A Riyal denominated sukuk has been issued by the Saudi International Petrochemical Company (Sipchem). The company announced the successful completion of the issuance amounting to SAR 1.0 billion (Sukuk) on June 16, 2016. The Sukuk was priced at 235 bps over six (6)-month SAIBOR for tenor of five (5) years maturing on June 16, 2021. Riyadh Capital and NCB Capital helped to arranged the private issuance.

In the hard currency space, the Commercial Bank of Qatar issued a Eurobond which achieved the tightest spread for a MENA financial institution this year, conventional or Sukuk.

Whilst the issuance was not a sukuk, demand for bond indicates strong investor appetite, a good sign of market demand which is likely to be tested with several large planned issuances post Ramadan. Most eagerly anticipated is a potential sovereign issuance by Saudi Arabia, as well as by Aramco, the Saudi national oil giant.

Strong investor appetite

The Commercial Bank of Qatar issued a US$750 million five-year senior unsecured bond under the Bank and its subsidiary, CBQ Finance Limited’s USD 5 billion European Medium Term Note (“EMTN”) Programme. The issue was arranged and offered through a syndicate of Joint Lead Managers comprising Citibank, HSBC, Morgan Stanley and National Bank of Abu Dhabi and attracted substantial global interest.

The bond was issued at a spread of 215 basis points over mid-swaps, carries a coupon of 3.250% and has a final reoffer yield of 3.385% per annum. The spread was the tightest achieved by a MENA financial institution in 2016 (for both conventional and sukuk) and the coupon is also the lowest for a MENA conventional financial institution since May 2015, reflecting strong investor appetite. The issuance is to listed on the Irish Stock Exchange and is rated A2 by Moody’s and BBB+ from Standard and Poor’s.

Qatar and Abu Dhabi go conventional

Qatar has issued $9 billion worth of sovereign bonds across three maturities, selling $3.5 billion in five-year and 10-year issuances and a $2 billion 30-year issuance, according to a report by Bloomberg. The deal follows a $5 billion Eurobond from Abu Dhabi last month which attracted an order book of $17 billion, with considerable demand coming from outside the region.

Qatar previously issued sukuk in 2012 with a dual issuance totalling $4 billion for five and ten years respectively.

Saudi Arabia May Follow

Saudi Arabia, and Saudi Aramco are expected to enter the credit market shortly, possibly before Ramadan.

Saudi Aramco is likely to issue Riyal denominated sukuk and has appointed JPMorgan Chase & Co., HSBC Holdings Plc and Riyadh Bank to arrange the deal.

Saudi Aramco subsidiaries Saudi Aramco Total Refining & Petrochemical Co (Satorp) and Sadara Chemical Co have previously issued sukuk.

It is not known whether the Saudi sovereign issuance will be Sukuk or a Eurobond, though according to a report in Bloomberg, Saudi Arabia may “have to offer a very generous premium” to investors after Qatar has flooded the market.

Dubai Corporates Stick with Sukuk – Noor Bank Funding Jumps

RHB Global Sukuk Markets Research reported DP World Ltd (Baa3/NR/BB-), the Dubai-owned port company, issued a USD1.2bn 7y senior sukuk priced at 3.9% (MS+237.5bps) for general corporate purposes and to refinance its sukuk that is maturing in 2017. Emirates Islamic Bank (NR/NR/A+) sold USD750m 5y Sukuk al-Wakalah at a profit rate of 3.54% (MS+220bps) with a 2.95x BTC which attracted the investors from GCC, Asia and Europe; while Noor Bank (NR/NR/A-) priced USD500m AT1 Pc6/21 at 6.25%.

The Emirates Islamic sukuk was much tighter than its previous issuance, whilst Noor Bank has previously issued at a considerably lower profit rate of 2.788% though the previous issuance was not perpetual. RHB added “We find Noor Bank’s Pc6/21 issuance rather attractive given its competitive yield relative to other perps in the USD sukuk space”

USD Sukuk Issuance up to 27 May-2016. Source: Bloomberg, RHBFIC

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

Highlights and Performance

In the USD sukuk pipeline, DP World and Noor Bank have selected banks for a possible benchmark issuance. Turkey’s Deputy Prime Minister Mehmet Simsek mentioned plans of an issuance within 1H16 – we believe it will most likely be within the 5y tenor and issuance amount to range between USD1-1.5bn. We believe the slew of upcoming issuances in 1H16 are mainly due to (1) issuers placing sukuk prior to Ramadhan when generally liquidity drops slightly, and (2) while interest rates are still low. We maintain USD sukuk primary offers to reach USD16-23bn in 2016 driven by Government’s need to plug fiscal deficits and infra spending.

Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices closed lower at 103.55 (-0.26%) and 159.18 (-0.44%) respectively. The top losers of BMSXMTR index are AXIATA 20, QATAR 23, and SECO 24 which saw a total market value decline of USD33.4m. Brent oil climbed by 1.86% WoW to USD48.72/bbl as increase in demand offset the impact from rising inventories. IMF approved Saudi Arabia’s strategy to finance its deficit, through an economic reform plan. Looking to the US, the Fed’s April meeting minutes hinted of an interest rate hike in June. Meanwhile, BNM and Bank Indonesia kept their interest rate unchanged on stable economic conditions with the latter cutting its economic growth forecast for 2016 to 5.0-5.4% (from 5.2-5.6%).

Malaysia’s revenue fell slightly to MYR1.54bn (-0.7%) in 2015 while income tax revenue increased by 7.8% (or MYR1.9bn), while Goods and Services Tax collection achieved its target of MYR27bn as reported in the Auditor-General’s Report. The CDS widened to 166.1bps (+7.6bps). Turkey unemployment rate declined to 10.9% in Feb-16 (Feb-15: 11.2%) (see Chart of the Week) mainly due to the rise in services and construction hiring. Turkey’s government budget balance improved to TRY5.36bn in Apr-16 (Mar-16: –TRY6.57bn) with its CDS widening to 279.5bps (+8.7bps). Indonesia’s trade balance rose to USD667m in Apr-16 (Mar-16: USD508m) mainly due to the larger than expected decline in imports (Apr-16: -14.6% YoY; Mar-16: 10.4% YoY). Its CDS widened to 200.1bps from 13.1bps.

Moody’s affirmed ratings for five UAE banks, National Bank of Abu Dhabi (Aa3), Abu Dhabi Commercial Bank (A1), Union National Bank (A1), Al-Hilal Bank (A1) and Abu Dhabi Islamic Bank (A2) had its ratings reaffirmed due to the continued capacity & willingness of government support in the event of a default, while the negative outlook reflects ongoing pressure of oil prices on UAE’s fiscal position and economic strength. Meanwhile, Saudi Electricity (SECO) has been downgraded to A2 from A1 by Moody’s with a stable outlook, in line with Saudi Arabia’s downgrade by one notch from Aa3 to A1. This reflects its strong credit linkage between SECO and the Saudi Arabian government.

Over $4 billion of sukuk were issued mostly from Gulf based issuers in the run up to Ramadan.

Noticeable domestic currency issuances were also made by Government of Malaysia with a 2.5 billion Ringgit print as well as domestic issuances by Governments of Jordan, Brunei and Bahrain, as well as a private placement by Kuveyt Turk.

Details of the following sukuk issued in May can be found on the Sukuk.com Sukuk Database, the leading source of Sukuk data used by the Sukuk industry.

• Noor Bank $500m
• DP World $1.2b
• IILM $1.34b
• Emirates Islamic Bank $750m
• Jordan 75m JOD
• Ezdan $500m
• Boubyan Bank $250m
• Central Bank of Bahrain BD 26m
• Kuveyt Turk 300m TL
• Government of Malaysia 2.5 B MYR
• Brunei 20 million BND

The Governments of Nigeria, Qatar and Turkey are in the pipeline to issue shortly, as is Qatar Islamic Bank and Saudi Electricity.

Sukuk Issuance up to Q2 16

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

Highlights and Performance

Bloomberg Malaysia Sukuk

Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices were relatively flat at 103.8 (+0.15%) and 159.9 (+0.29%) respectively, with yields rising 3.0bps to 2.43% with top gainers being MALAYS 4/25-4/26, and AXIATA 3/26. Brent oil jumped to USD47.8/bbl (+5.4% WoW), due to unexpected decline in US crude inventories (3.4m barrels) and concerns over supply disruptions in Nigeria and Canada. Meanwhile, Saudi Arabia, Oman and Bahrain were downgraded by Moody’s due to weaker credit profile expected from cheap oil, while the Aa2 ratings of Kuwait, Qatar, UAE and Abu Dhabi were affirmed but outlook remains negative. Looking ahead, focus will be on the minutes of FOMC’s April meeting (19 May), as well as Bank Negara Malaysia’s (BNM) and Bank Indonesia’s (BI) interest-rate decisions (19 May) which are expected to remain unchanged.

Malaysia GDP

Malaysia’s 1Q GDP grew moderately to 4.2% (4Q15: 4.5%), led by 5.3% growth in private consumption despite high base effects from frontloading of purchases prior to the GST implementation. The slower growth appears in line with other data received last week — 1Q current account surplus narrowed to MYR5.0bn from MYR10.5bn in 4Q15, and industrial production growth fell to 2.8% in March from 3.9% in February. Malaysia CDS narrowed 4.7bps to 158.5bps. On the other hand, Turkey’s CDS widened by 5.9bps to 270.8bps due to concerns over the political environment in Turkey, weaker current account balance (March: – USD3.7bn; Feb: -USD2.0bn) and industrial production growth (March: 2.9%; Feb: 5.9%). Indonesia recorded a narrower current account deficit of USD4.7bn in 1Q16 from USD5.1bn in 4Q15, with its CDS trading at 187bps (-6.6bps).

GCC Sukuk

Ezdan Holding (Ba1/BBB-/NR) sold USD500m 5y senior sukuk at 4.375% (MS+337.5bps) with a 1.6x BTC, pursuant to its USD2bn Trust Certificate Issuance Programme to finance current real estate  development projects; while Boubyan Bank (Baa1/NR/A+) priced USD250m AT1 Pc5/21 at 6.75% (MS+558.8bps) with BTC of 5x.

Sunrise Murabahah

UEM Sunrise (MARC: AA-) priced MYR500m 7y sukuk Murabahah at 5.0%. Turning to ratings, RAM assigned preliminary AAA/Sta and AA3/Sta to Al Dzahab Asset’s MYR95m Class A sukuk and MYR25m  Class B sukuk which are backed by RCE Marketing’s personal-financing facilities and to be repaid through non-discretionary salary deductions.

Total number of orders was fourteen representing an order book of $1.672 billion.

The Sukuk rated A-1 by Standard and Poor’s Rating Services (S&P’s) was tendered today but will be issued on 24 May has a maturity of 90 days.

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.

Full details of todays IILM sukuk, as well as access to the most complete sukuk database in the industry please visit the Sukuk Profiles section.

The Bahrain sukuk was arranged by Noor Bank, Bank ABC and Kuwait Finance House last week.

Details of Ezdan Holdings $500 million Wakala sukuk can be found on the Sukuk database, as well as Boubyan Bank’s perpetual sukuk issued for $250 million at a profit rate of 6.75%.

In Saudi Arabia, Al Bayan Group Holding Company raised US$50 million in a privately placed sukuk whilst Dubai based Emirates Islamic Bank, and DP Word have announced intentions to issue sukuk shortly.

Euro Denominated Sukuk follows recent CPI linked Issuance in Turkey

Turkiye Finans planned EURO denominated sukuk along with a recent indexed linked sukuk by Kuveyt Turk illustrates a maturing market in Turkey.

In recent regulatory filings made with the Turkish Capital Markets Board, Turkiye Finans through its subsidiary TFKB Varlik Kiralama announced plans for a EURO denominated Sukuk.

In a separate filing Aktif Bank through its subsidiary Aktif Bank Sukuk Varlık Kiralama announced a planned 100 million Turkish Lira denominated Sukuk.

Sukuk in Turkey are issued as Rental certificates due to Turkey’s secular constitution.

Maturing Sukuk Market in Turkey

The hard currency EURO Sukuk by Turkiye Finans represents the first EURO denominated Sukuk in Turkey, though a number of US Dollar Sukuk have been issued previously, most recently by a Turkish based subsidiary of Kuwait Finance House (Kuveyt Turk) which issued a $350 million Sukuk in February 2016.

Kuveyt Turk also recently issued an innovative CPI linked Sukuk, the first of its kind in Turkey. The small 10 million Turkish Lira private issue provided investors protection against rising inflation in Turkey.

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

Saudi Arabia Unveils Economic Reform Plan; IMF Cuts GCC’s GDP Growth Forecast to 1.8%

Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices rose moderately to 103.6 (+0.18%) and 159.4 (+0.15%) respectively, with yields declining 1.7bps to 2.447%. MALAYS 7/21-4/26, FGBUH 1/17 and AXIATA 11/20-3/26 were among the top gainers. Brent oil climbed 6.7% to USD48.13/bbl, but the changes have had little effect on the market with attention turning to corporate earnings and economic reforms.

Meanwhile, IMF cut GCC’s GDP growth forecast to 1.8% in 2016 (from 2.75%) as the oil-dependent region reduced public spending in response to a higher fiscal deficit of 11.6% of GDP. Fed held interest rates unchanged and remained ambiguous about raising rates in June due to mixed global economic and financial developments as well as low US inflation.

Saudi Arabia

Saudi Arabia unveiled its structural reform plan, based on oil price assumption of USD30/bbl that aims to diversify its economy away from oil dependence. The plan includes (a) selling off a 5% take in Saudi Aramco through an IPO at USD2trn; (b) boosting private sector share of GDP from 40% to 60% of GDP by 2030; and (c) raising non-oil government revenue from SAR163bn to SAR1trn by 2030. Its M3 money supply growth decelerated at -0.4% YoY in Mar-16 from -0.9% in Feb- 16, which adjusts in line with the fall in net foreign assets to SAR2.19trn from SAR2.17trn. Accordingly, Saudi’s CDS widened 5.5bps to 155.0bps. Elsewhere, Turkey’s trade balance deficit widened to USD4.95bn from USD3.17bn, with its CDS trading at 240.3bps (+2.8bps).

Ratings Update

Moody’s and S&P assigned a Ba1/Sta and BBB-/Sta rating to Ezdan Holding, reflecting its sizeable and large investment properties portfolio which provides stable recurring cash flows. This came alongside the approval of a USD2bn sukuk issue by the company’s general assembly. In the MYR space, MEX II (AA-) priced MYR1.3bn 5y-18y sukuk at 5.1%-6.4% with proceeds earmarked for the highway extension of Maju Expressway from Putrajaya to KLIA. Perdana Petroleum (AAA(FG)) issued MYR635m 1y-5y IMTN at 4.30%-4.90% for refinancing of its MYR615m borrowings.

1MDB Default

1MDB defaulted on the USD1.75bn 5.75% bond issued by 1MDB Energy (Langat) Limited (Langat Notes) in 2012 after missing USD50.3m interest payment due from International Petroleum Investment Company (IPIC). Due to the default in the Langat Notes, it triggered cross defaults on 1MDB Sukuk MYR5bn 2039 and MYR2.4bn Bandar Malaysia Sdn Bhd (BMSB) Sukuk due between 2021 and 2024 – totaling to MYR7.4bn (USD1.9bn). The default may also trigger a “material adverse effect” clause on the MYR800m loan from the Social Security Organization (SOCSO) loan.

RHB View: Mildly negative. We have a mildly negative view on this development on the basis that investors seem unbothered given the yield tightening of the MALAYS 3.179% 4/26 (YTM: 3.12%; Z+138.43bps; T+135bps) and MALAYS 4.080% 4/46 (YTM: 4.07%; Z+188.11bps; T+145bps) by 17 and 10bps respectively during the week albeit added risk on contingent liabilities.

This cross-default raises the likelihood of the government assuming debt servicing obligations to 1MDB debt given the explicit government guarantees on both 1MDB sukuk and SOCSO loan. According to Moody’s estimates, the sum of IPIC (1)guaranteed/subject to indemnity payment (not including BMSB sukuk as it is neither government guaranteed or subject to indemnity payment) (MYR23.7bn), and (2)government guaranteed liabilities (MYR5.8bn) adds to a total of MYR29.5bn (USD7.47bn) or 2.5% of GDP.

The risk remains contingent despite the higher prospect of the government digging into its fiscal pocket to pay this indemnity. Nevertheless, additional risk should be added onto Malaysia’s government guaranteed debt which rose to 15.4% of GDP as at end 2015 from 12.8% in 2011 (2014: 15.5%).

Malaysian Government guaranteed debt

Sukuk linked to Consumer Price Index (CPI) rate will provide investors protection against rising inflation in Turkey.

The short term sukuk, known as rental certificates in Turkey was issued with a maturity of 729 days. The issue was subscribed by means of a private placement at a profit rate of 3.39 % above the CPI rate.