Anita Yadav - Head of Fixed Income Research
Aditya Pugalia - Analyst
Published Date: 09 April 2017
After a bullish start, US Treasuries drifted lower during the week. Yields on UST shifted upwards across the curve with 2yr, 10 yr and 30yr ending at 1.29% (+6bps), 2.38% (+6bps) and 3.00 (+5bps) respectively as strength of the economic data boosted the prospect of faster pace of rate hikes. Though 10yr Gilt yields were range-bound, sovereign bonds in Eurozone continued to benefit from safe haven bid ensuing from political unrest in Syria, French election, Brexit etc. Credit spreads in the developed world had little reason to change and cash bonds moved largely in tandem with the shift in the benchmark yield curves. Cash bonds from Europe had a week of positive returns while US Treasury and US Credit indices recorded negative total return for the week. Global high yield bonds generally outperformed the investment grade.
GCC bonds gained support from several factors such as a) 4% increase in oil prices; b) no material negative rating changes, c) increasing liquidity in the GCC banking systems, d) improvement in sentiment as validated by the regional PMI data and e) possible increase in capital flows to the GCC after events such as downgrade of South Africa’s rating into the junk category by S&P etc. Though accurate data for capital inflow into the GCC bonds is difficult to obtain, the multiple times oversubscription to the deals in the primary market is testament to the solid demand for GCC issues.
Liquid UAE bond index closed the week unchanged with yield at 3.09% and credit spreads at 139bps though the wider GCC Barclays bond index recorded a five bps tightening in credit spreads to 131bps. Despite the sizeable new offerings in the sukuk space, GCC sukuk outperformed their conventional bond counterparts.
The week was marked by completion of the merger of NBAD and FGB under the new name First Abu Dhabi Bank. As was expected, S&P affirmed FADB’s rating at AA-/stable and withdrew the rating on FGB. The bonds of NBAD and FGB reflected no material change. Fitch downgraded SECO’s rating from A+ to A which remains much in sync with A2/stable from Moody’s and A-/stable from S&P.
Primary market had an active week with more than $1.75 billion of new issues getting priced that were well spread across sector and rating spectrums. AAA rated, Islamic Development Bank (IDB) priced its 5yr, $1.25 billion sukuk at MS+40bp while B1 rated Dar Al Arkan issued $500 million 5yr sukuk at 7.125%. Increasing prospects of higher rates in the foreseeable future is encouraging issuers to front load their borrowings as evident by DARALA raising finance now ahead of its 2018 and 2019 maturities. Also higher investor interest in floating rate securities instead of fixed rate in order to hedge against the negative impact of rising rates encouraged DAMAC to privately place a $125 million floating rate note. DAMAC is also on the road to offer a fixed rate benchmark sized sukuk offering in order to refinance up to $250 million of tender of its $650 million 2019 maturing sukuk.
Further adding to the skew of sovereign issues dominating the GCC universe, investors now have Kingdome of Saudi Arabia and Oman both on the road this week. KSA’s debut sukuk offering is expected to be around $10 billion though Oman will probably be more modest. Emirate of Abu Dhabi that had earlier met investors in Asia is not directly in the market now, however, its investment vehicle, Aa2/AA rated, Mubadala Development Co, is believed to have mandated banks for Reg S offering of 7yr and 12 yr tenures. Also Kuwait sovereign is believed to have raised limit on its international bond sales to $66 billion, thereby paving way for future issuance.
Since the onset of low oil price led budget deficits, local currency markets in the region have picked up pace. The much awaited corporate sukuk from Aramco ended up going in the SAR domestic market instead of the international dollar space. Aramco issued $3 billion equivalent 7yr sukuk at 6m SAIBOR +25bps in the KSA domestic market.
One of the topical news during the week was the staggering AED 19 billion loss reported by TAQA as a result of asset impairment. Looking at reported equity of circa AED7.3 billion as at Dec 2015, this magnitude of loss would have resulted in TAQA’s liabilities far exceeding net assets. However, the equity injection of a similar amount by its parent ADWA, via the leasehold rights on a piece of land, helped to keep TAQA’s balance sheet intact. ADWA increased its ownership of TAQA to 74%. High expectation of government support via restructuring has kept TAQA’s rating firmly at A3/stable, A/stable from Moody’s and S&P respectively and has kept bond prices stable. TAQA has been on a deleveraging path for most of 2016, however is now considering funding options including Formosa bond, sukuk as well as loans.
Relative Value in Sukuk : May 2018
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