Monday, June 22, 2015

RHB FIC Global Sukuk Markets Weekly - 19/6/15



19 June 2015

Global Sukuk Markets Weekly

Less Hawkish Fed Nursed Sukuk Returns; Sovereign and Supras Enter Pipeline; Hold GBHK 19

Highlights & Performance
¨       
¨      Sukuk returns recovered on less hawkish Fed. The Bloomberg Malaysia Sukuk Ex-MYR Total Return Index (BMSXMTR) made 0.29% during the week to 101.36 (vs. -0.25% to 101.07 in week prior), allowing YTD returns to regain 7bps to 1.14% (vs. -27bps to 1.07% in week prior). More favorably, the Dow Jones Sukuk Total Return Index (DJSUKTXR) grew 0.45% W-o-W to 154.84 (vs. -0.48% to 154.14 in week prior), earning back 45bps in YTD returns to 1.53% (vs. -100bps to 1.08% in week prior). Accordingly, the weighted average bid yield to worst on the BMSXMTR members tightened 4.8bps to 2.282% (vs. +7.3bps to 2.330% in week prior) tracking the UST curve bull steepener. Global sukuk recovery was thanks to a less hawkish FOMC meeting and ‘dot plot’ (refer to Chart of the Week) which asserted Fed will begin hiking rates by end-2015 but at a more gradual pace despite strong indicators of US economic recovery in May. The top 5 gainers on the BMSXMTR were SECO 24, ISDB 19, SECO 22, QATAR 23, and PETMK 20, adding USD39.14bn in market value.
¨      Investors still wary about GCC risk. 5y USD CDS continued to widen in Bahrain (+13bps to 286bps), Saudi Arabia (+3bps to 66bps), Abu Dhabi (+3bps to 60.56bps) and Turkey (+1bps to 229bps) likely on continuing concerns of deflated oil prices; while yields tightened in only Dubai (-19bps to 177bps) and Qatar (-3bps to 62bps). Elsewhere, credit protection cost for Malaysia rose 2bps to 127bps after CPI increased to 2.1% YoY in May (prior: 1.8%) and ahead of Fitch Rating’s credit review within a month. Meanwhile, Indonesia CDS narrowed 2.5bps to 169.5bps after reporting stronger than expected trade surplus of USD955m in May (prior: USD454m, consensus: USD661m) and holding rates at 7.5%.
¨   Sovereign and supranational enter pipeline. The start of Ramadan could see slower issuance, but pipeline could stay exciting with at least USD400m planned to enter the market. Pakistan (B3/B-/NR) is eyeing an issuance of up to USD200m, following up the country’s USD1bn sukuk issuance in November 2014 and taking advantage from recent upgrade to B3 by Moody’s. Similarly, IFFIm is eyeing its second sustainable and responsible investment (SRI) sukuk of USD200m 3y, after having sold a larger USD500m 3y in November last year. Also, the International Finance Corp (IFC), World Bank’s lender to the private sector, mentioned interest in a 2015-issuance after its last foray in 2009 for USD100m 5y at 3.037%.
Macroeconomics and Sovereign Comment
Country/Issuer
Update
RHBFIC View
Saudi Arabia (Aa3/AA-/AA)

·         Saudi Arabia opened its stock market to foreign investors on Monday as it seeks to attract more international investment that will help reduce its dependence oil.
·         After rallying ahead of the development, the benchmark index fell 0.9% to 9561.7 at close led by local sellers of blue chip petrochemicals and banking sectors (source: WSJ).

Mild Positive. The opening of Saudi Arabia’s stock market will lead to inflows of foreign capital to satisfy financing needs amid tumbling oil prices. We believe the increased overseas interest will also benefit neighbours including Qatar, Kuwait and the UAE and corporate within the Gulf. However, only a few foreign institutions have applied for licenses so far, hindered by rich valuations and pending more clarity on the regulations. Both ISDB and SECO complex tightened (with ISDB 16 as an exception) up to 10bps W-o-W.

Pakistan
(B3/B-/NR)
·         Moody’s upgraded Pakistan’s foreign currency issuer and senior unsecured bond ratings to B3 from Caa1 with a stable outlook.
·         In its budget announced June 5, Prime Minister Nawaz Sharif’s administration said it will increase its capital gains tax to boost revenue and raise economic growth to the highest in nine years. He’s aiming to meet goals under a $6.6 billion IMF loan deal. (Source: Bloomberg)
·         Sindh Province of Pakistan is looking to issue up to USD200m sukuk.

Positive. Moody’s and S&P had lifted the credit Outlook on Pakistan to Positive from Stable this year after political tensions eased over opposition allegations of vote rigging in the 2013 election. Moody’s ratings upgrade represents the agency’s vote of confidence in the country’s improving foreign-exchange reserves and government’s economic overhaul midway into an IMF program. Yield on the PKSTAN 6.75% 12/19 widened 5bps to 5.95% over the week, retracing from a stellar 108bps tightening year to date.

TRADE IDEA
¨                  We reiterate GBHK 19 vs. GBHK 20 and ISDB19
Bond
Hong Kong Sukuk 2014 Ltd
GBHK 2.005% 9/19 (Aa1/AAA/NR) (YTM: 1.965%; z-spread: 38.8bps) (Amt o/s: USD1bn)
Comparable
Hong Kong Sukuk 2015 Ltd
GBHK 1.894% 6/20 (Aa1/AAA/NR) (YTM: 1.947%; z-spread: 21.5bps) (Amt o/s: USD1bn)
Islamic Development Bank
ISDB 1.813% 3/19 (Aaa/NR/AAA) (YTM: 1.685%; z-spread: 24.0bps) (Amt o/s: USD1.5bn)
ISDB 2.111% 9/19 (Aaa/NR/AAA) (YTM: 1.816%; z-spread: 23.6bps) (Amt o/s: USD1.5bn)
Relative Value
We reiterate our preference for GBHK 9/19 against the GBHK 6/20 and ISDB 3/19 and 9/19. We believe that GBHK 19 offers 12bps pickup to GBHK adjusting for tenure; and at least 5bpd to 18bps against ISDB 9/19 and 3/19 despite adjusting for the latters’ higher issuer rating. Notwithstanding, we note that credit ratings at the sovereign levels for Hong Kong (Aa1/AAA/AA+, all stable) are higher than Saudi Arabia (Aa3/AA-/AA, Negative Outlook by Moody’s). Moreover, GHBK may offer investors some diversification from issuers affected by volatile oil prices and geopolitical tension in the Gulf.
Fundamentals
Hong Kong government’s strong credit profile is premised on:
·         Strong and competitive economy with real GDP growing at almost 4% annually over the last decade buoyed by services sector (93% of GDP),
·         Large net external assets equivalent to 2.8x of GDP attributed to consecutive positive current account surpluses since 1997, though we note the proportion of CAB has sharply declined to 1.9% of GDP in 2014 from 13.7% in 2009,
·         Healthy accumulation of fiscal reserves of HKD828.5bn as at Mar-15 due to 11 consecutive years of budget surpluses,
·         Beneficiary of buoyant trade and financial activity with Mainland China, though we are cautious of  potential growth slowdown and credit shocks emanated from the mainland, and
·         Ambition to become Asia’s Islamic financial hub, having issued two landmark global sukuk within 9 months (USD1bn each in Sep-14 and Jun-15).

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