Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia

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).

Pipeline flourish

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.

Following the passing of laws in Egypt providing tax neutrality to sukuk, a workshop organised by the Finance ministry was held in Cairo in order to raise awareness.

Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia

The Bloomberg Malaysia Sukuk Ex-MYR Total Return Index (BMSXMTR) made 0.29% during the week to 101.36 (vs. -0.25% to 101.07 in week prior), allowing YTD returns to regain 7bps to 1.14% (vs. -27bps to 1.07% in week prior).

More favorably, the Dow Jones Sukuk Total Return Index (DJSUKTXR) grew 0.45% W-o-W to 154.84 (vs. -0.48% to 154.14 in week prior), earning back 45bps in YTD returns to 1.53% (vs. -100bps to 1.08% in week prior). Accordingly, the weighted average bid yield to worst on the BMSXMTR members tightened 4.8bps to 2.282% (vs. +7.3bps to 2.330% in week prior) tracking the UST curve bull steepener. Global sukuk recovery was thanks to a less hawkish FOMC meeting and ‘dot plot’ (refer to Chart of the Week) which asserted Fed will begin hiking rates by end-2015 but at a more gradual pace despite strong indicators of US economic recovery in May. The top 5 gainers on the BMSXMTR were SECO 24, ISDB 19, SECO 22, QATAR 23, and PETMK 20, adding USD39.14bn in market value.

Investors still wary about GCC risk.

5y USD CDS continued to widen in Bahrain (+13bps to 286bps), Saudi Arabia (+3bps to 66bps), Abu Dhabi (+3bps to 60.56bps) and Turkey (+1bps to 229bps) likely on continuing concerns of deflated oil prices; while yields tightened in only Dubai (-19bps to 177bps) and Qatar (-3bps to 62bps). Elsewhere, credit protection cost for Malaysia rose 2bps to 127bps after CPI increased to 2.1% YoY in May (prior: 1.8%) and ahead of Fitch Rating’s credit review within a month. Meanwhile, Indonesia CDS narrowed 2.5bps to 169.5bps after reporting stronger than expected trade surplus of USD955m in May (prior: USD454m, consensus: USD661m) and holding rates at 7.5%.

Sovereign and supranational enter pipeline.

The start of Ramadan sees slower issuance, but pipeline could stay exciting with at least USD400m planned to enter the market. Pakistan (B3/B-/NR) is eyeing an issuance of up to USD200m, following up the country’s USD1bn sukuk issuance in November 2014 and taking advantage from recent upgrade to B3 by Moody’s. Similarly, IFFIm is eyeing its second sustainable and responsible investment (SRI) sukuk of USD200m 3y, after having sold a larger USD500m 3y in November last year. Also, the International Finance Corp (IFC), World Bank’s lender to the private sector, mentioned interest in a 2015-issuance after its last foray in 2009 for USD100m 5y at 3.037%.

Quarterly USD Sukuk Supply (as at 19-June-2015)

In a recent country report on Afghanistan, the IMF highlighted developments of the Islamic finance sector.

The Afghan authorities are preparing a sukuk law, along with supporting legislative infrastructure, and an implementation plan. The IMF is assisting with sukuk implementation plan, including identification of assets to back sukuk, and preparing, the necessary capital market and securities issuance legislation and regulations.

Download IMF Report on Afghanistan.

Background

Afghanistan completed a peaceful transfer of power in September 2014, with the conclusion of the presidential elections and establishment of the national unity government. The new  government is resolved to push ahead with economic reforms and improve governance to  promote economic growth and development that benefits all Afghans. The international community and key donors have reaffirmed their partnership and commitment to Afghanistan at the London Conference held in December 2014. They welcomed the new government’s commitment to macroeconomic stability and reforms that will promote sustainable and inclusive growth.

Islamic Finance by IslamicFinance.com is an Initiative for the Development of the Islamic Financial Market

Islamic Finance and its sister site Sukuk are initiatives for the enhancement and development of the Islamic financial market [1] by means of free access to a comprehensive Sukuk database of issued sukuk and its arrangers, structure and issuer data [2], the latest market news, trends and information [3] as well as a database of qualified industry professionals and services firms [4].

[1] The Size of the Market
[2] The Sukuk Database
[3] Islamic Finance News
[4] WHOs WHO of Firms & Professionals

Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia

Sukuk Indexes Decline

Returns took a hit from strong US NFP and retail sales data. The Bloomberg Malaysia Sukuk Ex-MYR Index (BMSXMTR) fell 0.25% during the week (vs. -0.24% in week prior) to 101.07, shaving 27bps from YTD returns to 1.07% (vs. 1.34% in week prior). The decline was more severe for the Dow Jones Sukuk Total Return Index (DJSUKTXR) which fell 0.48% W-o-W (vs. -0.02% in week prior) to 154.14, forfeiting almost half of YTD returns to 1.08% (vs. 2.08% in week prior). The weighted average bid yield to worst on the BMSXMTR members widened 7bps to 2.33%, mirroring the UST curve bear steepener from yields on the 10y widening 7bps to 2.377% and 5y widening 5bps to 0.661%.

This was largely due to signs of economic recovery in May indicated by stronger NFP growth of 280k (prior: 221k) and retail sales increase of 1.2% (prior: 0.2%), and reinforcing expectations for the Fed to begin rate hikes in September 2015. The top 5 drags on the BMSXMTR were Qatar 23, Qatar 18, SECO 24, ISDB 9/19 and ISDB 3/19, losing USD37.2bn in market value.

Global Sukuk Supply

2Q15 global sukuk supply is currently within our forecast of USD6-8bn despite USD strengthening as issuers lock in lower interest rates. The current total supply for 2Q15 to date stands at USD6.25bn, within our supply forecast range of USD6-8bn, despite the dollar strengthening of late. We continue to believe the low interest rate environment should maintain momentum of USD sukuk supply.

In the pipeline, we still have yet to see Cagamas issuing from its USD2.5bn multi-currency programme (set up in November 2015). We are also expecting Drake & Scull to issue a potential USD sukuk, and still awaiting Abu Dhabi Islamic Bank (ADIB) to extend its USD2bn Tier 1 sukuk programme to USD3bn, subject to approval.

Sukuk Comments

• Islamic Development Bank (IDB) (Aaa/AAA/AAA) – IDB increased its sukuk issuance programme ceiling from USD10bn to USD25bn.
• Drake & Scull (D&S) (Not Rated) D&S has set initial price guidance for its senior USD perp at c. 9% Structure: 3 years to the first call date and 5 years to the second. Rate reset and coupon increase of 500bps if sukuk not called in 5th year. Size of offering: USD150m to USD200m

Quarterly USD Sukuk Supply (as at 12-June-2015)

US Dollars Issuances by Dubai Islamic Bank, Hong Kong government and Indonesia national airline Garuda Indonesia, as well as the Saudi Riyal issuance by Saudi British Bank have been added to the Sukuk.com database.

Total issuances crossed USD4bn in 2Q15.

Indonesia has sold a record equalling sukuk for the value $2 Billion matching a record set by Qatar in 2012.

Order book of over $6.8 billion from 240 investors. Islamic and Middle Eastern investors subscribed to 41% of the notes, followed by USA 21% and Europe 16%, Asia ex-Indonesia 12% and Indonesia 10%, according to a source close to the deal. Banks purchased 42% of the paper, followed by fund managers 39%, central banks 15%, insurers 2% and private banks 2%.

The sukuk’s structure and documentation, which include the following features in the ijara and wakala series: – On the scheduled dissolution or following the occurrence of a dissolution event, PPSI-III will have the right to require the state to purchase all of its rights, benefits and entitlements in, to and under the trust assets.

Upcoming Sukuk

The Government of Hong Kong, Dubai Islamic Bank are expected to sell Sukuk next week.

Short term Sukuk rated A-1 by Standard and Poor’s Rating Services (S&P’s) have been issued by the International Islamic Liquidity Management (IILM). IILM order book picks up from previous auction.

Full details of sukuk can be found within our Sukuk profile section.

The IILM is an international institution established by central banks, monetary agencies and multilateral organisations to introduce and facilitate effective cross-border Shari’ah-compliant liquidity management.

IILM sells its Sukuk through its primary dealers, who consist of: Abu Dhabi Islamic Bank, AlBaraka Turk, CIMB Islamic Bank Bhd, Luxembourg’s KBL Private Bankers, Kuwait Finance House, Maybank Islamic Bhd, National Bank of Abu Dhabi, Qatar National Bank, Standard Chartered Bank and Barwa Bank.

The Government of the Hong Kong has begun investor meetings for the issuance of its second Sukuk.

Following the successful issuance in 2014 of a five year $1Bn Sukuk which attained an order book of $4.7Bn. The AA stable (S&P) / Aa1 stable (Moody’s) / AA+ stable (Fitch) Government of the Hong Kong Special Administrative Region of the People’s Republic of China (HKSAR) will begin investor meetings on 18 May.
Meetings will be held in the UK, Saudi Arabia, UAE and Malaysia.

Hong Kong has mandated HSBC and Standard Chartered as Joint Global Coordinators, Joint Lead Managers and Joint Bookrunners, and CIMB and National Bank of Abu Dhabi PJSC as Joint Lead Managers and Joint Bookrunners.

The Hong Kong Monetary Authority is acting as the HKSAR Government’s representative in the Sukuk offering.