Fitch Rates Indonesia's Sukuk 'BBB-(EXP)'

Fitch Ratings has assigned Indonesia's proposed US dollar-denominated sovereign global certificates (sukuk) issued through Perusahaan Penerbit SBSN Indonesia III (PPSI-III) an expected 'BBB-(EXP)' rating. The expected rating is in line with Indonesia's Long-Term Foreign Currency Issuer Default Rating (IDR) of 'BBB-', which has a Stable Outlook.

The rating reflects Fitch's view that cash flows supporting payment on the sukuk will constitute direct, unconditional, unsecured and general obligations of Indonesia, ranking equally with Indonesia's unsecured and unsubordinated marketable external debt. Fitch has given no consideration to the sukuk's underlying assets.

KEY RATING DRIVERS

PPSI-III (the issuer and trustee) is a legal entity in Indonesia set up solely for the purpose of issuing sharia-compliant securities of the government of Indonesia in foreign currencies in the international markets. The sukuk rating is driven solely by Indonesia's IDR and senior unsecured rating of 'BBB-', due to the sukuk's structure and documentation, which include the following features in the ijara and wakala series:

• On the scheduled dissolution or following the occurrence of a dissolution event, PPSI-III will have the right to require the state to purchase all of its rights, benefits and entitlements in, to and under the trust assets.
   
• The state will have to purchase the assets at a price equal to the outstanding face amount of the sukuk plus any accrued and unpaid periodic distribution amounts, and any accrued but unpaid supplementary rental. 
   
• In the ijara series, on or prior to each periodic distribution date, the state (as lessee) will pay PPSI-III rental due under the lease agreement for the ijara assets, which is intended to be sufficient to fund the periodic distribution amounts payable by PPSI-III. Furthermore in the wakala series, the lessee will pay to PPSI-III an amount reflecting the rental due for any project assets following their completion and delivery. 

The programme includes a negative pledge provision that is binding on Indonesia, as well as financial reporting obligations, covenants and default acceleration terms.

Certain aspects of the transaction will be governed by English law while others will be governed by Indonesian law. Fitch does not express an opinion on whether the relevant transaction documents are enforceable under any applicable law. However, Fitch considers Indonesia's intentions to support PPSI-III and its obligations. Fitch's rating for the certificates reflects the agency's belief that Indonesia 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.

RATING SENSITIVITIES

The rating will be sensitive to any changes in Indonesia's Long-Term Foreign-Currency IDR. In November 2015, Fitch affirmed Indonesia's Long-Term Foreign-Currency IDR at 'BBB-' with a Stable Outlook. The Long-Term Local-Currency IDR is also 'BBB-' with Stable Outlook.