RHB FIC Global Sukuk Markets Weekly - 5/6/15

5 June 2015

Global Sukuk Markets Weekly

Improved US Data Stagnates Returns; Drake & Scull to Issue USD Sukuk Perp; We Like ISDB 3/19

Highlights & Performance

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¨   Improved US data stagnated sukuk returns. The Bloomberg Sukuk Market Return Index (BMSSUTR) remained unchanged during the week (vs. 0.05% in week prior) at 120.09, and YTD returns remaining at 1.60%. Similarly, the Dow Jones Sukuk Total Return Index (DJSUKTXR) was relatively unchanged (vs. 0.05% in week prior) to 154.89, bringing YTD returns to 2.08% (vs. 2.10% in week prior). Sentiment improved in the US, where the University of Michigan Sentiment improved to 90.7 in May 2015 (April 2015: 88.6), as personal income rose by 0.4% in April 2015 from no change in the month prior. Manufacturing data also improved as the US Markit manufacturing PMI rose to 54 in May from 53.8 in April, while ISM manufacturing ticked higher at 52.8 in May from 51.5 in April. External balances improved as the US trade deficit eased to USD40.9bn from USD50.6bn. The top five names that weighed on the BMSSUTR during the week were SECO 24, MALAYS 25, PETMK 20, RAKS 25, and QATAR 23, contributing a market value loss of USD5.8bn during the week.

¨   Risk premiums tightened mainly in GCC, while emerging markets’ widened. The 5y CDS in Saudi Arabia tightened marginally to 62.05bps (-0.45bps W-o-W), as the IMF lifted Saudi Arabia’s outlook to 3.5% in 2015 from the previous forecast of 3% as government spending is expected to lift growth. Qatar’s risk premium surprisingly tightened to 60.17bps (-1.42bps W-o-W) despite uncertainty of the Qatar World Cup, while Abu Dhabi 5y CDS eased to 59.04bps (-0.47bps). Bahrain’s 5y CDS tightened -16bps W-o-W to 269bps, however Dubai’s risk premiums also widened 2.33bps to 193.37bps. As the Greek debt talk stalls, strengthening developed economies may dampen demand of higher yielding assets, already seen in widening risk premiums of emerging market economies., followed Turkey widened the most (+6.5bps W-o-W) to 215.7bps, while Indonesia’s 5y CDS rose by 3.38bps W-o-W to 170.31bps and Malaysia (+3.58bps W-o-W) to 116.74bps.

¨   Despite the uncertainty surrounding the Qatar World Cup, we believe Qatar’s National Vision 2030 and initiatives by other GCC countries should support the region’s growth. Qatar’s National Vision 2030 is driven by four pillars (human development, social development, environmental development and economic development) (refer to Chart of the Week) will be catalysts to continued infrastructure spending. We also believe that there will be little impact to Qatar’s real estate market given the country’s initiatives, regardless of the 2022 World Cup.

Macroeconomics and Sovereign Comment

Country/Issuer	Update	RHBFIC View
Islamic Development Bank (IDB) (Aaa/AAA/AAA)	-       IDB plans to tie up with Asian Infrastructure Investment Bank (AIIB) to utilize sukuk for infrastructure financing, according to Monetary Authority of Singapore (MAS) Deputy Managing Director Jacqueline Loh at a World Islamic Banking Conference Summit in Singapore on 3 June.	Positive.  In a World Economic Forum meet in May 2014, ASEAN was said to need to bridge a USD8trn infrastructure gap by 2020 (an estimated USD60bn a year), however challenges to speed up infrastructure was not the issue of financing, but finding bankable projects. We are positive on this development, where it could mean further development of the global sukuk market, and the likelihood of increased global sukuk supply. The yields in the IDB complex widened by an average of 6bps W-o-W.

CREDIT BRIEF

Company/Issuer	Sector	Country	Update	RHBFIC View
Bank Asya (C/NR/NR)	Banking	Turkey	·         Banking Regulation and Supervision Authority  (BDDK) orders Savings Deposit Insurance Fund (TMSF)  to take over Bank Asya	Neutral on Bank Asya, Negative on Turkey. We do not believe there will be negative impact to Bank Asya as the bank only has a 1% market share of the Turkish banking sector. However, we agree with the comments made by Fitch, of which the takeover of Bank Asya by TMSF indicates the weakness in independence of the country’s financial regulator (BDDK), and this may impact on Turkey’s institutional standing. ASYAKA 23 (C/NR/NR) (YTM: 13.25%; z-spread: 1869bps) yield jumped 70bps W-o-W to 13.25%.
Drake & Scull (D&S) (NR)	Engine-ering	UAE (Dubai)	·         D&S may be offering unrated Reg S USD senior perp, after being able to win AED728m worth of engineering contracts (sectors: hospitality & commercial) ·         Mandated banks: -       Joint global coordinators: Emirates NBD Capital & HSBC -       Joint lead managers: Emirates NBD Capital, Standard Chartered & HSBC ·         Investor meetings: Middle East & Europe	Neutral. D&S has strong presence globally, but two of the largest revenue exposures by location are closer to home being Saudi Arabia (41%) and UAE (25.5%) as at 1Q15, while the two largest segments being mechanical, engineering and plumbing (MEP) (58%) and civil works (37%). Nevertheless, we are concerned on the inconsistent revenue growth over the years, e.g. from 2010 to 2014, revenue growth has ranged between -11% to +68%. D&S’s credit quality deteriorated as its net debt-to-EBITDA has risen to 11.25 times (x) in 1Q15 from 2.58x in 1Q14 while it’s EBITDA-to-interest expense worsened to 3.74x in 1Q15 from 33.28x in 1Q14.

TRADE IDEA

¨      We like ISDB 3/19 in the ISDB complex; take profit on ISDB 6/17

Bond	ISDB 1.8125% 3/19 (YTM: 1.71%; z-spread: 22.34bps) (Amt: USD1.5bn)
Comparable	ISDB 1.775% 10/15 (YTM: 0.59%; z-spread: 27.31bps) (Amt: USD ISDB 2.35% 5/16 (YTM: 0.79%; z-spread: 28.71bps) (Amt: USD750m) ISDB 1.357% 6/17 (YTM: 1.05%; z-spread: 12.42bps) (Amt: USD800m) ISDB 1.535% 6/18 (YTM: 1.37%; z-spread: 21.32bps) (Amt: USD1bn) ISDB 2.111% 9/19 (YTM: 1.84%; z-spread: 21.03bps) (Amt: USD1.5bn) ISDB 1.831% 3/20 (YTM: 1.91%; z-spread: 17.58bps) (Amt: USD1bn)
Relative Value	We find that our recommendation made on 11 July 2014 for ISDB 6/17 has become rich. We now find ISDB 3/19 attractive due to its higher yield pickup of 36bps vs. ISDB 18, and having shorter duration of 5.76 months than ISDB 9/19.
Fundamentals	IDB is a multilateral development bank (MDB) rated AAA by all three major credit rating agencies. The bank uses equity (paid in capital and reserves) and utilizing financial market resources to fund its operations and objectives which consist of promoting Islamic financial industry and institutions, poverty alleviation and promotion of cooperation among member countries. IDB is the only MDB that offers sukuk issuances in the market. IDB’s top five largest country exposures are Morocco (9%), Pakistan (8%), Iran (6%), Tunisia (5%) and Azerbaijan (4%). IDB has been increasingly funding its assets via sukuk issuance, and has upsized its medium term programme to USD10bn at the end of 1433H (2013). The bank has issued 21 sukuk under the program in USD and MYR since its establishment in 2005 in both public and private placements. Ratios 2012 2013 Net loans/adjusted total assets: 14.6% 12.7% Equity investments/adjusted total assets: 8.1% 6.8% Risk adjusted capital (RAC) ratio after adjustments (S&P calculation): 45% 38.9% Gross debt/adjusted common equity: 0.4x 0.6x Short term debt (by remaining maturity)/gross debt: 2.1% 0.5% Net income/average adjusted assets: 1.2% 1.4% Liquid assets of total assets: 16% 20%