Saudi Arabia’s USD17.5bn Bond Issue; AUB Priced AT1 USD200m at 5.5%

24 October 2016

Global Sukuk Markets Weekly

Saudi Arabia’s USD17.5bn Bond Issue; AUB Priced AT1 USD200m at 5.5%

Highlights & Performance

¨   Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) index closed with modest gains at 105.5 (+0.23%) and 163.8 (+0.40%) respectively. The index yield fell 3.6bps to 2.434%, led by SECO, especially those of longer duration — SECO 4/24-4/44 tightened 16-44bps to 3.39-5.06% — amid the USD17.5bn Kingdom’s mammoth bond offering. The offering attracted about 3.8x BTC at below initial guidance of 2.58-4.62% for 5-30y notes. At last week’s Governing Council meeting, ECB kept all policy rates unchanged and maintained the pace of purchase programme.

¨   Malaysia Budget 2017 projects a marginal reduction of the deficit target to 3.0% of GDP from 3.1% in 2016, with Brent oil price assumption of MYR45/bbl; and a stronger GDP growth of 4-5% from 4-4.5% in 2016. The Sept’s headline inflation was stable at 1.5% YoY as the easing in food inflation (3.0% from 3.5%) was offset by the smaller decline in the transport inflation (-5.5% from -6.7%) due to base effects from fuel adjustments. Malaysia’s CDS widened by 1.1bps to 122.5bps. Elsewhere, Indonesia’s trade surplus widened to USD1.2bn in Sept from USD294m in Aug, lending support for another 25bps 7D-RR rate cut by Bank Indonesia (BI) to 4.75%, along with inflation remaining within the 3-5% target band. Its CDS premium remained stable at 151.4bps (-0.6bps). On the other hand, Turkish CDS tightened by 5.0bps to 246.5bps following Central Bank of the Republic of Turkey’s (CBRT) decision to keep its rates on hold, which in turn provided some relief to the currency that reached all-time lows amid rising political risks associated with an executive presidency referendum.

¨   Over in the primary market, Ahli United Bank (AUB, NR/BBB/BBB+) priced USD200m AT1 Pc10/21 sukuk at 5.500% (MS+422.6bps).

SOVEREIGN/Corporate UPDATE

Country/Issuer	Update	RHBFIC View
Saudi Arabia (A1/Sta; A-u/Sta; AA-/Neg)	Saudi Arabia issues USD17.5bn in bonds in three tranches. Average bid-to-cover was at c. 3.8 times (x). The issuance was split into three tranches: 1)     USD5.5bn at a 5y maturity at 2.63% 2)     USD5.5bn at a 10y maturity at 3.44% 3)     USD6.5bn at a 30y maturity at 4.64%	Positive. We see this development as mildly positive given that the issuance was higher than the expected USD15bn, following its commitment to stabilise the budget deficit further to c. 7-8% of GDP in 2017. IMF mentioned in Aug-16 that given the commitment to budget cuts, the deficit is estimated to fall to below 10% in 2017 after an estimated 13% in 2016 and 16% in 2015. Nevertheless, government debt ratio is expected to rise to c. 15-20% of GDP by end of 2016 from 5.9% in 2015.  We do not believe this is a worrying metric, given that the median government debt of AA rated countries is 38.7% according to Fitch’s estimation.
Ahli United Bank (AUB) (NR; BBB/Sta; BBB+; Sta)	AUB issued USD200m Perpetual Additional Tier 1 Sukuk Pc10/21 last Monday and was 3x oversubscribed, having its books opened at 5.75% on Monday and finalized to 5.5%. The issuance will be a new source of funding of AUB’s capital, which will further diversify its capital and funding base.	Positive. This issuance should sustain its growth momentum and optimize its capital resources. To note, AUB reported net profit growth of 8.2% YoY in 1H16, while 2Q16 showed 11.7% YoY growth. The regulatory environment in Kuwait is positive towards the banking system as there is strong systemic support and has low vulnerability to oil prices.