Fitch assigns Saudi Electricity Company Sukuk expected 'AA-' rating

The structure for the Sukuk is similar to that of SEC's 2007 SR5bn Sukuk, which is also rated 'AA-' by Fitch.

The transaction involves the transfer by SEC of a portfolio of assets to a custodian, Sukuk Electricity Company, a wholly-owned subsidiary of SEC. The asset portfolio comprises rights to provide service connections and the entitlement to levy and receive a one-time charge for each connection.

The final rating is contingent upon the receipt of final documentation conforming materially to information already received and details regarding the Sukuk amount.

The Sukuk will be issued on an unsecured and unsubordinated basis and matures in 2029. Sukuk holders are entitled to a quarterly periodic distribution amount and can require the issuer to purchase their Sukuk after five, 10, 15 and 20 years and also following an event of default.

If the issue is exercised after five years, Sukuk holders are entitled to 100% of the face value of the Sukuk. The face value percentage reduces to 80%, 60% and 40% if the Sukuk is exercised after 10, 15 and 20 years respectively. Fitch therefore views the effective maturity as five years.

Among other aspects, the Sukuk benefits from a negative pledge and a cross default clause. Sukuk holders are protected against the negative impact on earnings of the possible entry of new competitors into the market as a result of the government's plans to restructure the sector.

This protection is in the form of an agreement by SEC to top up the reserve with an amount equal to the shortfall resulting from the possible introduction of competition in the power distribution sector.

Fitch also notes that the restructuring is likely to be implemented gradually and expects that SEC will continue to be the dominant player for the foreseeable future.

Proceeds from the issue will be used for general corporate purposes, including working capital requirements, refinancing of existing obligations and implementation of an investment programme targeted at expanding capacity and optimising the grids to safeguard security of supply.

SEC is the incumbent electric utility in the Kingdom of Saudi Arabia. Its ratings (Long-term Issuer Default and senior unsecured 'AA-', with a Stable Outlook) are aligned with the sovereign in accordance with Fitch's parent/subsidiary methodology.