Decent Bid for Malaysia New USD Sukuk ; Turkey Central Bank Cut Overnight Lending Rate by Another 50bps

25 April 2016

Global Sukuk Markets Weekly

Decent Bid for Malaysia New USD Sukuk ; Turkey Central Bank Cut Overnight Lending Rate by Another 50bps

Highlights & Performance

¨   Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices ended mixed at 103.4 (-0.08%) and 159.2 (+0.06%) respectively, with yields rising 2.2bps to 2.464%. MALAYS 7/21 and 4/45 were among the top losers which traded 10-13bps higher to 2.50% and 3.99% respectively. Brent oil climbed 4.7% to USD45.1/bbl with signs of lower volatility. Saudi Arabia is expected to announce the structural reform plan to diversify away from its dependence on oil and public-sector spending as well as to shore up government finances. The FOMC meeting on 26-27 April is expected to leave its rate unchanged.

¨   Turkey central bank cut its overnight lending rate by 0.5 percentage points to 10% and recorded a higher consumer confidence index of 68.5 in Apr-16 vs. 67 in Mar-16, CDS eased 8.2bps to 237.5bps. Meanwhile, Bank Indonesia kept its rate on hold at 6.75% following 3 consecutive rate cuts this year, with its CDS trading at 191.72bps (-9.8bps). CDS for Malaysia widened 3.4bps to 155.7bps amid headline risk though inflation eased to 2.6% in Mar-16 from 4.2% in Feb-16 and foreign reserves rose MYR0.2bn to MYR97.2bn as at 15 April.

¨   Turning to the USD primary front, the Government of Malaysia (A3/A-/A-) priced a dual-tranche USD1bn 10y at 3.179% (T+135bps) and USD500m 30y sukuk issues at 4.08% (T+145bps) which were oversubscribed by 4.2x vs. 6.7x of the same size and tenure last year. Michigan-based University Bank, a subsidiary of University Bancorp (NR) may price its AT1 perpetual sukuk with an IPT of not more than 5.75% under US Law. On the ratings front, Banque Saudi Fransi was downgraded to A-/Neg from A following Saudi Arabia’s downgrade by Fitch.

¨   MYR primaries led by DanaInfra’s (GG) MYR4.5bn IMTN — MYR800m 7y at 4.10%, MYR500m 10y at 4.29%, MYR700m 15y at 4.57%, MYR500m 20y at 4.76%, with another MYR2bn was privately placed; Kuala Lumpur Kepong’s (RAM: AA1) MYR500m 10y IMTN at 4.65% and Sarawak Energy’s (RAM: AA1) MYR1.5bn 15-20y IMTN at 5.04-5.18%. . Employees Provident Fund is target to set a MYR100bn Islamic saving plan next year and expects about one-quarter of its members to switch to the retirement plan. With about 51% of assets in fixed income and long-term investment strategy for asset and liability matching, this should deepen the Islamic finance market by spurring sukuk sales.

SOVEREIGN UPDATES

Country/Issuer	Update	RHBFIC View
The Government of Malaysia (A3/A-/A-; Sta)	Malaysia issues a total of USD1.5bn in two tranches - MALAYS 3.179% (T+135bps) 4/26 USD1bn and MALAYS 4.080% (T+145bps) 4/46 USD500m - oversubscribed by 4.2x, mainly to prefund its maturity of USD1.2bn in July. Investors from Asia dominated demand for the 10y and 30y sukuk taking up 65% and 54% respectively, followed by Europe (10y: 11%; 30y: 12%), Middle East (10y: 19%; 30y: 9%) and US (10y: 5%; 30y: 25%).	Demand was strong despite negative headlines, while we saw spread for 30y improved by 25bps from last year’s +170, while 10y deal was priced wider by 20bps from +115.
Dubai (NR)	Dubai’s DUGB’s 3.89% 3/25 USD569m began trading on 21-April according to information on Bloomberg, with its current YTM at 5.47%.	By looking at the maturity and profit rate, this could be a retap by Dubai, given lack of information and details.
Banque Saudi Fransi (BSF) (Aa3*-; BBB+/Sta; A-/Neg)	Fitch downgraded BSF’s ratings to A-/Neg from A to reflect deterioration in domestic operating environment after Saudi’s downgrade.	BSF remains moderately susceptible to event risk of low oil prices at least in the next 12 months. Nonetheless the bank’s credit profile to remain resilient given  (1) strong asset quality with NPL and reserve coverage of 0.8% and 207% respectively; (2) relatively strong capitalization with CET1, T1 and CAR of 15.0%, 15.0% and 17.2% respectively; and (3) low loans-to-deposits ratio of 87.1%, which displays strong earnings capacity and allows some room to react to risks arising from the decline in oil prices as well as high single-party concentration in the corporate loan portfolio. Yield on BSFR 5/17 tightened 3bps to 1.87%.