RHB FIC Global Sukuk Markets Weekly - 28/6/15

28 June 2015

Global Sukuk Markets Weekly

Modest Gains Deterred by Greece Uncertainties and US data; CDS Rallied; Pipeline Flourish with TURSK and ADIBUH; Value in SECO 23

Highlights & Performance

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¨      Moderate gains pulled down by Greek uncertainties and strong US data. The Bloomberg Malaysia Sukuk Ex-MYR Total Return Index (BMSXMTR) saw marginal gains of 0.02% W-o-W to 101.38 (vs. +0.29% to 101.36 in week prior). Similarly, the Dow Jones Sukuk Total Return Index (DJSUKTXR) inched 0.11% higher to 155.00 (vs. +0.45% W-o-W to 154.84), recovering YTD gains by 11bps to 1.65% (vs. +45bps to 1.53%). BMSXMTR yields were also unexciting narrowing 0.5bps to 2.277% (vs. -4.8vps to 2.282%). Sukuk returns ended the week with most of its early-week/post-FOMC meeting gains erased following days of heated discussions between Greece and its creditors, which ended with the former rejecting the preconditions (i.e. EUR8bn worth of tax rises, pension cuts and wage cuts) for the release of bailout funds. Additionally, US posted strong data: positive final revision of 1Q GDP to -0.2% YoY (from -0.7%), near 6-year high consumer spending of 0.9% MoM in May and 7-year high new home sales of 2.2% YoY in May. The top 5 gainers on the BMSXMTR were TUFIKA 4/19, SECO 4/24, TUFIKA 5/18, KFINKK 6/19 and ISDB 3/19, adding USD18.61bn in market value (week prior: +USD39.14bn).

¨      Credit sentiments improved in general. CDS spreads tightened substantially across the Gulf rallying on last week’s less hawkish FOMC meeting, hopes of a Greek resolution (earlier in the week) and oil price stabilisation around USD60-64/bbl, especially in resilient economies like Saudi Arabia (-5.2bps to 61.2bps), Abu Dhabi (-5.0bps to 56.0 bps), and Qatar (-4.6bps to 57.0bps). Pricier CDS markets also cheapened, namely Turkey (-12.2bps to 216.7bps), Bahrain (-8.3bps to 277.6bps), Dubai (-2.3bps to 175.45bps) and Indonesia (-2.0bps to 167.5bps). However, Malaysia’s CDS (+4bps to 131.5bps) continued to suffer as we draw closer to Fitch’s rating review reportedly slated for end-June.

¨      Brace for volatility triggered by Greek uncertainties, Gulf geopolitical tensions and US NFP release.  In the week ahead, we anticipate volatility to return (refer to Chart of the Week) as markets open to a plethora of Greek issues including a referendum on creditors’ bailout proposal (to be held on 5 July), emerging bank runs, a potential default on its EUR1.6bn repayment to IMF due Tuesday, and renewed fears of a ‘Grexit’ from the Euro. Credit risk may also be priced higher in the Gulf as geopolitical tensions resurfaced with Friday’s lethal bombing of a Shia mosque in Kuwait by an alleged Saudi citizen who entered the city in the morning through the national airport; and Turkey’s plans for a military intervention into northern Syria despite US and NATO criticisms. US NFP will also be released on Thursday prior to the extended Independence Day weekend.

¨   Pipeline flourish with potential issuance by Turkey and ADIB AT1. Pipeline continue to flourish after last week’s less hawkish FOMC meeting. Turkey (TURKSK, Baa3/NR/BBB-) is seeking to raise USD1.1bn to be priced in 4Q15 (along with USD400m-equivalent in JPY Samurai targeted for 2H15). Separately, Abu Dhabi Islamic Bank (ADIB, A2/NR/A+) reportedly received approval from UAE central bank for a USD1bn perpetual sukuk slated for 2H15, just before it seeks shareholder approval on 28 June to increase its Tier-1 sukuk programme size to USD3bn from USD2bn as well as sale of rights shares.

Macroeconomics and Sovereign Comment

Country/Issuer	Update	RHBFIC View
Turkey (TURKSK, Baa3/NR/BBB-)	·         Seeking to raise USD1.1bn in sukuk and the remainder in JPY; ·         The sovereign is aiming to price the sukuk in 4Q15, and the yen-denominated deal some point in 2H15.	Neutral. We are mixed on the proposed issuance given that Turkey is accumulating substantial external debt while its currency has weakened sharply against the USD; while issuing before the US Fed Funds Rate hike may allow for a softer impact on tighter liquidity and costlier capital later on. Additionally, we opine that the fund raising is necessary to boost economic growth and perhaps meet future repayments. Yields on TURKSK 3/18 and 11/24 tightened 7bps and 3bps to 2.803% and 4.489% respectively, while TURKSK 10/18 remained at 3.27% during the week.
	·         Turkey’s President Recep Tayyip Erdogan is planning a military intervention into northern Syria (bordering southern Turkey) to prevent Syrian Kurds from forming their own state there, despite concerns among his own generals and possible criticism from Washington and other NATO allies.	Negative. We believe this could lead to higher military expenditure for Turkey and spur geopolitical tensions in the region. Should the situation get out of hand, a downgrade by Moody’s may be plausible after the agency assigned a Negative outlook in April-14 and reaffirmed in June-15 citing political uncertainties arising from Turkey’s inconclusive parliamentary election results, and the capacity of the incoming government implement policies, retain investor confidence and avoid damaging outflows of international capital.

CREDIT BRIEF

Company/Issuer	Sector	Country	Update	RHBFIC View
Abu Dhabi Islamic Bank (ADIBUH, A2/NR/A+; RAM: AAA)	FI	Abu Dhabi	·         Received UAE central bank approval for USD1bn perpetual sukuk slated for 2H15; ·         Seeking shareholder approval on 28 June to increase sukuk programme ceiling to USD3bn from USD2bn, as well as sale of rights shares; ·         USD750m maturing 4/11/2015 and USD500m in 30/11/2016.	Mild positive. This would be an opportunity for ADIBUH to raise cheaper funding before the US rate hike. The proceeds will also help liquidity requirements ahead of its USD750m and USD500m sukuk maturities in Nov-15 and Nov-16 respectively. The industry faces challenges like growth and support deterioration from lower oil prices, concentration risk in real estate, and implementation of BASEL 3. ADIBUH’s credit profile is moderate compared to peers with Tier-1 of 13.9%, NPA of 4.4%, and ROA of 18.4% in FY14. Nonetheless, ADIBUH is the largest Islamic Bank in Abu Dhabi and is soundly backed by the Abu Dhabi royal family (at least 49.1% ownership, including indirectly via National Holding’s EIIC). ADIBUH 11/15 and 11/16 tightened 5bps and 2bps to 0.75% and 1.40% respectively.
DP World (DPWDU, Baa3/NR/BBB-)	Logistics /Ports	Dubai	Listed USD500m conventional bond on Nasdaq Dubai. This is its third debt listing on the bourse following a USD1.5bn sukuk and USD1.75bn bond (as well as its IPO) in 2007, a year after it purchased UK’s Peninsular and Oriental Steam Navigation Company (P&O) for GBP3.9bn, which was the world's fourth largest ports operator at the time.	Neutral. We believe the sum will cover the USD500m CAPEX (delayed from its USD3.7bn 2012-2014 plans) to develop additional capacity. Impact on credit profile is manageable given its position as the world’s 4th largest container terminal operator by capacity and throughput (76.1m gross TEU; 79% utilisation), and indirect shareholder (80.5% owned by government of Dubai). Leverage is moderate with net debt to EBITDA of 1.7x; while liquidity is strong with operational cash flow of USD1.2bn (3.9x interest cover), cash balance of USD3.5bn and c.USD3bn available term and revolving facilities as at FY6/14 sufficient to cover the USD1.5bn sukuk maturing in 2017 and USD1.75bn conventional in 2037. Yield on DPWDU 7/17 tightened 3bps to 2.14%.
Emaar Properties PJSC (EMAAR, Ba1/BBB-/NR)	Real Estate	Dubai	·         The Egyptian subsidiary, Emaar Misr, sold 600m shares (13% of share capital) at EGP3.8 each (lower end of EGP3.5-EGP4.25 range) in its IPO on the Egyptian Exchange (EGX); ·         Strong demand was observed with the Institutional tranche (85% of offering) 11x oversubscribed, and retail tranche (15%) 36x oversubscribed.	Positive. The expansion in Egypt will further improve revenue and geographical diversification for MENA’s largest developer by market cap. Operations is sound with 72% of recurring EBITDA (able to withstand up to 20% drop in Dubai home prices as per S&P’s estimates). Credit profile is also healthy with net cash position of AED3.6bn (equivalent to 2.65x of EBITDA and 10.2% of equity), EBITDA interest cover of 12.0x, and debt/GAV of 17% as at Mar-15. EMAAR 8/16 widened 4bps to 1.7% and 7/19 was unchanged at 2.98%; while subsidiary EMG sukuk (Baa2/BBB-/NR) 6/24 widened 3bps to 4.05%.
Abu Dhabi National Energy Company (TAQA, A3/A/NR)	Utilities	Abu Dhabi	·         Moody's affirmed the A3 LT issuer rating, (P)A3 rating for MYR3.5bn sukuk programme, (P)A3 rating for USd9.0bn global MTN programme, A3 rated debt instruments, and the P-2 short-term issuer rating; ·         Baseline Credit Assessment (BCA) was lowered to b2 from ba2; ·         Outlook on the A3 ratings is stable.	Mild Negative. Lower O&G prices has eroded the group’s ability to bolster profitability and operating cash flows; while it is thinly capitalised with total equity of AED8.1bn against reported debt of AED74.4bn given its cash flow levels.

TRADE IDEA

¨                  We like SECO 23 among SECO Complex

Bond	Saudi Electric Co. SECO 3.473% 4/23 (A1/AA-/AA-) (YTM: 3.24%; z-spread: 98.1bps) (Amt o/s: USD1bn)
Comparable	Saudi Electric Co. SECO 4.211% 4/22 (A1/AA-/AA-) (YTM: 3.08%; z-spread: 100.1bps) (Amt o/s: USD1.25bn) SECO 4% 4/24 (A1/AA-/AA-) (YTM: 3.13%; z-spread: 77.4bps) (Amt o/s: USD1.5bn) Islamic Development Bank ISDB 1.831% 3/20 (Aaa/NR/AAA) (YTM: 1.99%; z-spread: 23.9bps) (Amt o/s: USD1.0bn)
Relative Value	We like SECO 4/23 given the absolute yield pickup of 16bps and 11bps over SECO 4/22 and SECO 4/24 respectively. Furthermore, the dry spell from Saudi Arabia since the passing of its ruler and cabinet reshuffling early this year has shielded the issuance from supply risks, while future fund raising to cover its widening budget deficit are likely to be denominated in local currency.
Fundamentals	We are comfortable with Saudi Arabia’s credit profile given its: ·         ample foreign reserves equivalent to c.100% of GDP from previous current surpluses (14.9% of GDP in 2014) to buffer against budget shortfalls in the short to medium term; ·         manageable fiscal deficit despite expected rise to 12-20% of GDP in 2015 (from 0.6% in 2014) given the drop in oil prices (approximately 87% contribution to government revenues); ·         plentiful headroom for further financing given it world’s lowest debt to GDP of 1.6%, low (estimated) external debt/GDP of 12.8%, and flexibility to drawdown on financial assets; and ·         resilient economy with provisional real GDP growth of 3.6%, GDP per capita of USD52k in 2013, and estimated inflation rate of 2.7% YoY. * All financials as at Dec-2014.