Fitch Ratings has assigned The Saudi National Bank's (SNB) up to USD5 billion trust certificate issuance programme, housed under SNB Sukuk Limited (SSL), 'A-'/'F1' ratings.

SSL is a special purpose vehicle incorporated in the Cayman Islands and was established solely to issue certificates (sukuk) and enter into the transactions contemplated by the transaction documents.

Key Rating Drivers

The ratings are in line with SNB's Long- and Short-Term Issuer Default Ratings (IDRs) of 'A-' and 'F1', respectively, which in turn are driven by the bank's standalone credit profile as captured in the bank's 'a-' Viability Rating (VR).

The rating alignment reflects Fitch's view that default of these senior unsecured obligations would reflect a default of SNB in accordance with Fitch's rating definitions.

Fitch has given no consideration to any underlying assets or any collateral provided, as it believes that the issuer's ability to satisfy payments due on the certificates will ultimately depend on SNB satisfying its unsecured payment obligations to the issuer under the transaction documents described in the base offering circular.

In addition to SNB's propensity to ensure repayment of the sukuk, in Fitch's view SNB would also be required to ensure full and timely repayment of SSL's obligations due to the bank's various roles and obligations under the sukuk structure and documentation, especially, but not only, due to the features below:

Pursuant to the Wakala agreement, SNB as Wakeel will ensure sufficient funds are available to meet the periodic distribution amounts payable by the trustee under the certificates of the relevant series on each periodic distribution date. SNB can take other measures to ensure that there is no shortfall and that the payment of principal and profit are paid in full, and in a timely manner.

On any dissolution or default event, the aggregate amounts of deferred payment price then outstanding pursuant to the master Murabaha agreement shall become immediately due and payable; and the trustee will have the right under the purchase undertaking to require SNB to purchase all of its rights, title, interests, benefits and entitlements, present and future, in, to and under the relevant assets in consideration for payment by SNB of the relevant exercise price.

The deferred payment price payable by SNB under the master Murabaha agreement and the exercise price payable by SNB under the purchase undertaking together are intended to fund the dissolution distribution amount payable by the trustee under the relevant certificates, which should equal the sum of the outstanding face amount of such certificates; and any accrued but unpaid periodic distribution amounts for such certificates, or such other amount specified in the applicable pricing supplement as being payable upon any dissolution date.

The payment obligations of SNB under the service agency agreement, purchase undertaking, master trust deed and the master Murabaha agreement will be direct, unconditional, unsubordinated and unsecured obligations and shall at all times rank at least equally with all other unsecured and unsubordinated obligations of SNB, present and future.

The transaction documents also include an obligation on SNB to ensure that at all times the tangibility ratio, which is the aggregate value of the tangible assets comprising the relevant sukuk assets to the aggregate value of the relevant sukuk assets, is more than 50%. Failure of SNB to comply with this obligation shall not constitute an obligor event. However, if the tangibility ratio falls below 33% (tangibility event), this would result in the certificate holders having a put right. The certificates would then be delisted and each certificate holder can exercise a put option to have their holdings redeemed, in whole or in part, at their dissolution distribution amount within 30 days after delisting notice is given. In such an event, there would be implications on the certificates' tradability.

Fitch expects SNB to maintain the tangibility ratio at above 50%. For the purpose of establishing the programme, SNB has identified USD4.98 billion of eligible tangible assets (primarily ijara financing), which cover nearly 100% of the programme size and effectively cover three times the level required for a tangibility event. The prospect of an early redemption would have only minor implications on SNB's liquidity. This is because the bank has a strong liquidity profile, which allows it to repay the outstanding sukuk under the programme in case of a breach of the tangibility ratio, although this is not our base case. The USD5 billion maximum programme size would have accounted for about 0.7% of SNB's liabilities at end-3Q21.

The sukuk issue includes a negative pledge provision, cross-acceleration terminology, as well as trustee and obligor event clauses.

Certain aspects of the transaction will be governed by English law while others are governed by the laws of Saudi Arabia. Fitch does not express an opinion on whether the relevant transaction documents are enforceable under any applicable law. However, Fitch's rating on the certificates reflects the agency's belief that SNB would stand behind its obligations.

When assigning ratings to the certificates to be issued, Fitch does not express an opinion on the certificates' compliance with sharia principles.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of SNB's Long-Term IDR would result in a downgrade of SSL's certificates' rating. A downgrade of SNB's IDR would be driven by a downgrade of the bank's VR.

SNB' VR could be downgraded if Fitch believes the operating environment has weakened significantly, and if this is combined with a sharp or sustained deterioration in asset-quality and profitability metrics.

The Short-Term IDR of SNB would be downgraded if the bank's funding and liquidity profile weakens and this would also result in a downgrade of SSL certificates' short-term rating.

The rating may be sensitive to adverse changes to the roles and obligations of SNB under the sukuk's structure and documents.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of SNB's Long-Term IDR would result in an upgrade of SSL's certificates rating. An upgrade of SNB's IDRs would come from an upgrade of the VR, although this is unlikely without a material improvement in the Saudi Arabian operating environment.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

The ratings of the trust certificate issuance programme, housed under SSL, are in line with SNB's Long- and Short-Term Issuer Default Ratings (IDRs) of 'A-' and 'F1', respectively.

RATING ACTIONS

Entity / Debt

Rating

SNB Sukuk Limited

senior unsecured

LT

A-

New Rating

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