Hawkish Fed a Drag to Indices; SECO Downgraded to A2; Mumtalakat Net Earnings Fell 68.7% YoY

23 May 2016

Global Sukuk Markets Weekly

Hawkish Fed a Drag to Indices; SECO Downgraded to A2; Mumtalakat Net Earnings Fell 68.7% YoY

Highlights & Performance

¨   Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices closed lower at 103.55 (-0.26%) and 159.18 (-0.44%) respectively. The top losers of BMSXMTR index are AXIATA 20, QATAR 23, and SECO 24 which saw a total market value decline of USD33.4m. Brent oil climbed by 1.86% WoW to USD48.72/bbl as increase in demand offset the impact from rising inventories. IMF approved Saudi Arabia’s strategy to finance its deficit, through an economic reform plan. Looking to the US, the Fed’s April meeting minutes hinted of an interest rate hike in June. Meanwhile, BNM and Bank Indonesia kept their interest rate unchanged on stable economic conditions with the latter cutting its economic growth forecast for 2016 to 5.0-5.4% (from 5.2-5.6%).

¨   Malaysia’s revenue fell slightly to MYR1.54bn (-0.7%) in 2015 while income tax revenue increased by 7.8% (or MYR1.9bn), while Goods and Services Tax collection achieved its target of MYR27bn as reported in the Auditor-General’s Report. The CDS widened to 166.1bps (+7.6bps). Turkey unemployment rate declined to 10.9% in Feb-16 (Feb-15: 11.2%) (see Chart of the Week) mainly due to the rise in services and construction hiring. Turkey’s government budget balance improved to TRY5.36bn in Apr-16 (Mar-16: –TRY6.57bn) with its CDS widening to 279.5bps (+8.7bps). Indonesia’s trade balance rose to USD667m in Apr-16 (Mar-16: USD508m) mainly due to the larger than expected decline in imports (Apr-16: -14.6% YoY; Mar-16: 10.4% YoY). Its CDS widened to 200.1bps from 13.1bps.

¨   Moody’s affirmed ratings for five UAE banks, National Bank of Abu Dhabi (Aa3), Abu Dhabi Commercial Bank (A1), Union National Bank (A1), Al-Hilal Bank (A1) and Abu Dhabi Islamic Bank (A2) had its ratings reaffirmed due to the continued capacity & willingness of government support in the event of a default, while the negative outlook reflects ongoing pressure of oil prices on UAE’s fiscal position and economic strength. Meanwhile, Saudi Electricity (SECO) has been downgraded to A2 from A1 by Moody’s with a stable outlook, in line with Saudi Arabia’s downgrade by one notch from Aa3 to A1. This reflects its strong credit linkage between SECO and the Saudi Arabian government.

¨   In the USD sukuk pipeline, DP World and Noor Bank have selected banks for a possible benchmark issuance. Turkey’s Deputy Prime Minister Mehmet Simsek mentioned plans of an issuance within 1H16 – we believe it will most likely be within the 5y tenor and issuance amount to range between USD1-1.5bn. We believe the slew of upcoming issuances in 1H16 are mainly due to (1) issuers placing sukuk prior to Ramadhan when generally liquidity drops slightly, and (2) while interest rates are still low. We maintain USD sukuk primary offers to reach USD16-23bn in 2016 driven by Government’s need to plug fiscal deficits and infra spending

SOVEREIGN/CORPORATE UPDATES

Country/Issuer	Update	RHBFIC View
Bahrain Mumtalakat (NR; BB/Sta; BBB-/Neg)	2015 net profit fell 68.7% YoY to USD76.3m from USD243.6m due to the adjustment on goodwill against Aluminium Bahrain (Alba) totaling USD583m from lower aluminum prices (Alba’s net profit was 38% lower than 2014). This impairment was offset by the higher contribution of profit from Gulf Air, where its net profit rose to USD176.6m in 2015 from USD42m in 2014 thanks to reduced operating costs by 53% and improved efficiency during the year. In an announcement last week, Mumtalakat stated it would acquire a stake in USD250m portfolio of commercial real estate assets in the US. The wealth fund also announced a deal to buy a 49% stake of Spanish aluminum firm Aleastur.	Neutral. Despite the fall in profit, Mumtalakat is well positioned in terms of liquidity given its USD500m unsecured revolving credit facility signed in Dec-14, which was later structured as a 5 year revolving credit facility and was fully utilized in 2015 to refinance existing debt. Year to date, MUMTAK 21 (YTM: 4.66%; Z+330.55bps) yield tightened 36bps. MUMTAK 21 looks cheap, nevertheless, we would prefer to stay on the sidelines given weak sovereign credit quality.