Despite economic challenges sweeping OIC countries, the likelihood of issuers failing to repay their Sukuk obligations are low, according to Fitch Ratings.
Fitch issued a series of reports in January 2025 highlighting to investors the theoretical default risks of bonds and Sukuk as well as loans in jurisdictions from the Americas to Europe and OIC member nations.
In the ‘Country Groups for Country-Specific Treatment of Recovery Ratings – December 2024’ report, the rating agency said 70% of the 19 OIC countries covered are categorized in the lowest-classified Group D “underscoring ongoing challenges in recovery projections”.
These OIC countries are Azerbaijan, Bangladesh, Egypt, Gambia, Indonesia, Jordan, Kazakhstan, Morocco, Nigeria, Sierra Leone, Tunisia, Turkiye and Uzbekistan. Also included in Group D are non-OIC nations of the Philippines and Sri Lanka.
“Sukuk default rates globally are very low, at only 0.19% of all Sukuk issued as of end-2024,” Fitch qualified in the same OIC-related report.
“No sovereign Sukuk has defaulted to date, with most Sukuk defaults linked to corporates, and some by financial institutions. Apart from [a] few court-supervised Sukuk default resolutions over the past five years, most Sukuk defaults were resolved out of court, resulting in limited transparency on the final outcome.”
Interestingly, the next tiered Group C has Bahrain, Malaysia, Oman and Saudi Arabia. Only two OIC members are placed highest in country Group B – UAE and Qatar – with none of the 19 OIC nations covered qualified into Group A.
As to how these country groupings were crafted, Bashar Al Natoor, the managing director and global head of Islamic finance at Fitch, told IFN Investor the categorization was done by leveraging on three indicators of ‘World Governance Indicators project of the World Bank: Rule of Law, Regulatory Quality, Control of Corruption’, namely:
- Rule of law,
- Regulatory quality, and
- Control of corruption.
Bashar clarified these country groupings only touch on recovery projections and not on independent sovereign ratings, pointing out that all six OIC countries in Groups B and C are still classified as investment grade.
The UK, notably placed in Group A, currently has an outstanding Sukuk issuance of GBP500 million (US$622.13 million) maturing in 2026 – which is not rated by the Fitch.
The lion share of rated Sukuk is of investment-grade quality – 81.3% of Sukuk rated by Fitch are rated ‘BBB’ or higher with 91.3% of Sukuk issuers granted stable outlooks. The rating agency rates over 70% of global outstanding US dollar-denominated Sukuk.
In explaining the rationale for the unfavorable recovery ratings of OIC nations (which form the bulk of Sukuk issuers), Fitch said: “There remains resolution uncertainty for both Sukuk and bonds in many Sukuk-issuing countries, due to the lack of precedents for default resolution and the still-developing nature of the debt capital markets.”
Noting that decisions of a court in one case will have no binding authority with respect to another case in many Sukuk-issuing countries, including in the GCC, Fitch views the adoption of the proposed AAOIFI Shariah Standard No 62 on Sukuk in a positive light.
“The majority of Sukuk issued to date globally are originator-backed (or asset-based) and senior unsecured, with Sukuk investors generally having no rights of enforcement against the underlying trust assets.”
Fitch said the AAOIFI 62 draft provisions require “the transfer of legal ownership of the underlying Sukuk assets, and related risks, to Sukukholders, who would have recourse to these assets, among other areas”.
Table 1: Country-specific treatment of recovery ratings – December 2024
Group A – all nations featured | Group B – OIC nations featured |
Australia | Qatar |
Austria | UAE |
Belgium | |
Bermuda | Group C – OIC nations featured |
Canada | Bahrain |
Czech Republic | Malaysia |
Denmark | Oman |
Finland | Saudi Arabia |
France | |
Germany | Group D – OIC nations featured |
Hong Kong | Azerbaijan |
Iceland | Bangladesh |
Ireland | Egypt |
Israel | Gambia |
Japan | Indonesia |
Luxembourg | Jordan |
Macao | Kazakhstan |
Netherlands | Morocco |
New Zealand | Nigeria |
Norway | Sierra Leone |
Singapore | Tunisia |
South Korea | Turkiye |
Sweden | Uzbekistan |
Switzerland | |
Taiwan, China | |
United Kingdom | |
United States |
Source: Fitch Ratings
In the separate ‘US Distressed and Default Monitor – January 2025’ report, Fitch said the “US issuer default rate in 2024 exceeded pandemic levels, indicating ongoing financial risks in both the leveraged loan and high-yield markets”.
The report stated 2024’s default rate rose to 5.26%, higher than 2020’s 4.5% during the pandemic. “Fitch forecasts a 2025 default rate between 3.5% and 4% for institutional loans and 2.5%-3% for high-yield bonds.”
As for the ‘European Distressed and Default Monitor – January 2025’ report, Fitch said: “A single default in the European leveraged loan and high-yield markets in December drove trailing 12-month (TTM) default rates to 1.8% and 2.8% respectively. This is a moderate rise in the high-yield rate, from 2.7% in November and 2.3% in October.
“Despite the additional loan default by Veritas the leveraged loan rate declined for the third consecutive month in December, due to several defaults from December 2023 falling out of the TTM measurement period.”
Veritas Holdings is an information management software company that has been downgraded due to concerns over its proposed repayment of secured term loans and notes due 2025 totaling US$4.2 billion outstanding.
Fitch forecasts the pace of central bank-rate cuts to total 125bps in 2025, alongside a Eurozone GDP growth of 1.2%. “However, overall funding costs remain high and will continue to negatively affect debt coverage ratios of highly levered, stressed corporate issuers.”