RHB FIC Global Sukuk Markets Weekly - 17/4/15

17 April 2015

Global Sukuk Markets Weekly

Malaysia’s USD1.5bn Sukuk  Receives Massive Orderbook; Index Rallied on Disappointing Data from US

Highlights & Performance

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¨   Disappointing US data boosted Sukuk returns; Malaysia’s USD sukuk flooded with demand. The Bloomberg Sukuk Market Return Index (BMSSUTR) inched 0.17% higher W-o-W (vs. +0.14% in week prior) to 120.16, bringing YTD returns to 1.67% (vs. 1.50% in week prior). The Dow Jones Sukuk Total Return Index (DJSUKTXR) rose +0.08% W-o-W (vs. +0.18% in week prior) to 155.75, bringing YTD returns to 2.05% (vs. 2.13% in week prior). The top 5 gainers in the BMSSUTR during the week were QATAR 23, MALAYS 21, PETMK 20, ISDB 18 and ISDB 19 bringing a total market value gain of USD2.24bn.

¨   Bahrain’s risk perception worsened as the 5y CDS widened by 13bps W-o-W to 312.74bps due to Moody’s downgrading its sovereign rating by one notch to Baa3 while outlook stays negative. Bahrain’s finances has been deteriorating since 2009, being the only GCC member state to have continuous fiscal deficits since 2009. Dubai, Abu Dhabi, Qatar, and Saudi Arabia CDS were relatively stable during the week. In Turkey, risk premium widened sharply by 22bps W-o-W to 231bps, while Indonesia widened 7bps W-o-W to 157bps. Malaysia’s CDS remained stable.

¨   Oil rout ahead of mega projects increases demand for financing. IDB’s infrastructure bank will be opening in Indonesia, named Islamic Investment Infrastructure Bank (IIIB) with IDB injecting USD1bn of capital. While in China, a memorandum between two Qatari banks, Qatar National Bank and Qatar International Islamic Bank (QIIB), and Chinese brokerage Southwest Securities in establishing a company to handle Islamic finance deals in China. Looking to Qatar, Qatari banks plan to borrow about USD6bn to finance construction ahead of the World Cup 2022, alongside potential sukuk by QIIB and Masraf al Rayan (Qatar’s second largest bank). Qatar is spending USD182bn (90% of 2013 GDP) on infrastructure by 2019, with banks likely to boost lending to USD239bn in 2018 as population growth rose 9.5% in 2014. Separately, expect a potential sukuk issuance by Dubai’s Noor Bank up to USD3bn by end of April 2015.

Macroeconomics and Sovereign Comment

Country/Issuer	Update	RHBFIC View
Malaysia	·         Malaysia government issues MALAYS 4/25 USD1bn and MALAYS 4/45 USD500m; 10y note bid-to-cover ratio (BTC) of c. 7 times (x) and 30y note by 6x. ·         Use of proceeds: o    Redemption of the existing 1Malaysia Sukuk Global Bhd’s USD1.25bn sukuk due in June 2015 o    Finance development expenditures Geographical allocation: ·         MALAYS 25: Middle East (24%), Asia (50%), Europe (16%), US (10%) ·         MALAYS 35: Middle East (2%), Asia (50%), Europe (19%) and US (29%)	Positive. The impressive BTC was beyond our expectations, given the softer 1Q15 BTC average of USD denominated sukuk total issuances of c. 3x vs. 2014 average of c. 6x. Looking at the MALAYS yield curve, we view this as a positive due to the extension of the yield curve. The 30y tranche is Malaysia’s longest dated sukuk, as well by any sovereign. Currently, there are three Malaysian USD denominated sovereign sukuk. MALAYS complex performed rallied, given the average yield tightening by 6bps, with MALAYS 21 (A3/NR/A-) (YTM: 2.64%; z-spread: 104.66bps) tightening the most by 14bps W-o-W.

TRADE IDEA

¨                  MALAYS complex fair to mildly rich, MALAYS 45 looks cheap

Bond	MALAYS 4.236% 04/22/45 (P)A3/A-/NR) (YTM: 4.17%; z-spread: 185.15bps)
Comparable	MALAYS 3.928 06/04/15 (A3/A-/NR) (YTM: 0.79%; z-spread: 51.33bps) MALAYS 2.991 07/06/16 (A3/A-/NR) (YTM: 1.13%; z-spread: 63.47bps) EIBMAL 2.874 02/19/19 (A3/NR/A-) (YTM: 3.59%; z-spread: 113.53bps) MALAYS 3.043 04/22/25 (P)A3/NR/NR) (YTM: 3.02%; z-spread: 106.65bps)
Relative Value	We find that MALAYS complex is mildly rich in the sovereign RV space, as well as in the MALAYS space, however MALAYS 45 is cheap relative to the benchmark 30y.
Fundamentals	Malaysia’s economy is well-diversified, with principal sectors such as services and manufacturing, which accounts for 79.9% of 2014 GDP, while the commodity sector accounts for 14.8% of GDP and construction taking up a share of 3.9% of GDP. We expect Malaysia’s GDP to grow at 5% this year after recorded a 6% growth in 2014 still decent amid concerns over sluggish global growth in 2015. The announcement of 11MP on 21 May should provide further catalysts for Malaysia, while the implementation of GST this month is credit positive, expanding the Government’s source of income towards reaching a balance fiscal position in 2020.