Identifying the determinants of Malaysian corporateSukukrating

Abstract

Purpose This study aims to identify the determinants of Malaysian corporate Sukuk rating and attempts to find out which determinant has the most significant impact. Design/methodology/approach The framework tries to establish a relationship between firm’s size, profitability, Sukuk guarantee status and types of Sukuk with Sukuk rating from the perspective of Agency Theory and Information Asymmetry Theory. The data consist of 43 Sukuk issuances from 2006 to 2015. Multinomial Logistic Regression Model is then used to find out the significant determinants of Sukuk rating. Findings The study found that only three variables significantly impact Sukuk rating. The results show that a guaranteed Sukuk Ijarah or a guaranteed Sukuk Musyarakah that is issued by a highly profitable firm has a higher likelihood of getting rating AAA or rating AA as compared to getting rating A. A type of Sukuk, particularly Sukuk Murabahah, is the most significant variable influencing Sukuk rating. However, firm size is not a significant determinant of Sukuk rating in the context of this study. Research limitations implications The first limitation of the study is the relatively small sample size. Second, the study only tested four independent variables. Practical implications Several implications are derived from the results of the study. First, new firms that are planning to issue Sukuk should consistently maintain a high level of profit and consider issuing debt-based Sukuk to ensure that the issued Sukuk have higher rating. To increase the likelihood of getting higher rating, they should also consider providing a third-party guarantor. As for existing Sukuk issuers that are in lower rating category, they should increase their profitability to be upgraded to higher rating category. Second, risk-adverse investors should invest in highly profitable, guaranteed and debt-based Sukuk, as these Sukuk are likely to be in higher rating category and provide guarantee in terms of capital payments during liquidation or bankruptcy. Third, to reduce information asymmetry, policymakers should make it compulsory for all Sukuk issuers to have their Sukuk rated annually and make it mandatory for all rating agencies in Malaysia to publish their Sukuk rating methodologies. Originality/value This paper helps to expand the limited existing literature about the determinants of Sukuk rating, particularly for the Malaysian corporate Sukuk.

Determinants of Corporate Bond and Sukuk Ratings in Indonesia

“…On the other hand, asset growth that is not too large cannot directly affect sukuk ratings. These results are in line with the research of Hardwick et al (2000), who state that their results could not be significant because the growth of company assets was small, so did not affect the model, and also with the results of the research by Borhan and Ahmad (2018), who also state that assets do not affect sukuk ratings.…”

“…The main difference between this study and previous ones is the objective : we examine the rating determinants of both conventional and sukuk corporate . Borhan and Ahmad (2018) established that just three variables significantly impacted sukuk ratings. Their results demonstrate that a guaranteed Sukuk Ijarah or Sukuk Musyarakah issued by a highly profitable firm have a higher likelihood of obtaining an AAA or AA rating compared to an A.…”

“…This ratio shows the rate of return for all investors (Brigham & Houston, 2010). (Borhan & Ahmad, 2018 ). Qizam and Fong (2019) found that sukuk and bond ratings were influenced by ROI (Return on Investment), and that ROI and ROA had significant correlation.…”

Nexus between risk sharing vs non-risk sharing financing and economic growth of Bangladesh

“…Although Sukuk are an equity-like structure which is comparatively more conservative than traditional debt instruments. However, incidents of Sukuk default have increased in recent times as reported by The National (2009), Aziz (2010), Khnifer (2010), Boey (2013) and Wijnbergen and Zaheer (2013), Halim et al (2017), Klein et al (2017), Smaoui and Khawaja (2017), Ariff et al (2018) and Borhan and Ahmad (2018), among others. Some of these recent defaults have created uncertainties in Sukuk and have given rise to negative implications as described by Laldin (2013) and Majid et al (2011).…”

“…Such an exercise would normally lead to the extension of the maturity of Sukuk, consequently forcing Sukuk holders to experience losses arising from opportunity cost and time-value of money (see e.g. Khnifer, 2010 andBorhan andAhmad, 2018).…”