SUKUK
Investment and Challenges
ACADEMIC VISIT BY INCEIF’S CIFP CANDIDATES
30 October 2009
0
Presentation Outline
ƒ Background
ƒ Why Sukuk?
ƒ Issuer due diligence – a critical investment process
ƒ Challenges
ƒ Conclusion
1
Background
Total Sukuk volume issued globally close to USD 100 bn.
ƒ Sukuk Investors are largely made of
Commercial Banks (based on
primary volumes.)
UAE
Saudi Arabia
Indonesia
Qatar
Bahrain
Others
25
20
15
10
Market Update
5
ƒ Increasing appetite for risk in an
improved economic conditions saw
good demand for Sukuks this year.
0
ƒ The issuance of Sukuk slumped in
2008 but seems to be revived this
year.
Order size for recent Sukuk issuances
ƒ As liquidity is still flushed globally, we
believe
current
condition
will
continue.
Kuw ait
30
U S D b illio n s
ƒ Middle East, in particular the UAE
has been the dominant source of
issuance for USD Sukuks.
Malaysia
35
2002
2003
2004
2005
2006
2007
2008
2009ytd
Source : HSBC
Security
Issuer
Rtg
Spread vs
Issue
Order
Interest
UST 5
size
book
Gauge (x)
at issue (USD bn.) (USD bn.)
ISDB 5-year
ISLAMIC DEV. BANK
AAA
77.0
0.85
1.9
2
TDIC 5-year
ABU DHABI AGENCY
AA
266.0
1.00
6.78
7
CBBISC 5-year
CB OF BAHRAIN
A
340.0
0.75
3.98
5
RAK 5-year
UAE State
A
560.0
0.40
1.6
4
INDOIS 5-year
REP OF INDONESIA
BB-
705.3
0.65
4.8
7
DUBAI 5-year
State of Dubai
NR
406.0
1.25
4.9
4
Source : HSBC&SCB
2
Background
Sovereign CDS comps (as on 09/10)
Peer group by spread…
The GCC Market
ƒ CDS spreads have tightened significantly
but….
ƒ due to concerns about refinancing risk in
some countries in GCC, the markets had
factored in a substantial risk premium,
particularly in Dubai
ƒ The positive global credit environment and
improving local liquidity has lead to a
continued rally in GCC credit spreads
ƒ Cash has outperformed CDS on much
greater volumes. CDS/ Cash traded volume
ratio at 20% in 2009 versus historical
average of 60%
Country
Rtg
Dubai
Lebanon
Estonia
Egypt
Turkey
Panama
Peru
Brazil
Morocco
Abu Dhabi
Qatar
Thai
Malaysia
Saudi Arabia
Czech
Italy
NR *
B2/BA1/ABa1/BB+
Ba3/ BBBa1/ BB+
Ba1/ BBBBaa3/BBBBa1/ BB+
Aa2/ AA
Aa2/ AABaa1/BBB+
A3/AA1/AAA1/A
Aa2/A+
5yr CDS (mid)
*Dubai is unrated, but Dubai Inc rtgs result in
an implied rating in the A1/ A range
3
295
290
220
205
175
135
122
115
107
95
84
84
83
75
71
68
Why Sukuk?
Attractive source of income above US Treasuries
ƒ Yield enhancement
Issuer
ƒ Asset class diversification
Rtg
Spread
at issue (bps)
Current
Spread
(bps)
Performance
(bps)
ƒ Potential growth (strategic allocation)
ABU DHABI AGENCY
AA
266.0
194.3
71.7
ƒ Familiarity
CB OF BAHRAIN
A
340.0
174.4
165.6
ƒ Commitment to the development of Islamic
Bond Market
UAE State
A
560.0
336.2
223.8
REP OF INDONESIA
BB-
705.3
254.3
451.0
State of Dubai
NR
406.0
390.6
15.4
Source : Bloomberg
Relatively better performance than UST…
25.0%
UST return
Emerging Sovereign Sukuk Return
20.0%
19.3%
15.0%
10.0%
5.0%
6.4%
3.9%
3.3%
0.0%
INDO USD SUKUK 04/14
Oct-09
Oct-09
Sep-09
Sep-09
Aug-09
Aug-09
Source : HSBC
Jul-09
-7.9%
Jul-09
-10.0%
Jun-09
-5.0%
Jun-09
2009YTD
May-09
2008
May-09
2007
INDO USD 05/14
Apr-09
2006
9
8.5
8
7.5
7
6.5
6
5.5
5
4.5
4
Apr-09
2005
Slight premium for Sukuk in terms of pricing
Source : Bloomberg
4
Issuer due diligence – a critical investment process
Macro assessment
ƒ
Rating
ƒ
Economic Fundamentals
ƒ
Economic Policies
ƒ
Political Environment
Comparison – conventional vs sukuk
Micro assessment
ƒ
The cash flows of a Sukuk are
similar to those of a conventional
bond.
ƒ
Sukuk is treated as unsecured debt
and therefore assessment on Sukuk
focuses primarily on its structure
(type) and credit risk of the issuer
Source : HSBC
5
Challenges – Investing in Sukuk
HSBC/NASDAQ Dubai UAE Sukuk Avg
Clean Price
75
70
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
65
May-07
The absence and timeliness of
published data proved to be a
significant challenge in order to
make an informed decision.
80
Jan-07
ƒ Data Availability & Timeliness
85
Sep-06
Absence of hedging instrument
during risk aversion during crisis.
90
May-06
ƒ Price Volatility
95
Jan-06
A captive market lead to a wide bidoffer spread
100
Sep-05
ƒ Liquidity
105
May-05
Political
stability,
economic
fundamentals and policies may
affect credit performance
Flight to quality during Lehman fallout saw volatility
in sukuk markets
Jan-05
ƒ Macro Risk Factors
Source : Bloomberg
1997 Asian
Crisis
6
Lehman
Fallout
Challenges – Investing in Sukuk
Wide bid-offer spread in the sukuk market
1997 Asian
Crisis
Lehman
Fallout
Source : Bloomberg
7
Conclusion
BNM is a long term unleveraged real money investor in which investments are
strategic and long term in nature. Our investment approach is governed by three
main principles, as follows
a) Capital preservation
b) Sufficient liquidity
c) Optimal returns
As a Central Bank, BNM seeks to avoid market disruption while at the same time
supports the regulatory body’s objectives in various markets.
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Thank you
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