RHB FIC Global Sukuk Markets Weekly - 22/5/15

22 May 2015

Global Sukuk Markets Weekly

Sukuk Advances; Indonesia Priced USD2bn of 10y at 4.325%; Garuda, DIB Next; Prefer EIB 17 to DIB 17

Highlights & Performance

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¨   Sukuk advances moderately ahead of upcoming issuances and weaker US data. The Bloomberg Sukuk Market Return Index (BMSSUTR) inched up 0.11% W-o-W (vs. 0.06% in week prior) to 120.03, bringing YTD returns to 1.55% (vs. 1.44% in week prior). Whereas, the Dow Jones Sukuk Total Return Index (DJSUKTXR) declined 0.28% W-o-W (vs. 0.08% in week prior) to 155.62, bringing YTD returns to 2.05% (vs. 1.84% in week prior). Sukuk returns improved from the previous week as Indonesia has successfully priced its 10y USD2bn at 4.325% while Garuda Indonesia, the country’s airline eyeing for USD500m placement of 5y at 6.95%. In addition to this, weaker US existing home sales (April 2015: -3.3% M-o-M; March 2015: +6.5%), preliminary Markit US manufacturing PMI data (May 2015: 53.8; April 2015: 54.1), US Fed FOMC noting a rate hike in June is highly unlikely had also supported returns. The top five gainers during the week were QATAR 23, KFINKK 19, TUFIKA 19, DEWA 18, and TUFIKA 18, contributing a market value gain of USD1.2bn during the week.

¨   5y CDS tightened overall as oil prices stabilized during the week and geopolitical concern wanes. Oil prices barely changed during the week, declining slightly by 0.08% W-o-W to USD66.54/bbl which kept confidence on the region stable. Among Middle East risk premiums, Saudi Arabia tightened the most by 7.42bps W-o-W to 64.5bps, followed by Bahrain (-5.24 bps to 275.56bps), while Qatar remained relatively unchanged at 61.56bps. In the UAE, Dubai and Abu Dhabi risk premiums tightened by c. 1bp W-o-W. Looking to Turkey, its 5y CDS tightened 7bps W-o-W to 205.31bps as the central bank maintains its benchmark repurchase rate at 7.5% while the unemployment rate improved to 11.2% in February 2015 from 11.3% in January 2015. Malaysia and Indonesia’s 5y CDS tightened by 6.39bps and 8.38bps to 111.33bps and 159.84bps respectively.

¨   Sukuk pipeline are likely to add c.USD1bn to USD sukuk primary market. Total issuances reached USD4bn in 2Q15 (by Malaysia Government, Noor Bank and Indonesia) with Garuda and Dubai Islamic Bank could add c.USD1bn to the pipeline, bringing total issuances during the quarter to USD5bn (vs. USD7.6bn in 2Q14). This may mean 1H15 may surpass 1H14 supply (1H14: USD9.8bn; 1H15 YTD: USD9.66bn).

Macroeconomics and Sovereign Comment

Country/Issuer	Update	RHBFIC View
Indonesia (Baa3/BB+/BBB-)	·         Issued USD2bn of 10y at 4.325%, vs. previous 10y USD sukuk at 4.35% issued in September 2014 and 3.3% in sukuk issued in November 2012. ·         S&P raises sovereign outlook to Positive from Stable.	Neutral.  Since last September’s sukuk sale, Indonesia’s President Joko Widodo removed gasoline subsidies, freed up IDR230m to spend on infrastructure such as roads and ports, as well as improved policy framework and enhanced monetary and financial management. The INDOIS complex tightened by c. 4bps W-o-W, except for INDOIS 22 which widened 2bps W-o-W. The new INDOIS 4.325% price rose 12.5cents to 100.125.

CREDIT BRIEF

Company/Issuer	Sector	Country	Update	RHBFIC View
Garuda Indonesia (NR/NR/BBB+ by Fitch Indonesia)	Airlines	Indonesia	·         Shareholders approved USD500m USD sukuk to help finance general corporate programs. ·         Part of the funds will be used to refinance the company’s debt worth USD350m maturing in 2015, while the remaining USD150m will be used for other purposes, including capital expenditure according to Garuda. ·         In preparation for the sukuk, Garuda obtained a bridge loan worth USD400m from National Bank of Abu Dhabi and Dubai Islamic Bank. The loan will serve as a “back stop facility” for the sukuk if it is not successful	Neutral. Garuda’s performance was weak in 2014, as the company faced USD373m in losses vs. USD11.2m profit in 2013 due to foreign exchange losses and increasing costs. The company was downgraded in February 2015 due to BBB+ from A-, and the outlook was also downgraded to Negative from Stable due to its weaker financial profile. Garuda expects improved financial performance in 2015 as the company plans to restructure cost drivers and is expected to save USD146.94m, in addition to USD172.2m due to falling oil prices.
Dubai Islamic Bank (DIB) (Baa1/NR/A)	Banking	UAE (Dubai)	·         DIB to issue senior unsecured USD sukuk (will be issued under USD2.5bn Sukuk Programme). DIB mandated DIB, First Gulf Bank, HSBC, Maybank, National Bank of Abu Dhabi and Standard Chartered Bank as Joint Lead Managers ·         Fitch assigns DIB’s proposed sukuk a rating of A(EXP)	Positive. DIB issued a 5y USD500m sukuk in 2012 which was priced at 4.752% (YTM: 1.97%; z-spread: 113.23bps), and this issue has been one of the best performers among USD sukuk financials year-to-date (-43bps YTD). Comparing with a similar issuance with a peer bank such as Emirates Islamic Bank (Baa1/NR/A+), EIBUH 17 was priced at 4.718% while EIBUH 18 was priced lower at 4.147%, both issued in 2012.
Aldar Properties PJSC (ALDAR, Baa3/BBB-/NR, Sta)	Real Estate	Abu Dhabi, UAE	·         Net income increased 36% YoY to AED618m in 1Q15, boosted by a 61% YoY jump in gross profit from recurring revenue assets to AED368m. ·          Net debt reduced to AED2.9bn, 16.05% of equity and 2.03x of EBITDA (Dec-14: AED4.5bn, 24.52% and 4.07x).	Positive. ALDAR's credit profile strengthened significantly due to successful deleveraging and cash flow improvement. The company received 2-notch upgrades by both Moody’s (from Ba2 to Baa3 in Nov) and S&P (from BB to BBB- in Jun and Dec) last year. Given the growing proportion of stable income and good track record of support from the Abu Dhabi government, we opine that ALDAR is likely to continue on its positive trajectory, though the health of Abu Dhabi's real estate sector will require close monitoring. Yield on ALDAR 4.348% 12/18 inched 1bps lower over the week to 2.556%, unfazed by earnings given it has already tightened 48bps YTD.

TRADE IDEA

¨                  We prefer EIB 17 to DIB 17

Bond	Emirates Islamic Bank (EIB) - EIB 4.718% 1/17 (Baa1/NR/A+) (YTM: 1.91%; z-spread: 120.84bps) (Amount: USD500m)
Comparable	Dubai Islamic Bank (DIB) - DIB 4.752% 5/17 (Baa1/NR/A) (YTM: 1.97%; z-spread: 113.23bps) (Amount: USD500m)
Relative Value	EIB 17 seems cheaper from z-spread perspective (+7.61bps) and shorter duration by 3.84 months.
Fundamentals	EIB’s revenue rose 38.6% in 2014 to AED1.69bn (2013: 71.4%), while net income rose to AED364.2m in 2014 from AED139.5m in 2013. Already in the 1Q15, revenue jumped 82.2% Y-o-Y to AED617m, while net income rose to AED193.7m, a 106% Y-o-Y increase from 1Q14. EIB’s coverage ratio has already improved to 97% in 1Q15 from 90% as at end 2014 as the bank focuses on capturing market share and solidifying financial base.