RHB FIC Global Sukuk Markets Weekly - 6/7/15

6 July 2015

Global Sukuk Markets Weekly

Sukuk Losses Cushioned by Close Calls on Greece, Iran and Malaysia;  Take Profit on MALAYS 45

Highlights & Performance

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¨   Returns stumbled. The Bloomberg Malaysia Sukuk Ex-MYR Total Return Index (BMSXMTR) inched lower by 0.05% during the week to 101.3 (vs. -0.02% to 101.38 in week prior). The Dow Jones Sukuk Total Return Index (DJSUKTXR) also dropped by 0.18% W-o-W to 154.7 (vs. +0.11% to 155.0), lowering YTD gains by 18bps to 1.46% (vs. +12bps to 1.65%). Meanwhile, the weighted average yield of BMSXMTR rose 3.8bps W-o-W to 2.315% (vs. -0.5bps to 2.277%); with worst performers led by KFINKK 6/19, SECO 4/24, ISDB 6/17, QATAR 1/23, and ISDB 3/19 shedding USD33m in value (week prior: 18.61m).

¨   Plot-twits for Greece, Iran and Malaysia cushioned losses. Sukuk started the week on a bad note as expected, but picked up mid-week after: 1) Greece counteroffered the bailout proposal it had previously rejected; 2) discussions on Iran’s nuclear agreement (a prelude to sanctions uplift) passed its 30-June deadline; and 3) Fitch unexpectedly revised Malaysia’s sovereign rating to ‘A-/Stable’ from ‘A-/Negative’. The US also surprised as non-farm payrolls (NFP) was revised down to 254k (from 280k) for May and fell short of expectations at 223k (consensus: 233k) for June, leading to a rally in UST yields, tightening 1-7bps before closing for 4-July holidays.

¨   Risk aversion rises. Geopolitical tensions and oil price jitters (from the Iran deal and higher rigs-count in US) led CDS spreads to rise 1-5bps in the Gulf, except for Bahrain (-8.6bps to 269) where Sunnis and Shiites held joint prayers on Friday. Elsewhere, Indonesia’s CDS widened 1.6bps to 169 on higher inflation and weaker consumer confidence; while Malaysia’s narrowed 2.8bps to 129 after Fitch revised the sovereign’s Rating/Outlook to ‘A-/Stable’ (from ‘A-/Negative’) citing improving fiscal finances.

¨   Market volatility to be event-driven. Greece decided to vote no (61%) for the austerity measures on Sunday, which could prolong the period of uncertainty in Europe. Earlier, the survey hinted on a mixed views (refer to Chart of the Week), Iran may see a drafted nuclear agreement by the extended 7-July deadline. The US will publish services sector growth and trade data before releasing FOMC minutes on Thursday night. In China, authorities suspended IPOs, announced a market stabilisation fund, and pleaded investors to refrain from panic to stem a stock market sell-down that has wiped out 29% (or USD2.8trn) from the Shanghai Composite Index (SHCOMP) since its 12-June peak, completely ignoring PBOC’s 25bps rate cut to 4.85% last weekend, and easing of margin-trading rules and trading fees Wednesday.

Macroeconomics and Sovereign Comment

Country/Issuer	Update	RHBFIC View
·      Malaysia (MALAYS, A3/A-/A-) ·      Petroliam Nasional Bhd (PETMK, A1/A-/A)	·         Fitch reaffirmed Malaysia’s LTFC sovereign rating at ‘A-‘ and revised the Outlook to ‘Stable’ from ‘Negative’, mainly due to improving fiscal finances; i.e. budget deficit narrowed to 3.8% of GDP and government debt/GDP declined to 53.9% in 2014 (2013: 4.6% and 54.7% respectively). ·         Similarly, Fitch reaffirmed PETMK’s ratings at ‘A’ and revised the Outlook to ‘Stable’ (from ‘Negative’).	Positive. The positive revision will restore some stability to Malaysian markets which have seen selling pressure by international investors earlier. Nonetheless, other uncertainties surrounding the off-balance sheet debts and low governance standard will need immediate fix to restore investors’ confidence. MALAYS complex and PETMK 3/20 tightened 1-6bps over the week.
Saudi Arabia (Aa3/AA-/AA)	·         Foreign reserves dropped for a fourth month to Apr-2013 low of USD672bn in May (Mar: USD679bn); ·         PMI declined for a third consecutive month to a 6-year low of 56.1 in June (prior: 57.0); ·         1Q real GDP grew 2.4% YoY to SAR627.4bn (4Q14: 1.6%); -     Crude oil and natural gas grew 1.5% YoY to SAR243.1bn; -     Manufacturing other than oil refining grew 2.6% YoY to SAR32.1bn; -     Construction grew 7.1% YoY to SAR32.1bn; -     Trade, restaurants and hotels grew 4% YoY to SAR61.3bn; -     Financial Institutions and real estate grew 1.1% YoY to SAR 59.3bn.	Mild Negative. The developments are bearish overall, though we maintain our view that Saudi Arabia has sufficient reserves (USD672bn at May-15) and fund-raising capacity (debt/GDP of 1.6% at Dec-14) to buffer against IMF’s estimated budget deficit of USD130bn (or 20% of GDP) in 2015 (from 0.6% in 2014). We also take some comfort from news that the Kingdom’s oil sector (40% of GDP) grew 1.8% in 1Q15 (4Q14: -0.7%) due to a ramp up in production to gain global market share, and Brent crude prices holding above USD60/bbl since Apr-15. Yields for SECO and ISDB complex mostly edged 1-7bps higher during the week.
United Arab Emirates (UAE, Aa2/AA/AA)	·         The Ministry of Finance said it has completed a corporate tax law draft and plans to create a department to collect and implement federal taxes. The UAE Cabinet has approved the ministry’s tax policy. Talks are also moving forward among GCC countries on a value added tax (VAT).	Positive. Without any details on the tax rates, we opine that the development will help to some extent to reduce the government’s reliance on oil revenues, which is expected to lead to UAE’s first budget deficit since 2009 estimated by IMF. UAE does not impose personal income tax or measures such as value added tax (VAT).

CREDIT BRIEF

Company/Issuer		Sector	Country	Update	RHBFIC View
Abu Dhabi Islamic Bank (ADIBUH, A2/NR/A+; RAM: AAA)		FI	Abu Dhabi	Shareholders have approved: ·         proposals to raise AED504m of share capital through a rights issue of 168m new shares (56:1000 at AED3 per share); and ·         increased authorisation for issuing T1 sukuk to USD3.0bn (from USD2.0bn).	Mild positive. The rights issue will increase ADIBUH’s total equity by 3.6% to AED14.6bn and lower leverage to 0.69x (from 0.74x) based on pro-forma Mar-15 accounts. The bank is reportedly issuing USD1bn T1 sukuk soon, which we believe is good for the coming repayments (USD750m in Nov-15 and USD500m in Nov-16) as well as for capitalisation. The bank is well-capitalised with Tier-1 ratio of 16.2% and has robust liquidity given net cash position of AED18.1bn versus total debt of AED10.1bn at Mar-15. Yields were mixed as ADIBUH 11/15 and ADIBUH Pc10/18 tightened 10bps and 3bps to 0.61% and 4.64% respectively; while ADIBUH 11/16 widened 8bps to 1.46%.
Banking		FI	UAE	·         Moody's assigned Counterparty Risk Assessments (CRA) to 16 UAE banks; and ·         affirmed Abu Dhabi Commercial Bank, MashreqBank and Emirates NBD PJSC’s FC subordinated ratings of Baa1, Ba2, and (P)Baa3 respectively.	Neutral. Banks that were assigned CRA include: -   ADCB (A1u/A/A+) at Aa3(cr); -   ALHILA (A1/NR/A+), ADIBUH (A2/NR/A+), and FGBUH (A2/NR/A+) at A1(cr); -   SIB (A3/NR/NR) at A2(cr); and -   DIBUH (Baa1/NR/A) at A3(cr). CRAs are positioned 1-notch above the banks’ baseline credit assessment (BCA) ratings to reflect a higher commitment to avoid counterparty repayment above debt and deposits; except for ALHILA which already incorporates 7-notch government uplift. Yields on the banks’ mostly widened 5-9bps over the week; except for ADIBUH Pc10/18 (-3bps to 4.64%) and DIBUH Pc3/19 (-2bps to 5.22%).
Drake & Scull (DSIUH, NR)	Construct-ion		Dubai	·         Increased the Gulf Cooperation Council nationals’ shareholding limit on its shares to 100% from 49%, leading to a 11% jump in its share price.	Mild positive. The positive response shows investor interest in DSIUH, which will be offering USD150-200m senior perpetual sukuk at IPG of 9%, callable in 3y and a 500bps coupon step-up if not called by 5y.

TRADE IDEA

¨                  Take profit on MALAYS 45

Bond	Malaysia Global Sukuk MALAYS 4.236% 04/22/45 (A3/A-/A-) (Yield: 4.57%; Z-spread: 163.6) (Amt o/s: USD500m)
Comparable	MALAYS 2.991% 07/06/16 (A3/A-/A-) (Yield: 1.17%; Z-spread: 62.2) (Amt o/s: USD500m) MALAYS 4.646% 07/06/21 (A3/A-/A-) (Yield: 2.80%; Z-spread: 78.4) (Amt o/s: USD500m) MALAYS 3.043% 04/22/25 (A3/A-/A-) (Yield: 3,12%; Z-spread: 64.1) (Amt o/s: USD500m)
Relative Value	We recommend to take profit on MALAYS 45 (which has tightened 21.6bps in Z-spread since our imitation on 17-Apr) to seek opportunity from the recent positive revision to ‘A-/Stable’ by Fitch Ratings and to abstain from growing market volatility for now.
Fundamentals	Malaysia sovereign fundamentals to stay intact in the long term, in our view: ·         Improving fiscal position with deficit falling to 3.5% of GDP (and 3.2% target in 2015),  debt/GDP declining to 52.8% (2013: 3.9% and 54.7%) and supported by progress on the Goods and Services Tax (GST) and fuel subsidy reforms despite lower oil prices; ·         Moderate external liquidity with reserve coverage of short term external debt of 1.1x and liquidity ratio of 113.2% (2013: 1.3x and 130%); ·         Current account surplus of about 4% (2010-2014 average: c.7.2%); ·         Stable real GDP growth rate of 5.8% over 2010-2014 and inflation volatility of 1.3% (vs ‘A’ median of 3.1% and 1.7% respectively). We opine that Malaysia has the resources and that support is likely to sustain the majority of the Federal government debt and explicit guarantees which has risen to 16% of GDP (from 15.4% in 2013). * All financials as at Dec-2014.