FW: RHB FIC Global Sukuk Markets Weekly

24 November 2014

Global Sukuk Markets Weekly

Returns Subdued After FOMC Minutes; USD Sukuk Supply To Reach New Record; Reiterate DPWDU6.25% 7/17 

Highlights & Performance

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¨   Sukuk returns relatively unchanged during the week on mixed central bank signals. The Bloomberg Sukuk Market Return Index (BMSSUTR) declined marginally this week (-0.01% W-o-W) at 118.34 (vs. +0.17% in week prior), pushing year-to-date gain of 5.62% (week prior: 5.06%).

¨   5y CDS of UAE emirates mixed; Turkey 5y CDS tightened.Dubai 5y CDS tightened the most during the week (-25bps W-o-W) while Abu Dhabi widened (+10.4bps). Bahrain and Saudi Arabia widened 16bps and 5bps respectively during the week.

¨   Brent crude rose 1.8% W-o-W to USD79/bbl after bombing in Kurdish region of Iraq. Brent crude rose by 1.8% W-o-W to USD79/bbl (-6% prior week) after a car bomb exploded in Erbil which is a Kurdish region in Iraq.

¨   Sukuk supply surpassed our target, more than 2012 record year (USD18.6bn) to USD18.8bn in 2014. With the upcoming International Finance Facility for Immunisation (IFFIm) (we estimate at USD500m), USD500m 5y Fly Dubai benchmark issuance and just issued USD1bn 10y Turkey sukuk, this would make the 4Q14 USD sukuk supply totaling to USD2.8bn, surpassing our full year target (USD18.6bn) to USD18.8bn for 2014 (2012: USD18.6bn; 2013:  USD16.5bn). We believe this trend will continue in 1H2015, before getting drier in 2Q15 due to the expected US Fed interest rate hike in addition to the debt ceiling debate to resurface again.

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Macroeconomics and Sovereign Comment

¨   Turkey issues USD1bn TURKS 11/24 (Baa3/NR/NR; Neg) after 30% oil drop and 5y yield lowest in 19 months. The conventional 10y sukuk fell c.1.3ppts in October and a 5.2% return so far during 4Q14, which indicates investors’ confidence amidst low oil price environment. We see potential upside in the TURKSK 24, given the INDOIS 24 as a comparison where the yield declined by 27bps M-o-M.

¨   Malaysia GDP moderated to 5.6% y-o-y as expected in 3Q14 (2Q14: 6.5%). The moderation in growth was contributed by a slowdown in export growth, where 3Q14 exports grew at a much slower rate at 11.4% y-o-y vs. 91% in 2Q14. The MALAYS (A3/A-/NR; -) complex wasrelatively unchanged during the week.

¨   Bank Indonesia (BI) hiked interest rates by 25bps to 7.75% at unscheduled meeting as gas prices rise. BI hiked interest rates on 18^th November after gas prices jumped 30% as scheduled. INDOIS 4.35% 9/24 (Baa3/BB+/BBB-; -) (YTM: 4.2%;Z-spread: 182bps) yield declined 3bps W-o-W.

¨   South Africa central bank held interest rates at 5.75% after policy tightening in 2014. The Reserve Bank of South Africa held interest rates after hiking 75bps so far this yearamidst power outages and and strikes during the year. The SOAFSK 3.903% 6/20 (Baa2/BBB-/BBB) (YTM: 3.62%; Z-spread: 178bps) yield declined by 1bp.

¨   IFFIm (Aa1/AA/AA+) to meet investors in the coming week for a potential sukuk (estimated: USD500m). IFFIm has arranged for roadshows starting 24^th November 2014 in Dubai and Tuesday in Doha on the potential sukuk issuance. With the potential sukuk, this would confirm our target sukuk supply making it another record year as it would surpass the 2012 (USD18.6bn) bringing the current total to USD18.8bn

Industry and Credit Comment

¨   Fly Dubai debut USD500m 6x oversubscribed, with 64% of orders from the Middle East. Fly Dubai began operations in June 2009 and made a net profit of USD14m in 1H2014, while revenue during the same period was USD515m (+17% y-o-y). Dubai Aviation Corporation, which trades as Fly Dubai, noted that the sukuk was priced at 3.776% (200bps + MS), which 150 investors worth over USD3bn. We opine this sukuk reflects confidence in the company, giving upside for growth in the coming months and as a positive as this assures Fly Dubai’s ability to gain market share.

¨   Moody’s and Fitch Affirms DP World on EZW acquisition. The affirmation was mainly on the account of DP World’s expansion plans, while also both DP World and JAFZ will benefit from the synergy. DPWDU 6.25% 7/17 (Baa3/NR/BBB-) (YTM: 2.36%; Z-spread: 137.6) yield rose by 4bps W-o-W however JAFZSK 7% 6/19 (Baa1/NR/BB-; Sta) (YTM: 3.2%; Z-spread: 159.8) declined 4bps W-o-W.

¨   Dubai Electricity and Water Authority (DEWA) announced a c.AED202m deal with ABB on developing pilot solar power project. A gas-insulated switchgear (GIS) will enhance transmission capacity, boost power supplies and strengthen the reliability of the grid integration from the Mohammed bin Rashid Al Maktoum solar park. DEWAAE 3% 3/18 (NR/BBB/NR; Sta) (YTM: 1.98%; Z-spread: 72bps) yield rose 4bps W-o-W.