Sukuk Returns Take a Hit from Strong US Data

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)