ACADEMIC VISIT BY INCEIF’S CIFP CANDIDATES 30 October 2009
0
Presentation Outline Background Why Sukuk? Issuer due diligence – a critical investment process Challenges Conclusion
1
Background Total Sukuk volume issued globally close to USD 100 bn.
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
Increasing appetite for risk in an improved economic conditions saw good demand for Sukuks this year.
0
The issuance of Sukuk slumped in 2008 but seems to be revived this year.
Order size for recent Sukuk issuances
As liquidity is still flushed globally, we believe current condition will continue.
Kuw ait
30
U S D b illio n s
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 CDS spreads have tightened significantly but…. due to concerns about refinancing risk in some countries in GCC, the markets had factored in a substantial risk premium, particularly in Dubai The positive global credit environment and improving local liquidity has lead to a continued rally in GCC credit spreads 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
Why Sukuk? Attractive source of income above US Treasuries
Yield enhancement
Issuer
Asset class diversification
Rtg
Spread at issue (bps)
Current Spread (bps)
Performance (bps)
Potential growth (strategic allocation)
ABU DHABI AGENCY
AA
266.0
194.3
71.7
Familiarity
CB OF BAHRAIN
A
340.0
174.4
165.6
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
Rating
Economic Fundamentals
Economic Policies
Political Environment
Comparison – conventional vs sukuk
Micro assessment
The cash flows of a Sukuk are similar to those of a conventional bond.
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
Data Availability & Timeliness
85
Sep-06
Absence of hedging instrument during risk aversion during crisis.
90
May-06
Price Volatility
95
Jan-06
A captive market lead to a wide bidoffer spread
100
Sep-05
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
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.
