RHB FIC Global Sukuk Markets Weekly - 13/7/15

13 July 2015

Global Sukuk Markets Weekly

Dovish Fed, Greek Bailout and Iran Delayed Deal Constructive for Sukuk; Take Profit on EMAAR 19

Highlights & Performance

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¨      Dovish FOMC and delayed Iran deal supported gains. Sukuk tracked the UST curve bull flattener of 4-7bps over the week mainly attributed to the dovish FOMC minutes released Thursday morning and wider fiscal deficit. Additionally, sanctions relief on Iran seemed less likely to fall within this year after its nuclear discussions stayed inconclusive past Thursday’s deadline. The Shanghai Composite Index ended the week with 2 days of recovery (c.4.7%-5.0%) as China’s support measures kicked in. Over the weekend, Greece is given until Wednesday for its parliament to approve the reforms before third bailout can be considered.

¨      Sukuk gained 0.18%-0.26%; yields tightened 4bps. The Bloomberg Malaysia Sukuk Ex-MYR Total Return Index (BMSXMTR) ended the week 0.18% higher at 101.5 (week prior: -0.05% to 101.3). The seemingly higher Beta Dow Jones Sukuk Total Return Index (DJSUKTXR) resonated with 0.26% WoW gain to 155.1 (week prior: -0.18% to 154.7), pulling YTD returns up by 26bps to 1.72% (week prior: -18bps to 1.46%). Meanwhile the weighted average yield on the BMSXMTR tightened 3.8bps to 2.277% (reversing last week’s 3.8bps widening to 2.315%). Top 5 performers in the BMSXMTR were short to mid dated IG names like QATAR 1/23, SECO 4/22, SECO 4/24, GBHK 6/20, and ISDB 3/19 gaining USD30.7m in value (week prior: loss of USD33m).

¨      USD60/bbl support broken on further demand weakness and supply glut. The USD60/bbl Brent price support (that held since Apr-14) may have inverted into a potential ceiling as markets dreaded additions to the supply glut from US, OPEC and potentially Iran. In Us, Baker Hughes reported 2 weeks of rising rig count that broke a 28-week decline streak (refer to Chart of the Week); while OPEC reached 3-year high productions of 32.1m bpd in June (May: 31.4m) boosted by record supplies from Iraq (4.4m bpd) and Saudi Arabia (10.45m bpd); and Iran could export up to 1.5m bdp of oil based on current production and consumption levels from EIA’s report.

¨      CDS shows evident flight to safety. CDS markets evidently displayed a flight to safer assets over the week as spreads widened in the high credit risk markets like Bahrain (+6.0bps to 275), Turkey (+1.5bps to 222), Dubai (+6.8bps to 187), Indonesia (+7.0bps to 176) and Malaysia (+8.3bps to 137); and narrowed in safer markets like Abu Dhabi (-3.9bps to 55.5), Saudi Arabia (-5.4bps to 57.5) and Qatar (-3.3bps to 57.5).

¨      APICOR establishes USD3bn programme. Arab Petroleum Investment Corp, an oil-centric supra national rated A3 by Moody’s, has targeted end-2015 for a dollar-sukuk to diversify funding sources and investors.

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SOVEREIGN UPDATES

Country/Issuer	Update	RHBFIC View
United Arab Emirates (UAE) (Aa2/AA/AA)	UAE Approved law to bailout firms nearing bankruptcy.	Mild Negative. This may lead to the drawdown of sovereign funds should any bailout events happen, and may weaken business acumen for companies that are perceived to be strategically important or “too big to fail.” That being said, we think this development is Positive for weak but important/large corporate. DUGB 17-29 and DIFCAE 24 yields rallied 2 to 4bps and 6bps respectively.

CREDIT UPDATES

Company/Issuer	Sector	Country	Update	RHBFIC View
Emirates (NR)	Airlines	Dubai, UAE	Plans to open flight to second destination in Iran (City of Mashhad) from Sept-15.	Neutral. We are mixed on the route expansion given potential disruptions arising from geopolitical events in the region that may weigh on the route’s profitability and traffic. Yield on KHDRWY 3/25 tightened 1bps to 2.51%.
Ooredoo QSC (A2/A-/A+; Neg)	Telco	Qatar	·   Filed a lawsuit against Kuwaiti finance minister to recover KWD2.4m, representing the duplication of taxes paid in Kuwait and Tusnisia. ·   Group will release 1H15 results on 29-July.	Neutral. While the lawsuit translates to 5.9% of FY14 EBITDA from its Kuwaiti outfit, the amount is insignificant to Group at <1% of EBITDA. Nonetheless, the amount will be crucial to improving the financial performance of its Kuwaiti operations, which declined 29% YoY in EBITDA in FY14. QTELQD 12/18 yield tightened 3bps to 2.05%.
Jebel Ali Free Trade Zone (JAFZ, Ba1/NR/BBB-) DP World (DPWDU, Baa3/NR/BBB-)	Industrial (Ports, Logistics and Infra)	Dubai, UAE	Fitch upgrades JAFZ’s LT Issuer Default Rating by 3-notches to BBB- from BB- citing that DP World will help improve operations following the latter’s well-received USD2.6bn acquisition (funded by cash holdings and loans/facilities) of Economic Zones World, which owned JAFZ late last year.	Positive. We subscribe to the likely support from DPWDU given its ownership stake in JAFZ plus the potential synergies as JAFZ, a 57 square-kilometer industrial park, is adjacent to DPWDU’s flagship Jebel Ali port in Dubai thus enabling easy integration, layout improvements and capacity expansion. Yields on JAFZSK 6/19 and DPWDU 3/18 rallied, tightening 9bps and 8bps to 3.13% and 2.11% respectively.
UAE Real Estate Developers and Hotel Operators	Real Estate (Hotel)	Abu Dhabi, UAE	Abu Dhabi hotel price index in March falls 17.8% MoM as a result of a 20.2% MoM drop in hotel room rates index (Abu Dhabi Statistics Centre).	Negative. This may signal for softer performance expectations for hotel operators in Abu Dhabi and potential spillovers to the broader real estate market in UAE. Yields on UAE real estate players like ALDAR, DAMAC and EMAAR tightened 1-3bps; while Saudi’s DARALA complex narrowed 3-8bps.

TRADE IDEA

¨                  Take profit on EMAAR 19

Sukuk	Emaar Properties EMAAR 6.4% 7/19 (Ba1/BBB-/NR) (Price: 112.7; Yield: 3.019%; Z-spread: 155.7) (Amt o/s: USD500m)
Comparable	EMAAR 8.5% 8/16 (Ba1/BBB-/NR) (Price: 107.1; Yield: 1.662%; Z-spread: 116.1) (Amt o/s: USD500m) Emaar Malls EMAARM 4.564% 6/24 (Baa2/BBB-/NR) (Price: 102.9; Yield: 4.167%; Z-spread: 186.6) (Amt o/s: USD750m)
Relative Value	We recommend to take profit on EMAAR 19 which has tightened 41bps in yield and 11bps in Z-spread since our initiation a year ago. While EMAAR displayed commendable strategic and balance sheet discipline (leading to Moody’s revising its ‘Outlook’ to Positive in Feb-15 and S&P upgrading its ratings to BBB- last year), we seek to shift our exposure to safer sectors for now; heeding the warning signs such as S&P’s report of a potential 20% decline in Dubai property prices in 2015; Abu Dhabi Statistics Centre’s data on declining hotel rates and prices; and the impact of weaker oil prices on the real estate sector. We also note that the yield on EMAAR 19 has been steadily widening since 29-May (+18bps).
Fundamentals	EMAAR’s credit profile is laudable given: ·         Large scale as no.1 developer by market capitalisation in MENA; ·         High proportion of recurring income of 51% of revenues and 72% of EBITDA; ·         Substantial property sales backlog of AED31.8bn with a bulk of the cash yet to be received; ·         Attractive earnings with EBITDA growth of 26% YoY to AED4.6bn in FY14 and margin of 47% (FY13: 36%); ·         Excellent leverage and liquidity positions with net cash position of AED3.6bn (Mar-14: AED2.3bn) and EBITDA interest cover of 12.0x in FY15 (FY14: 9.1x); * All financials as at Mar-2015.