capital base.
Despite the maturity mismatches that result from fund long-dated assets in the financing portfolio being funded by short- to medium-term maturity revolving facilities, BHF has been careful to match the rapid lending growth with pre-arranged new funding, including several tranches of Sukuk issuance, as well as bank debt. Nonetheless, coverage of short-term debt by liquid assets (cash and short-term FLs, as well as committed undrawn lines) was inadequate at end-2021. Furthermore, there is some concentration on bank debt by source. In case of need, BHF could however bridge any future gaps through FL portfolio sales; these take place on a regular basis and form part of the Company’s business model. In 2021 BHF sold a large volume of FLs to government-owned Saudi Real Estate Refinancing Company (SRC), the proceeds of which were partly used to repay the large liability to the Ministry of Housing (MoH). In addition, the Company has recently secured a large funding line with long-term duration from another local bank, addressing to some extent the structural maturity mismatch.
Despite some minor improvement, profitability – as measured by the ROAA – remained modest in 2021, hindered by relatively low fee income generation, high operating expenses (and resulting high cost-income ratio), and considerable risk charges. While net profit increased to some extent, this was mainly attributable to sizeable gains on FL portfolio sales to the SRC. At the same time, profitability at the operating level (before provisions and zakat charge) strengthened to a just adequate level, supported by sound growth in net financing income and the gains on FL sales; such gains are expected to repeat as further FL disposals to the SRC are planned, although this introduces a degree of volatility to both income and net profit numbers. CI expects core pre-provision profitability to continue improving in the short term thanks to a satisfactory net financing margin, as well as growing fees from FL servicing. However, ROAA is anticipated to remain pressured by risk charges over the medium term. In that regard, management has informed CI that impairment charges for credit losses taken to date have been higher than those mandated by IFRS 9 and regulatory requirements.
The Stable Outlook reflects our expectation the issue rating will remain unchanged over the next 12 months. This in turn assumes that BHF’s asset quality, capitalisation and leverage will remain relatively stable, and that its funding and liquidity in particular will not come under pressure.
Rating Dynamics: Upside Scenario
The issue rating could come under upward pressure in the short term were the Company to achieve its ambitious short- to medium-term growth targets, which would translate into enhanced economies of scale and strengthened operating profitability.
Rating Dynamics: Downside Scenario
The issue rating could come under downward pressure if BHF’s asset quality were to deteriorate significantly, or if there were to be a sufficient increase in borrowings to raise leverage considerably and further weaken liquidity coverage of short-term debt. The rating could also be lowered if the expectation of implicit support from the authorities is lowered, or the Company’s currently good access to government-related business diminishes. Finally, the rating could come under downward pressure should drawdowns under secured bank lines further raise the degree to such an extent that CI judged this Sukuk to have become structurally subordinated.
* A National Rating summarises the repayment risk of an entity relative to other entities within the same economy. It is not an absolute measure of credit risk. National Ratings are not directly comparable across borders.
Primary Analyst: George Panayides, Senior Credit Analyst; E-mail: email@example.com
Secondary Analyst & Committee Chairperson: Rory Keelan, Senior Credit Analyst
About the Ratings
The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.
The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2018-21 and Q1 2022. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.
The principal methodologies used to determine the ratings are the Corporate Rating Methodology (see the Bond Rating Methodology (see and the National Scale Ratings Criteria for Saudi Arabia, dated 16 November 2020 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at
Ratings on the SAR150mn sukuk were first released in November 2020 and last updated in July 2021. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure. The ratings have been assigned or maintained at the request of the rated entity or a related third party.
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