1. 'Towards a Global Sukuk Index – The Importance of Benchmarking and Ratings’ Raymond Hill, Head Of Emerging Markets (EMEA Corporates) 21 June 2007

2. Agenda Rating Definition, Scale And Process Role Of Ratings In The Development Of A Bond Market Approach To Rating Sukuk Sukuk Indices Selected Fitch Publications Conclusions

3. The Rating Definition, Scale and Process

4. The Rating Definition >The Rating Definition –“an opinion on the relative ability of an entity to meet financial commitments” –Includes Debt –Includes Sukuk >Scale –AAA, AA, A, BBB, BB, B, CCC, CC, C, D

5. SlideDefinition AAAExceptionally strong capacity for payment of financial commitments AAVery strong capacity for payment of financial commitments ACapacity for payment of financial commitments is considered strong BBBCapacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity The Rating Scale – “Investment Grade” Source: Fitch Ratings Scale subsequently expanded to include notches (+/-), outlooks and watch lists

6. SlideDefinition BBThere is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met BSignificant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favourable business and economic environment. CCC / CC / CDefault Possible / Default Probable / Default Imminent DDefault The Rating Scale – “Speculative Grade” Source: Fitch Ratings

7. The Rating Process >Information Gathering >Review Meeting >Report Production >Committee >Communication of Rating and Draft Research to issuer >Appeal Process (based on new information) >Publication of Rating >Ratings monitored constantly with periodic review and update meetings

8. The Role of Ratings In The Development Of A Bond Market

9. >History –1624: Dutch use bonds to finance war –1850s: US companies begin using bonds to finance railroad construction –1909: Rating business begins in United States –1913: Fitch Publishing Company founded in USA to publish financial statistics –“The Fitch Bond Book” and the “Fitch Stock and Bond Manual” –1924: Fitch introduced well established AAA to D scale –1975: Fitch given NRSRO recognition in USA >Drivers –The need for information –The need for independent sources –Universal access to same information available to investment banks

10. The Role of Ratings In The Development Of A Bond Market >Comments from “The Euro Bond Market Study” published in 2004 by the European Central Bank include: –“Since the advent of the euro, rating agencies have been playing a pivotal role in the development of a euro bond market…” –“Traditionally, the use of credit ratings has always expanded hand in hand with the growth of debt capital markets” –“…corporations started to ask for credit ratings chiefly when they started to tap the bond market either to get more financing or to obtain in on better terms.” –“In the past, regulatory demand for ratings has given a strong support for the use of ratings.” –“In the next few years the reform of the capital accord (Basle II) will surely affect the need for and use of ratings…” Source: European Central Bank

11. Total Sukuk Issuance (USDm) Source: International Islamic Financial Market. Data as at Dec 2006 Year2000200120022003200420052006 Corporate3365301804,5375,73111,35924,526 Sovereign02508001,1801,4797062,271 Total3367809805,7177,21012,06526,797

12. The Role of Ratings In The Development Of A Bond Market >Need for infrastructural development to sustain GCC GDP development and economic diversification >"While there are likely to be some peaks and troughs in the coming 8 to 10 years, estimates are that there is some $1 trillion worth of projects in the pipeline around the region, which will keep the project finance industry busy for years to come" (Shaikh Mohammad Bin Ahmad Al Thani) >Diversification of funding essential >International investors will expect issuers and instruments to be rated. >Issuers will seek to maximise Shari’ah compliant opportunity, particularly through Sukuk issuance.

13. The Role of Ratings In The Development Of A Bond Market >Ratings are opinions >Measure relative creditworthiness >Ability and willingness to meet financial obligations >Reputational capital >Information economies of scale –Widen investor pool –Reduce information asymmetry (investors and issuers) >Resolve principal/agent problems –Simple and verifiable –Low cost –Help investors without independent research functions >“Regulatory” aspect (Regulator rules, fund mandates and instrument covenants)

14. The Approach to Rating Sukuk

15. >Corporate Methodology –Quantitative and Qualitative Factors –Country Ceiling >Public Sector Entities –Dependent entities: Top down –Non-Dependent: Bottom up >Recovery Analysis (Country Overlay impact) >Assign Issuer Default Rating (‘IDR’) >Review Sukuk Documentation –Typical Sukuk instruments likely to be rated in line with IDR >Asset Based and not Asset Backed

16. The Approach to Rating Sukuk >Corporate Governance in the GCC (CG) –Disclosure improving – but more needs to be done –Ownership often includes material stakes in hands of state or ruling family – Top down or bottom up approach to rating? –Question mark over concerns controlling shareholders have for interests of other stakeholders –Associate company transactions usually material –Investors tend to demand higher returns when CG perceived as a weakness –A general need for improved governance –GCC states are introducing corporate governance codes –IPOs, opening local exchanges to international investors and international M&A are all driving the need for improved CG –Credit ratings also tend to drive improved CG, including transparency

17. The Approach to Rating Sukuk >Collateralised Deals –Based on IDR –Notching Possible >Securitisation –Legal concerns remain >Key legal concern relates to effective enforcement of security in Islamic countries >Legal systems are relatively new and substantially untested –Not unusual for Emerging Markets –Shari’ah is an additional factor

18. The Approach to Rating Sukuk >Credit Assessment –An indication of a likely rating –Full rating process –Point in time conclusion –Private >Shadow Rating –Based on limited information –Private >Private Ratings –Usually to rated entities –Kept up to date

19. The Approach to Rating Sukuk >Rating Assessment –What rating under a set of hypothetical assumptions: >Revision of capital structure >M&A

20. Sukuk Indices

21. >Dow Jones Citigroup Sukuk Index launched in March 2006 in Kuala Lumpur –For use as a benchmark by investors in Shari’ah compliant instruments: Industry screening, Financial screening –Conform to Bahrain-based Auditing & Accounting Organization of Islamic Financial Institutions (AAOIFI) standards for tradable Sukuk –Investment grade instruments (BBB- and above) –USD denomination, Maturity over one year –Base date: October 2005 –Catalyst for secondary market and relative value trading >Equity Indices available already >Additional Sukuk indices probable Source: Dow Jones

22. Selected Fitch Publications

23. Fitch Publications  Islamic Finance >“Securitisation and Shari’ah Law” –Published by Fitch in March 2005 >“Fitch’s Approach to Rating Sukuk” –Published by Fitch in March 2007 >“Demystifying Corporate Sukuk” –Published by Fitch in March 2007 >“Islamic Banking – Factors in Risk Assessment” –Published by Fitch in March 2007

24. Fitch Publications  Other >“The Rating Process” –June 2006 >“Rating Public Sector Entities” –February 2007 >“Country Ceilings” –August 2006 >“Country-Specific Treatment of Recovery Ratings” –August 2006

25. Conclusions >Scale of investment driving diversification of funding and an increasing demand for credit ratings >As the scale of international rated issuance expands further indices will be needed to enable investors to benchmark their performance >The Dow Jones Citigroup Sukuk Index includes credit ratings as a key factor for inclusion

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