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Rating Action:

Moody's assigns A2 rating to Saudi Electricity's green sukuk issuance; negative outlook

 The document has been translated in other languages

10 Sep 2020

London, 10 September 2020 -- Moody's Investors Service, ("Moody's") has today assigned an A2 rating to the proposed senior unsecured green sukuk certificates (the "Certificates") to be issued by Saudi Electricity Global SUKUK Company 5 (the "Issuer"), a special purpose vehicle established in the Cayman Islands (Aa3 stable) by Saudi Electricity Company ("SEC", A2 negative). The outlook is negative.

SEC is seeking to finance green projects relating to energy efficiency and renewable energy, such as smart meters and transmission and distribution infrastructure connecting renewable energy sources to the grid.

RATINGS RATIONALE

The A2 rating and negative outlook assigned to the Certificates are at the same level as the long-term issuer rating of SEC. In Moody's view, the Certificate holders (i) will be effectively exposed to SEC's senior unsecured credit risk; (ii) will not be exposed to the risks relating to the trust assets; (iii) will not have any preferential claim or recourse over the trust assets, or rights to cause any sale or disposition of the trust assets except as expressly provided under the transaction documents (which are governed by either English or Saudi Law); and (iv) will only have rights against SEC, ranking pari passu with other senior unsecured obligations as provided in the transaction documents. As such, a change in SEC's ratings will automatically be reflected in the rating of the Issuer and of the issued Certificates.

Moody's also notes that its rating of the Certificates does not express an opinion on the sukuk structure's compliance with the principles of Shari'ah, and for this it refers to the decision provided by the Shari'ah supervisory committees/boards of the joint lead managers for the issuance.

The Certificates follow an "Ijarah" structure, whereby proceeds will be used by the Issuer to buy certain electricity distribution assets (the "Assets") from SEC in Saudi Arabia. SEC will pay a certain rental amount on a semi-annual basis to lease the Assets from the Issuer, which will then be used to pay the periodic distribution amount to the Certificateholders. Under the servicing agency agreement, SEC as the servicing agent retains responsibility for the service, maintenance and insurance of the Assets. If an "SEC Event" occurs (analogous to an event of default), this will trigger a dissolution event, whereby the Certificateholders will have the right to instruct the immediate redemption of the Certificates and early dissolution of the trust.

The rating of the trust certificates is subject to review of the final documentation, the terms and conditions of which are not expected to change in any material way from the draft documents reviewed.

We view SEC as a government-related issuer (GRI) that benefits from credit linkages with the government of Saudi Arabia. The long-term issuer rating of A2 reflects the creditworthiness of SEC as expressed by a baseline credit assessment (BCA) of baa1, combined with a 'very high' level of dependence and 'high' level of support from the government. The negative outlook is in line with the Government of Saudi Arabia and reflects the significant credit linkages between the company and the sovereign.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

A rating upgrade is currently unlikely given the negative outlook. SEC's substantial debt load and absence of an explicit government guarantee currently prevents SEC's ratings from being aligned with that of the sovereign.

The rating could be downgraded as a result of (i) a downgrade of Saudi Arabia's government bond rating, (ii) a change in Moody's government support and dependence assumptions, or (iii) a weakening of SEC's credit metrics. Any material changes to the regulatory regime that would result in greater business risks could also lead to a downgrade if not offset by changes in SEC's capital structure.

The methodologies used in this rating were Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Saudi Electricity Company (SEC) is the dominant vertically integrated utility in Saudi Arabia, where it served over 9.8 million customers as of 31 December 2019. The company owns 40 major plants with a total generation capacity of 53.2 Gigawatts (GW), which represents the vast majority of Saudi Arabia's total generation capacity. The Saudi government indirectly owns 81.2% of SEC, including 74.3% directly through its sovereign wealth fund PIF and 6.9% through Saudi Arabian Oil Company (A1 negative). The remaining 18.8% is listed on the Saudi Stock Exchange (Tadawul). The company reported consolidated revenues of SAR65.0 billion ($17.3 billion) and SAR479.8 billion in assets ($127.6 billion) in 2019.

The local market analyst for this rating is Thomas Le Guay, +971 (423) 795-45.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Julia Pribytkova
Vice President - Senior Analyst
Corporate Finance Group
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Mario Santangelo
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​
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