Kuveyt Turk is looking to issue short term sukuk this coming week. The local currency denominated transaction will be for up to TRY200 million and follows a successful offering completed in September for TRY150 million.
Earlier in the year, the Turkish based bank, who is majority owned by Kuwait Finance House issued a Malaysian Ringgit sukuk for 300 million ringgit.
The recent sukuk issuance by UAE based Majid Al Futtaim has been listed on the Irish Stock Exchange.
The board of the Irish Stock Exchange approved the admission of MAF Sukuk Ltd, Series 2 – Issue of USD 500000000 4.5 per cent. Certificates due November 3, 2025 XS1308713723.
The ISE has so far this year additionally listed the following Sukuk:
Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia
The Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indexes closed the week at 102.4 (-0.04% w-o-w) and 156.4 (+0.06% w-o-w) respectively. Saudi, Qatar and Turkish bank credits garneréd the most interest with names such as IDB Trust Services 19 (Aaa/NR/AAA), Qatar 18-23 (Aa2/AA/NR), KT Kira Sert Varlik 19 (NR/NR/BBB) and TF Varlik Kiralama AS 19 (NR/NR/BBB) trading higher as market capitalization gained by USD13.2m. Weighted average yield was 0.8bps w-o-w wider at 2.23% after six weeks in a row of tightening, following Moody’s projections of a cut in Brent oil prices to USD53/barrel in 2016 (from USD65/barrel) and USD60/barrel in 2017 (from USD80/barrel) while Chinese 3QGDP and Japanese Sept exports slowing to 6.9% (vs. 2Q15: 7.0%) and 0.6% y-o-y (vs. prior: 3.1%) respectively.
The spread has fallen 15.2bps to 253.6bps as political tensions are expected to subside after November election, despite central government balance turning into a deficit from +TRY5.2bn to -TRY14.1bn. Similarly, CDS for Bahrain, Abu Dhabi and Qatar tightened by 2.5bps-5.8bps to 308.5bps, 71.9bps and 70.9bps respectively. An opposite trend was observed over the week for Indonesia (+1.9bps to 215.4bps), Dubai (+2.4bps to 195.9bps), Malaysia (+4.7bps to 204.7bps) and Saudi Arabia (+6.6bps to 134.5bps).
The decline in crude oil prices has weakened the fiscal positions of GCC states. Despite the mounting pressure to implement subsidy reforms, budget spending remain broadly unchanged at c.44% of GDP as GCC states accelerated economic diversification from oil. Without such structural changes, the economic prospect of the region may remain at threat given an unlikely recovery in crude oil prices, at least in the near term. Nonetheless, multiyear expansionary policies might not be sustainable as fiscal buffers have been significantly weakened, mainly due to lower oil revenues.
Measured by the years of fiscal buffers and fiscal breakeven oil prices (refer to Chart of the Week), Oman (A1/A-/NR) and Bahrain (Baa3/BBB-/BBB-) seem vulnerable to prolonged expansionary policies and would exhaust their buffers in less than five years, building up pressures on their banks with notably reduced deposits inflows and increased borrowings by governments and government related entities. Saudi Arabia (Aa3/AA-/AA), on the other hand, has low government debt (1.6% of GDP) and sizeable reserves of USD726.8bn in 2014, allowing more room for debt issuance at the event of any budgetary shortfalls. Sovereign credit profile for Kuwait (Aa2/AA/AA) remains the most resilient, followed by Qatar (Aa2/NR/NR) and UAE (Aa2/NR/NR).
Chart of the Week: Uneven fiscal strengths in GCC region.
In the 2nd Measure of the First Priority of the 2016 Budget, to further invigorate the capital market, the government announced a tax deduction on issuance costs of SRI Sukuk as of 2016. Currently, tax incentives are given on Sukuk issuances of Mudharabah, Musyarakah, Ijarah, Istisna’, Murabahah, Wakalah and Bai Bithaman Ajil from year of assessment 2003 to 2015, while Ijarah and Wakalah structures have been extended for another three years from 2016 to 2018. The SRI tax incentive is proposed for five years (2016 – 2020) on Sukuk issuance costs, given that it is approved by the Securities Commission (SC). In addition to the SRI Sukuk tax incentive, the government also announced the extension of double deduction or further deduction of retail Sukuk for another three years (2016-2018) in order to encourage more investors’ involvement in the capital market. The additional costs include professional fees relating to due diligence, drafting and preparation of prospectus, printing cost of prospectus, advertisement cost of prospectus, SC prospectus fees, Bursa Malaysia processing fee and initial fee as well as Bursa Malaysia new issue crediting fee, and primary distribution fee. These deductions are included on additional issuance costs of Sukuk under Mudharaba, Musyarakah, Istisna’, Murabahah and Bai’ Bithaman Ajil based on Tawaruq, and further deduction on additional issuance costs of Sukuk under the principles of Ijarah and Wakalah.
Malaysia is already the largest Sukuk market accounting for about 60% of the global Sukuk market. Khazanah issued its first tranche of MYR100m of its MYR1bn SRI Sukuk in May this year, which raised funds for its Trust schools programme where proceeds of the Sukuk will be channeled to Yayasan AMIR. Nevertheless, we may see weaker demand for SRI Sukuk if compared to corporate or sovereign issuances, as investors would have to accept lower yields; to recap, Khazanah’s SRI Sukuk issuance attracted c.1.3 times demand, lower compared to other Sukuk.
The board of the Irish Stock Exchange has approved the admission of the recent Qatar Islamic Bank Sukuk (QIB SUKUK LTD. Series 2 – Issue of USD 750000000 Trust Certificates due 27 October 2020 XS1310192031) to listing on the Official List and trading on the Main Securities Market of the Irish Stock Exchange (ISE).
The ISE has so far this year additionally listed the following Sukuk:
GCC Market Update by Rasameel Structured Finance
Sukuk issuances in September 2015 stood at USD610mn, declining from USD2.4bn registered in the earlier year during the same period. For YTD September 2015 sukuk issuance by value declined 33% y-o-y to USD13.6bn, mainly driven by a sharp decline in corporate issuances (-7%y-o-y, worthUSD8.6bn), sovereign (-33%y-o-y,USD4.0bn) and quasi sovereign issuances (-81%y-o-y, USD1.0bn). Corporates comprised 63% of the total issuance value for YTD September 2015, followed by sovereign at 29% and quasi-sovereign issuances at 8%.
Sukuk Issuance by Value, Number, and Type
Sukuk Issuance by Country –Number of Issuances
Bahrain was the largest issuer of sukuk by number of issuances (21) in GCC for YTD September 2015, followed by Saudi Arabia (10), UAE (6) and Qatar (1)Saudi Arabia accounted for the largest share of sukuk issued by value among GCC countries, with ten issuances totalling USD5.4bn for YTD September 2015, followed by UAE (six issuances; worth USD4.7bn), Bahrain (twenty-one issuances; worth USD3.0bn) and Qatar (one issuance; worth USD0.5bn).
Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia
Yield tightened 1.9bps to 2.27%. Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) index continues to improve by closing 0.09% w-o-w higher to 102.32; while the Dow Jones Sukuk Total Return (DJSUKTXR) index added 0.41% w-o-w to 155.9. This was driven primarily by strengthening in sovereign credits such as RAK Capital (NR/NR/A), Saudi Electricity Global Sukuk Co (A1,Sta/AA-/AA-) and SoQ Sukuk AQSC (Aa2,Sta/AA/NR) along with TF Varlik Kiralama As (NR/NR/BBB), which have increased the market value by USD1.5m over the week. Weighted average yield tightened modestly for five straight weeks to 2.27% (-1.9bps w-o-w) on expectations of US rate hike delay, spurred by weaker-than-expected US Sept nonfarm payrolls of 142k (consensus: 201k; prior: 173k), widening US trade deficit of USD48.3bn and IMF’s projections cut on global growth by 0.2 pp to 3.1% for 2015 and 3.6% for 2016.
Foreign currency Sukuk issuances have declined at a faster rate than local currency Sukuk.
As showed in the Chart of the Week, growth in Sukuk issuance is falling primarily by foreign currency issuance, with annualized annual growth rate of -40%, far outpacing the 10% decline in local currency issuance in 2015. The global economic uncertainties probably contributed to the shift towards local currency instruments, where more sovereign debts have been issued to hedge against depreciation of local currency and fiscal deterioration while abating effects due to capital outflows and contributing to the domestic financial markets development. On corporate and investor standpoints, local currency debt is less vulnerable to global shocks, yield fluctuations and foreign exchange risk. Therefore, we think local currency issuances will continue to drive the Sukuk market in 2016 which may deepen linkages between sectors in the economy and exposed to a higher systematic risk in times of stress.
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). The 3 month sukuk for $860 was issued at a profit rate of 0.63960%. Orders for $980m were received.
IILM sells its Sukuk through its primary dealers which were added to in this auction by Qatar Islamic Bank and Boubyan Bank. As at October 2015, the IILM Sukuk that have been issued and reissued amounted to USD12.69 billion.
Emerging East Asia’s sukuk market held firm in 2Q15 despite headwinds from challenging developments in the global economy. The region’s sukuk market managed to post modest growth in the first half of the year, amid uncertainties surrounding the anticipated interest rate hike by the United States Federal Reserve and, more importantly, falling oil prices that affected oil-producing economies who are active participants in Islamic financial markets. Growth was largely driven by the rising acceptance of sukuk as an important source of financing as demand for infrastructure funding continues to grow and interest from nonmainstream sukuk markets begins to advance.
At the end of June, the outstanding amount of sukuk in emerging East Asia had reached US$186.3 billion, up from only US$59.9 billion at the end of 2008, which represented a compounded annual growth rate of 19.1%. In the first half of 2015, the sukuk market expanded 6.0% from US$175.9 billion in 2014.
Malaysia is home to the largest sukuk market in emerging East Asia and the entire world. It dominates the region’s market, accounting for an 86.5% share of the region’s total sukuk stock at end-June. It was followed by Indonesia with a share of 11.1%, while all other emerging East Asian sukuk markets (Brunei Darussalam; Hong Kong, China; and Singapore) together only represent a 2.3% share of the total.
Malaysia dominates both the local currency (LCY) and foreign (FCY) currency sukuk markets. LCY-denominated sukuk accounted for an 89.7% share of the region’s total bond stock at end-June, while the remaining 10.3% share was accounted for by FCY-denominated sukuk.
At the end of June, the region’s outstanding sukuk were primarily denominated in Malaysian ringgit, which had an equivalent value of US$154.9 billion and represented an 83.1% share of the region’s total stock. Other markets in the region have also issued MYR-denominated sukuk, taking advantage of Malaysia’s pioneering efforts in creating a well-developed regulatory framework and market infrastructure for shari’ah-compliant financial products. The Indonesian plantation firm Bumitama Agri issued MYR-denominated bonds twice in 2014. In Singapore, all FCY corporate sukuk have been issued in Malaysian ringgit, including issuances by Golden Assets International and First Resources. Even Hong Kong, China’s Noble Group issued MYR-denominated sukuk in 2012 and 2013.
Next to the Malaysian ringgit, the US dollar was the region’s currency of choice for sukuk issues. Outstanding US$-denominated sukuk totaled US$16.0 billion at end-June. Indonesia is the most active market in terms of US$-denominated sukuk, with a total outstanding amount of US$7.5 billion The Indonesian government regularly issues global sukuk as part of its budget financing plan and instrument diversification strategy. It also issues global sukuk to support the development of the global Islamic financial market and to create a pricing benchmark for global sukuk issues.
At the end of June, the Indonesian government’s outstanding global sukuk stood at US$7.0 billion. The only other US$-denominated sukuk from Indonesia was the US$0.5 billion issuance of state-owned airline operator Garuda Indonesia in 2015. Malaysia’s aggregate US$-denominated sukuk totalled US$6.5 billion at end-June. Of this amount, global sukuk issued by the government comprised US$3.5 billion and sukuk issued by corporate firms comprised the remaining US$3.0 billion.
The remaining US$2.0 billion was accounted for by Hong Kong, China, whose government sold its first sukuk in September 2014 through the issue of a US$1.0 billion 5-year sukuk at a profit rate of 2.005%. The sukuk was structured following the wakalah Islamic principle. The issuance was an important milestone for Hong Kong, China in its foray into the Islamic financial market. The government issued another US$1.0 billion 5-year sukuk in June 2015 that carried a profit rate of 1.894%. IDR-denominated sukuk accounted for a 7.0% share of the region’s total outstanding sukuk at end-June.
All of which were issued by the Indonesian government through the auction of Islamic Treasury bills (SPN-S) and Islamic Treasury bonds, known as Surat Berharga Syariah Negara (SBSN), and the issuance of retail sukuk. The government auctions Islamic Treasury instruments on a bi-monthly basis. Sukuk denominated in Singapore dollars and Brunei dollars only accounted for an aggregate 1.3% share of the total.
Issuance in Singapore dollars came from both Singapore and Malaysian corporates, while BND-denominated sukuk were mainly issued by Autoriti Monetari Brunei Darussalam, a statutory body acting as the central bank. At the end of June, emerging East Asia’s outstanding government sukuk reached US$89.2 billion, while corporate sukuk stood at US$97.2 billion (Figure 16). Unlike the conventional bond market, where the government sector dominates issuance, in the sukuk space, it is the corporate issues that account for a larger share. Nonetheless, government sukuk have steadily advanced over the years, with a share of total sukuk outstanding nearly doubling from 27.5% in 2008 to 47.8% at end-June. Corporate sukuk accounted for a 52.2% share of the region’s total sukuk stock during the review period.
Only the markets of Malaysia and Singapore had a larger share of corporate sector sukuk vis-à-vis the government. In the case of Singapore, its entire stock of sukuk outstanding came from the corporate sector.
Sukuk issuance in emerging East Asia recorded a modest decline in 2014 to US$78.5 billion from 2013’s US$79.5 billion and 2012’s high of US$89.2 billion. While still robust, issuance volume has been on a downtrend since the 2013 “taper tantrum” when emerging markets experienced large capital outflows in response to statements from the Federal Reserve that it planned to wind down its monthly asset purchases. In the first half of 2015, total sukuk issuance volume in emerging East Asia reached US$26.9 billion.
Malaysia led the decline as its issuance volume has steadily dropped, particularly for government sukuk. In the first half of 2015, Malaysia ceased issuance of shari’ah-compliant Bank Negara Monetary Notes (BNMNs), which accounted for 55.4% of total LCY issuance in 2014. However, issuance of shari’ah-compliant BNMNs resumed in August. Bucking the declining trend in issuance volume was Indonesia, where sukuk issuance volume has steadily risen from only US$1.5 billion in 2008 to US$7.0 billion through the first half of 2015. Hong Kong, China also increased its total issuance volumes in 2014 and 2015 as a result of the government’s successive issues of US$1.0 billion sukuk.
Source: Asian Development Bank – Asia Bond Monitor September 2015
Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia
Highlights and Performance
Modest returns; yields tightened for the second week by 5.9bps to 2.30%.
The Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) index rose 0.31% to 102.07 (week prior: +0.09%, 101.75) while the Dow Jones Sukuk Total Return (DJSUKTXR) index posted a 0.48% gain to 155.46 from +0.07%, 154.71 a week earlier. We saw interest tilted towards sovereign credits on Saudi Arabia and Qatar such as QATAR 23, SECO 22- 24 and ISDB 18 (+USD17.2m in market cap).
Risk premiums easing amid dovish tone from the Fed.
CDS spreads for Turkey tightened the most over the week by 28.3bps to 268.0 as Fitch retained its ratings at BBB- with a stable outlook and a better than expected print of 3.8% GDP in the second quarter. A similar trend could be seen for Indonesia (-28.2bps to 215.3) and Malaysia (-22.87bps to 171.6) as high foreign ownership of their securities have benefited from Fed’s decision to hold interest rates steady. Additionally, yields of Bahrain, Dubai, Saudi Arabia, Qatar and Abu Dhabi have compressed favourably by 3.1bps – 9.3bps w-o-w.
Relatively stable return profile for Sukuk; with a standard deviation of 0.6 (vs. conventional 1.6) since Jan-15 (Chart of the Week).
The BMSXMTR index has moved in the range of 0.69 while the Bloomberg USD IG Emerging Market Corporate Bond (BIEM) index endured wider fluctuations between 136.3 and 137.2 over the week. This relative stability was partly due to the nature of Sukuk which is linked to an underlying asset that better provides security for investors. Also, the significant dominance of sovereign issuers (56%) as well as sector diversification (financial services: 14%; power and utilities: 7%; transport: 7%) made the index to be less prone to volatility.
Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia
Similarly, the Dow Jones Sukuk Total Return Index (DJSUKTXR) posted a 0.03% gain to 154.63 (week prior: 154.58) with YTD return at 1.4%. The weighted average yield of BMSXMTR tightened 0.5bps to 2.359%.
The Finance Minister Ibrahim al-Assaf mentioned in an interview that Saudi Arabia may issue bonds or sukuk to finance expenditure, as low oil prices are impacting the kingdom’s budget. The minister added that reserves are ample at c.USD600bn, public debt close to zero (2014: 1.6% of GDP; 2013: 2.2% of GDP) and now working on cutting unnecessary expenditure (fiscal deficit 2014: 3.4% of GDP; IMF 2015 fiscal deficit forecast: 19.4% of GDP).
Neutral. Saudi’s reserves now stands at c.USD600bn, or 14% lower from early of the year as oil prices tanked. We see any USD sukuk raising to have negligible impact given their near-zero public debt. SECO 17-44 curve generally bear steepened, with yields widening 1-12bps to 1.49%-5.52%.
Saudi Arabia, Dubai and Bahrain tightened 5-6bps W-o-W, after widening by average of 19bps last month to 88bps, 198bps and 292bps respectively. Across Malaysia (190bps), Indonesia (242bps) and Turkey (291bps), risk premiums widened by 12bps W-o-W due to the slump in China’s imports by -14% Y-o-Y in August 2015 vs. -8.1% in July 2015.
