Fitch rates Ras Al Khaimah's RAK Capital $400m trust certificates 'A'

The issue is the second under RAK Capital's certificates issuance programme, under which total issuance may be up to a maximum $2bn equivalent.

The inaugural issue of five-year notes in May 2008 was for Dhs1bn (equivalent to $272m). Fitch understands that no further issuance under the programme is planned in the near future.

RAK Capital is a special purpose company incorporated in the Cayman Islands whose sole purpose is to participate in this transaction.

The rating reflects Fitch's judgement that the Sukuk can be considered an unconditional, unsubordinated and general obligation of the Government of Ras al Khaimah (RAK), ranking equally with RAK's other senior unsecured obligations. The rating is therefore in line with RAK's Long-term foreign currency Issuer Default Rating (IDR) of 'A' on which the Outlook is Stable.

The Sukuk follows an 'ijara' (leasing) structure. The issuer will use the proceeds of the Sukuk to buy assets from RAK, acting through the Investment and Development Office, which it will then lease back to RAK for a period equal to the tenor of the Sukuk. The issuer will declare a trust over the assets in favour of the certificate holders. Semi-annual rental payments will be made by RAK, equal to periodic distribution amounts made by the issuer to the Sukuk investors.

On maturity, RAK will repurchase the lease assets and a dissolution distribution amount, which is irrevocable, will be made by RAK to the issuer, to coincide with the maturity of the certificates.

RAK is required to provide sufficient funds to satisfy any outstanding periodic distribution amounts in full plus the dissolution distribution amount, including in the case of a dissolution event (event of default). However, the issuer/trustee and the certificate holders have no right to sell or dispose of the trust assets and related rights.

RAK is the fourth-largest of the seven emirates making up the United Arab Emirates. Its 'A' Long-term foreign and local currency IDRs, which were affirmed in February 2009, are supported by a relatively diverse economy, rapid economic development, high per capita income and the government's prudent fiscal policy and strong balance sheet. This issue will bring RAK's gross public debt to around one-third of GDP, which remains below the median for sovereigns in the 'A' rating category.

Although RAK has been hit by the recession in Dubai, it has been able to relocate supplies of cement and other construction materials - a key sector - to stronger growing parts of the region, notably Qatar, Bahrain, Kuwait and Abu Dhabi.

The bond proceeds will allow continued improvements at the strategically important Saqr port. The authorities still expect the overall public sector to return to surplus this year as last year's record investment spending subsides.