RHB Fixed Income Conference 9 Sept 2014_NIK ZAKI

0Research Institute

2008 Debt Market Outlook & Strategy

Global Sukuk Markets2014 Q4 Outlook

Presented by:

Nik Ahmad Zaki Abdullah

Head, Global Sukuk Markets

Fixed Income & Currency Research

September 2014

Research Institute

1Research Institute

Outline

Factors Impacting Middle East Sukuk Space

Comparing market characteristics & trends of Malaysian & Global Sukuk

Investment Strategies For Global Sukuk Markets

2Research Institute

Factors Impacting Middle East Sukuk Space

3Research Institute

Sukuk Returns have been closely correlated to oil price

movements in the past …

Source: Bloomberg, RHBFIC

Brent crude vs. sukuk index

80

90

100

110

120

130

140

150

160

0

20

40

60

80

100

120

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160

Ap

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Au

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g-1

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Dec-1

1

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r-12

Au

g-1

2

Dec-1

2

Ap

r-13

Au

g-1

3

Dec-1

3

Ap

r-14

Au

g-1

4

IndexUSD/barrel

BRENT (USD/barrel) (LHS) DJSUKTXR Index (RHS)

Mar 2003: US led

invasion of Iraq begins

Mar 2005: Texas City

BP refinery explodes

July 2005: Iran & Iraq sign cooperative oil trading agreement

2H 2008:Global

Financial Crisis

Dec 2010:Arab Spring

Mar 2011:Libyan production dropped significantly

Jul 2013:Egyptian

coup d'etatSept 2001:

9/11 attack

June 2014:

ISIS captures

Mosul

Feb 2012:Iran stops oil

sales to France and British companies

Sep 2012:Chevron refinery catches fire

4Research Institute

Similarly during Geopolitical events in the past …

Source: Bloomberg, US Federal Reserve, RHBFIC

Impact of geopolitical events on sukuk markets

85

95

105

115

125

135

145

155

165

Fe

b-0

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Jun

-05

Oct-

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Jun

-06

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7

Jun

-07

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8

Jun

-08

Oct-

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Jun

-09

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b-1

0

Jun

-10

Oct-

10

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1

Jun

-11

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11

Fe

b-1

2

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-12

Oct-

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Fe

b-1

3

Jun

-13

Oct-

13

Fe

b-1

4

Jun

-14

Index

DJSUKTXR Index (RHS)

QE3QE3

(open-ended)QE 2

Jan 09:Intifada

Nov 09:Dubai debt

crisis

Dec 10:ArabUprising

Jul 13:Egyptian

coup d'etat

Jun 14:Northern

IraqOffensive

5Research Institute

Historical returns in the past


Returns (%)

Event Oil price peak/trough Time period DJSUKTXR Brent

• Beginning of Iran nuclear tensions

• Iraq supply concerns

• North Korea missile testing

• Israel's and Lebanon tensions

• USD weakening

Peak 11 Jan 07 - 3 July 08 +3.88 +182.55

• Global Financial Crisis

• Huge oversupply from slowing global growth.Trough 3 July 08 - 24 Dec 08 -18.12 -74.94

• Protests in MENA (Arab uprising) Peak 24 Dec 2008 - 19 June 2012 +50.22 +161.57

• Calming of Arab Spring Sideways 4 April 2011 - 4 Oct 2011 +2.08 -17.57

• Libyan civil war Peak 4 Oct 2011 - 13 Marc 2012 +3.58 +26.49

• Uncertainty in Core Europe economies Trough 13 March 2012 - 21 June 2012 +1.87 -29.31

• Operation Twist

• Strait of Hormuz closure Peak 21 June 2012 - 8 Feb 2013 +3.92 +33.25

• Northern Iraq Offensive Sideways 30 May 2014 - 25 Aug 2014 +0.99 -6.51

6Research Institute

Among GCC countries, Qatar and UAE most resilient in

event of sharp decline of oil prices

Source: S&P, RHBFIC

SovereignSovereign rating

(Moody’s/S&P/Fitch)

Hydrocarbon

component of

nominal GDP (%)

Hydrocarbon of

total exports (%)

Fiscal

breakeven oil

price (US$ per

barrel)

Years of

hydrocarbon

production

at current

levels (years)

Bahrain (Baa1/BBB/BBB; Sta) 26.2 73.1 126.9 11

Oman (A1/A/-; Sta) 49.7 66.1 89.4 21

Saudi Arabia (Aa3/AA-/AA-; Sta) 45.1 85.7 84.3 66

Kuwait (Aa2/AA/AA; Sta) 62.6 94.3 52.0 91

Qatar (Aa2/AA/-; Sta) 54.4 91.7 59.4 106

UAE (Aa2/-/-; Sta) 38.9 31.1 81.3 81

7Research Institute

Oil price to hover circa 108 over the 12-18 months

Source: EIA,RHBFIC

Global oil supply and demand

82

84

86

88

90

92

94

Ja

n

Ap

r

Ju

l

Oct

Ja

n

Ap

r

Ju

l

Oct

Ja

n

Ap

r

Ju

l

Oct

Ja

n

Ap

r

Ju

l

Oct

Ja

n

Ap

r

Ju

l

Oct

Ja

n

Ap

r

Ju

l

Oct

2010 2011 2012 2013 2014 2015

mn barrels/day

Supply Consumption

Forecast

8Research Institute

Non OECD countries will support slowing demand from

Europe

Source: EIA,RHBFIC

Global oil consumption

36

38

40

42

44

46

48

50

Jan

Mar

May Ju

l

Sep

Nov Jan

Mar

May Ju

l

Sep

Nov Jan

Mar

May Ju

l

Sep

Nov Jan

Mar

May Ju

l

Sep

Nov Jan

Mar

May Ju

l

Sep

Nov

2011 2012 2013 2014 2015

mn barrels/day

OECD Non-OECD

EIA forecast

9Research Institute

We Are Currently In Period of Complacency – Not Pricing

Risk Adequately


-0.8

-0.6

-0.4

-0.2

0

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60

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Ma

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Oct

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Jul-

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3

Se

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3

Ap

r-04

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Jun

-05

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-06

Au

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Ma

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7

Oct

-07

Ma

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Jul-

09

Fe

b-1

0

Se

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Ap

r-11

Nov-

11

Jun

-12

Jan

-13

Au

g-1

3

Ma

r-1

4

3MMA (USD/barrel)

3MMA (LHS) Correl (RHS)

Tensions in Gaza stripApr 09: 0.905QE1

announcement Jan 08: 0.902

Arab Spring June 11: 0.85

Euro haircutsraise concernJan 10: 0.893

DJSUKTXR correlation with Brent crude spot price

10Research Institute

Geopolitical crisis in Iraq – Iraq 2nd Largest Supplier of Oil

Source: EIA,RHBFIC

Supply from the Middle East

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

5

10

15

20

25

Jan

Ma

r

Ma

y

Jul

Se

p

Nov

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Ma

r

Ma

y

Jul

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p

Nov

Jan

Ma

r

Ma

y

Jul

Se

p

No

v

Jan

Ma

r

Ma

y

Jul

2011 2012 2013 2014

Surplus capacity mn barrels/day

Supply mn barrels/day

Iraq UAE

Saudi Arabia Kuwait

Qatar Libya

Middle East surplus capacity (RHS)


Any Invasion of South of Iraq Can Be Supported By Saudi

Source: EIA,RHBFIC

July 2014 OPEC countries crude oil production

9.8

3.0 2.8 2.7 2.6 2.2 2.0 1.61.2 0.8 0.5 0.4

0

2

4

6

8

10

12

mn barrels/day


Oil Price Cycles, Geopolitical Issues & Impact on Middle

East Sukuk

• Sukuk returns remain resilient against oil price movements and geopolitical events (exception only during 2008 GFC)

• Among GCC countries, Qatar and UAE most resilient in event of sharp decline of oil prices

• Geopolitical risks: Any shortage of oil from Iraq can be supported partly by Saudi

• Steady demand of oil in the medium term, supported by developing countries (i.e. India and Non OECD)

• Oil prices to remain stable in short to medium term at about USD108/barrel – credit positive for MENA sovereigns

• QE has somewhat distort pricing for risk taking activities


Comparing Market Characteristics and Trends of

Malaysian & Global Sukuk


Total Global Sukuk Issuance


Global Sukuk issuance

29

6156

34

0

10

20

30

40

50

60

70

2011 2012 2013 YTD2014

USD bn


Q4 Period Historically the Busiest Quarter– Expect More

Issuances


Global Sukuk quarterly bond issuance

0

5

10

15

20

25

30

Q1 Q2 Q3 Q4

USD bn

2011 2012 2013 YTD2014

*Up to end of August 2014


2.3

8.7

16.1

27.1

18.3

13.1

4 58

21

24

14

8

15

29

61

56

34

0

10

20

30

40

50

60

70

2009 2010 2011 2012 2013 YTD2014

USD bn

Malaysia GCC Global Sukuk

2014 will be a better year than 2013 and could even exceed

2012


Amount issued by country/region

2014 Forecast:60-70bn


Financials YTD Issuances Well Ahead of Previous Years


YTD Global Sukuk issuance by industry group

5.64.4

8.79.1

5.7

28.4

5.0 5.5

19.9

3.8

10.1

18.6

0

5

10

15

20

25

30

Sovereigns Financials Corporates

USD bn

8M2011 8M2012 8M2013 8M2014


GCC USD Issues Continue To Remain Strong


GCC USD bond issuance by geography

Saudi Arabia

Saudi Arabia Saudi ArabiaSaudi Arabia

Abu Dhabi

Abu DhabiAbu Dhabi Abu DhabiDubai

DubaiDubai

DubaiSharjah

SharjahBahrain

QatarQatar

Ras Al Khaimah

-

2

4

6

8

10

12

14

16

2011 2012 2013 2014YTD

USD bn


..Whereas Malaysia USD Issuances Have Slowed


Non-GCC USD bond issuance by geography

Turkey

Turkey

Turkey

TurkeyIndonesia

Indonesia

Indonesia

IndonesiaMalaysia

Malaysia

Malaysia

Malaysia

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2011 2012 2013 2014YTD

USD bn


Malaysia Remains the Largest Global Sukuk Market


Percentage share of total amount outstanding by country of risk (%)

MY44%

SA18%

UAE14%

ID9%

TR5%

QA4%

Supra3%

BH1%

Others2%

Others include: Singapore, US, Kuwait, Great Britain, Hong Kong, China and France


Outstanding MYR issuances Dominate, Not Far From USD


Total amount outstanding by currency

Currency Market Share (%) Issues Amt Outstanding (USD mn)

MALAYSIAN RINGGIT 41.57 1487 90,164.34

US DOLLAR 37.78 120 81,952.7

SAUDI RIYAL 11.58 32 25,127

INDONESIAN RUPIAH 5.35 56 11,615.23

TURKISH LIRA 1.51 4 3,280.56

SINGAPORE DOLLAR 0.95 11 2,058.03

UAE DIRHAM 0.86 2 1,875.90

PAKISTANI RUPEE 0.16 6 354.65

CHINA RENMINBI 0.11 2 236.54

OMANI RIAL 0.06 1 129.89

NIGERIA NAIRA 0.03 1 70.92

BANGLADESH TAKA 0.02 1 43.65

BRITISH POUND 0.01 1 11.18

EURO 0.00 1 0.62


USD Issuances Catching Up With MYR Issuances


Yearly percentage share of global issuance by currency

MYR

MYR

MYR

USD

USD

USD

IDR

IDR

IDR

SAR

SARSAR

SGD

SGDSGD

OMR

GBP

TRY TRYTRY

CNY

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014YTD

39%

42%

41%

31%

35%

46%


Could USD Sukuk Issuance Beat 2012 Record Year?

Source: EIA,RHBFIC

Annual USD sukuk issuances

12.29

18.35

16.50

11.30

0

2

4

6

8

10

12

14

16

18

20

2011 2012 2013 YTD2014

USDbn


Banks Have Been Leading USD Issuances In 2014 YTD


USD issuances by sector

Banks

Banks

Banks Banks

Govt

Govt

Govt

Govt

Real Estate

Real Estate

Real Estate

Real Estate

Utilities

Utilities

Utilities

Telco

Telco

TransportDiversified Co.

Oil & gas

0

2

4

6

8

10

12

14

16

18

20

2011 2012 2013 YTD2014

USD bn


USD2.31bn Net Issuance - More Issuances To Come in Q4

Source: EIA,RHBFIC

2014 USD net issuance

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

IND

OIS

19

AH

B

Pe

rp

AL

BR

K 1

9

KF

INK

W 1

9

EM

AA

RM

24

DA

RA

LA

19

INV

ICO

R 2

0

DU

GB

29

TU

FIK

A 1

9

ISD

B 1

7

DA

MA

CR

19

SE

CO

44

SE

CO

24

SII

19

ISD

B 1

9

DIC

UH

19

PE

TM

K 1

4

BH

RA

IN 1

4

IND

OIS

14

EIB

MA

L 1

9

IDB

14

Be

rbe

r 1

4

TD

IC 1

4

DU

GB

14

Hilal 14

DU

GB

14

GE

14

Amount issued in 2014: USD9.84bn

2014 maturities: USD 7.53bn


Selectively Good Performance From New Issuances


Name SectorCurrent Rating

(S&P/Moody's/Fitch)

Issuance

Date

Amount

Issued (USD)

Maturity

DateCoupon

Current

Yield*

Change

Since

Issuance

(bps)

PERUSAHAAN PENERBITAN SBSN INDONESIA Sovereign Baa3e/-/BBB-e; - 10/9/2014 1,500,000,000 10/09/2024 4.350 4.350 -

HM TREASURY UK SUKUK Sovereign -/-/-; Sta 02/07/2014 200,000,000* 29/6/2049 2.036 1.69 -34

AHB TIER 1 SUKUK LTD Banks -/-/-; Sta 30/06/2014 500,000,000 29/6/2049 5.500 5.35 -15

ALBARAKA TURK KATILIM BA Banks -/BB/-; Sta 30/06/2014 350,000,000 30/06/2019 6.250 6.19 -6

KT KIRA SERT VARLIK Banks -/-/BBB; Sta 26/06/2014 500,000,000 26/06/2019 5.162 4.52 -64

EMG SUKUK LTD Real Estate Baa2/BBB-/-; Sta 18/06/2014 750,000,000 18/06/2024 4.564 4.12 -44

DAR AL-ARKAN SUKUK CO LT Real Estate -/B+/-; Sta 27/05/2014 400,000,000 28/05/2019 6.500 5.77 -73

ICD SUKUK CO LTD Investment Companies -/-/-; - 21/05/2014 700,000,000 21/05/2020 3.508 3.54 3

DUBAI DOF SUKUK LTD Sovereign -/-/-; Sta 30/04/2014 750,000,000 30/04/2029 5.000 4.95 -5

TF VARLIK KIRALAMA AS Banks -/-/BBB; - 24/04/2014 500,000,000 24/04/2019 5.375 4.75 -63

IDB TRUST SERVICES LTD Multi-National -/-/-; Sta 22/04/2014 100,000,000 22/04/2017 0.900 1.00 10

ALPHA STAR HOLDING LTD Real Estate -/BB/-; - 09/04/2014 650,000,000 09/04/2019 4.970 5.54 57

SAUDI ELEC GLOBAL SUKUK Electric A1/AA-/AA-; Sta 08/04/2014 1,500,000,000 08/04/2024 4.000 3.50 -50

SAUDI ELEC GLOBAL SUKUK Electric A1/AA-/AA-; Sta 08/04/2014 1,000,000,000 08/04/2044 5.500 5.01 -49

IDB TRUST SERVICES LTD Multi-National Aaa/-/AAA; Sta 06/03/2014 1,500,000,000 06/03/2019 1.813 1.77 -4

DIP SUKUK LTD Real Estate -/BB+/-; - 20/02/2014 300,000,000 20/02/2019 4.291 3.86 -43

EXIM SUKUK MALAYSIA Banks A3/-/A-; - 19/02/2014 300,000,000 19/02/2019 2.874 2.36 -51

*HM Treasury UK Sukuk is denominated in GBP


More Innovative Structures and Hybrid Capital to Come…

Corporates looking to take advantage without diluting their equity ownership.

High demand from investors looking for higher yield with protective features.

Need to monitor closely any changes in banking regulations with regards to loss absorbency and recognition of capital.

More perpetual issuances in Sukuk space :-

• Tier 2 – Saudi, Bahrain and Turkish banks• Tier 1 – UAE banks• Corporates perpetual• Amortization features


Summary

Malaysian issuances taking up 44% of outstanding issuances, lesser issuances from previous years

MYR denominated issuances still dominate issuance, but USD issuances are picking up

We expect an additional USD30-40bn of new global sukuk issuance in 2014 in order to fund Malaysia and GCC ongoing infrastructure development

Financials have been leading in YTD issuances – more sovereign issuances perhaps?

GCC USD issuances have been gaining momentum since 2011 while Malaysian USD issuances have slowed ( thanks to ample liquidity in Malaysian market)


Investment Strategies for Global Sukuk Markets


Outlook : Multi-Track of Monetary Policies

Source: Bloomberg, RHBFIC Data as of September 5, 2014

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

(%)

Policy Rate

USA Japan Euro United Kingdom


Rate Rise Timeline to Watch

September FOMC meeting – Policy Transition

June 15 or September 15 FOMC meeting – Rate Lift-off

Rate Normalization, Neutral Fed Fund Rate of 3% – 4%

Policy Transition

Rate Lift-off Rate Normalization

FOMC

September 14

FOMC

June 15

FOMC

September 15

2015 - 2016


Outlook : Period of Complacency May Come to an End

Investors have been ignoring the risk of monetary tightening in their hunt for yield.

Trigger Points of VIX:-

Geopolitical Events• Ukraine-Russian crisis• ISIS strikes in Iraq and Syria (began July 2, 2014)• Israel – Hamas (began July 17, 2014)

Sovereign and Banking Sector Default• CDS has tightened close to 2007 level (potentially student loan is next

bubble)

End of QE3• Past events shows VIX shock after QEs ended


VIX Shocks After QEs Ended


QE1QE2

QE1

QE2QE3


Sovereign Outlook

Country Recommendation Outlook

UAEAa2/-/-;Stable

MildOverweight

• Sustainable trade sector as evidence by higher container throughput in Jebel Ali

• Dubai Expo 2020 is an added merit

• Emirates benefited from Dubai spillover effect

QatarAa2/AA/-; Stable

MildUnderweight

• World Cup 2022 status following the recent bid scandal

• Socio-political tension with close neighboring countries

Saudi ArabiaAa3/AA-/AA-; Stable

Marketweight• Saudi Arabia 2020 vision will improve diversification towards non-hydrocarbon

• Liberalization of mortgage laws

MalaysiaA3/A-/A-; Stable

Marketweight • More subsidy rationalization

BahrainBaa1/BBB/BBB; Stable

MildUnderweight

• Fiscal consolidation

• Non-oil sector will be main contributor for growth

IndonesiaBaa3/BB+/BBB-; Stable

MildUnderweight

• Untested government administration under Jokowi

TurkeyBaa3/BB+/BBB-; Stable

Underweight • Structural deficit given the high dependence on energy import


Sector Outlook - Banks


UAE Marketweight• Improvement in asset quality backed by real estate recovery. Positive on DIB

• Dubai World to make early redemption.

QatarMild

Underweight• Weakening liquidity metrics to support credit growth.

Saudi Arabia Marketweight • Liberalization of mortgage laws is credit positive but still at infancy stage

Malaysia Marketweight • Stable credits fundamental

Turkey (Islamic Banks)

MildUnderweight

• Challenging operating environment


NIM Trending Down

2.8%

3.1%

3.1%3.0%

3.5%

3.2%

3.0%2.9%2.9%

2.8%

2.6%

2.5%2.4%

2.3% 2.3%

2.1%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

3.6%

2010 2011 2012 2013

UAE Saudi Arabia Qatar Malaysia

Source: Bloomberg, RHBFIC Data as of June 30, 2014


Strong Asset Quality in Global Sukuk Financial Space,

Except for UAE Banks

2.8%

2.1%

1.7%

1.3%

1.6%

1.3%1.4%

1.7%

3.6%

2.7%

2.0%1.9%

3.9%

2.8% 2.8%

2.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2010 2011 2012 2013

Saudi Arabia Qatar Malaysia Turkey



UAE Distress Assets in Recovery Mode

7.3%

7.8%7.9%

7.4%

53.3%

58.5%

64.3%

74.3%

40%

45%

50%

55%

60%

65%

70%

75%

80%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

2010 2011 2012 2013

NPL NPL Coverage



Liquidity Maintained Stable from Middle East Banks but

Weakening from Turkish Banks

93.0%

91.6%

87.5% 87.3%

74.2% 74.9%77.1%

76.7%

83.9% 88.8%

94.2%95.4%

93.5%

101.1%

104.9%

113.2%

70.6%72.4%

74.3%

77.5%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

2010 2011 2012 2013

UAE Saudi Arabia Qatar Turkey Malaysia Data as of June 30, 2014Source: Bloomberg, RHBFIC


Sector Outlook – Real Estate


UAE Marketweight

• Cooling measures (such as restriction on off-plan sales and capped to the LTV) in

place to curb speculation on property prices

• High correlation between Dubai and Abu Dhabi property market

• Increasing recurring income going forward

• We like EMG and Aldar

Saudi Arabia Marketweight

• High demand in housing market

• Mortgage law will accommodate more off-plan sales


Dubai Real Estate Index Reached Peak Level in 2007



Sector Outlook – Others

Sector Recommendation Outlook

Utilities Overweight

• Strategic importance to the country

• We prefer DEWA

Telcos Marketweight

• High competition will increase churn rate and reduce market share

• Aggressive expansion to cope with the competition

Transport, Logistics

& Industrial ZonesOverweight

• Strategic location provides significant advatanges

• Vulnerable to global trade

• We like DP World, JAFZ and DIP


Operating Margin Remains Healthy

0

5

10

15

20

25

30

35

40

45

2008 2009 2010 2011 2012 2013 1H14

(%)

Seco Ooredoo Emaar Dar Al Arkan DP World



Leverage May Increase on Future Expansion

0

2

4

6

8

10

12

2008 2009 2010 2011 2012 2013 1H14

(x)

Net Debt to EBITDA

Seco Ooredoo Emaar Dar Al Arkan DP World



Strategy : Positioning Going Forward

Strategies to consider going forward :-

1) Stay short and overweight cash

2) Stay nimble within 2 to 5 years maturities (IG & HY)

3) Reinvest in new issuances that offers good concessions

4) Be selective on HY papers with strong fundamentals / credit metrics

5) For longer dated papers, focus on Banks or Corporates Perps

6) Different central banks policies, different strategy for each market

7) Cross currency opportunities to lock in high yield (SGD/MYR etc)

8) Rates linked derivatives opportunities in rates markets

9) Opportunities in MYR papers given recent OPR tightening

10) Trading opportunities given the expected volatility ahead


Current Sovereign Papers Are Mildly Rich in Terms of

Valuation

INVCOR 3.508 05/20DUGB 6.45 05/22

SECO 4.211 04/22

RAKS 3.297 10/18

SECO 2.665 04/17

RAKS 5.2392 01/16DUGB 4.9 05/17

QATAR 2.099 01/18

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1.0 2.0 3.0 4.0 5.0 6.0 7.0

Yie

ld (

%)

Modified Duration (Years)



Sovereign RV including Indonesia and Turkey


DUGB 5 04/29

INDOIS 4.35 09/24

INDOIS 3.3 11/22

TURKSK 4.557 10/18INDOIS 6 ⅛ 03/19

INVCOR 3.508 05/20

TURKSK 2.803 03/18

DUGB 3 ⅞ 01/23

INDOIS 4 11/18

SECO 4 04/24

DUGB 6.45 05/22

SECO 4.211 04/22

SECO 3.473 04/23

QATAR 3.241 01/23

BHRAIN 6.273 11/18RAKS 3.297 10/18

SECO 2.665 04/17

QATAR 2.099 01/18

DUGB 4.9 05/17

RAKS 5.2392 01/16

UKSUK 2.036 07/19

0

1

2

3

4

5

6

0 2 4 6 8 10 12

Yie

ld (

%)



Sovereign including 30 year space


ISDB 1.775 10/27/15

ISDB 2.35 05/25/16

ISDB 1.357 06/26/17

ISDB 1.535 06/04/18

ISDB 1.8125 03/06/19

SECO 2.665 04/03/17

SECO 4.211 04/03/22SECO 3.473 04/08/23

SECO 4 04/08/24

SECO 5.06 04/08/43

SECO 5 1/2 04/08/44

UKSUK 2.036 07/22/19

QATAR 2.099 01/18/18

QATAR 3.241 01/18/23

RAKS 5.2392 01/28/16

RAKS 3.297 10/21/18

MALAYS 3.928 06/04/15

MALAYS 2.991 07/06/16

MALAYS 4.646 07/06/21

BHRAIN 6.273 11/22/18

DUGB 4.9 05/02/17

DUGB 6.45 05/02/22

DUGB 3 7/8 01/30/23

DUGB 5 04/30/29

INVCOR 3.508 05/21/20

INDOIS 4 11/21/18

INDOIS 6 1/8 03/15/19

INDOIS 3.3 11/21/22INDOIS 4.35 09/10/24

TURKSK 2.803 03/26/18

TURKSK 4.557 10/10/18

-1

0

1

2

3

4

5

6

0 2 4 6 8 10 12 14 16

YTM%

Duration


Relative Value Idea – ICD 20

INVCOR 3.508 05/20

DUGB 6.45 05/22

SECO 4.211 04/22

RAKS 3.297 10/18

SECO 2.665 04/17RAKS 5.2392 01/16

DUGB 4.9 05/17 QATAR 2.099 01/180

20

40

60

80

100

120

140

160

180

1.0 2.0 3.0 4.0 5.0 6.0 7.0

Z S

pre

ad

(b

ps)




Perpetual Offer Value Pending Regulator Clarification

EBIUH 5 ¾ 05/49

DIBUH 6 ¼ 03/49ADIBUH 6 ⅜ 10/49

ALHILA 5 ½ 06/49

EIBUH 4.718 01/17DIBUH 4.752 05/17

EIBUH 4.147 01/18

SIB 2.95 04/18

EIBMAL 2.874 02/19ALHILA 3.267 10/18

SIB 4.715 05/16

QIIK 2.688 10/17

BSFR 2.947 05/17QIBKQD 2 ½ 10/17FGBUH 4.046 01/17

FGBUH 3.797 08/16

ADIBUH 3.78 11/16

ADCBUH 4.071 11/16ADIBUH 3.745 11/15

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Yie

ld (

%)




Looking at Z-Spreads …

EBIUH 5 ¾ 05/49

DIBUH 6 ¼ 03/49ADIBUH 6 ⅜ 10/49

ALHILA 5 ½ 06/49

EIBUH 4.718 01/17DIBUH 4.752 05/17 EIBUH 4.147 01/18

SIB 2.95 04/18

EIBMAL 2.874 02/19ALHILA 3.267 10/18SIB 4.715 05/16 QIIK 2.688 10/17

BSFR 2.947 05/17 QIBKQD 2 ½ 10/17

FGBUH 4.046 01/17

FGBUH 3.797 08/16

ADIBUH 3.78 11/16

ADCBUH 4.071 11/16

ADIBUH 3.745 11/15

0

50

100

150

200

250

300

350

400

450

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Z S

pre

ad

(b

ps)




Selective HY Issuers With Strong Fundamentals

DICUH 4.291 02/19

JAFZSK 7 06/19

EMAAR 6.4 07/19ALDAR 4.348 12/18

DPWDU 6 ¼ 07/17

EMAAR 8 ½ 08/16 MAFUAE 5.85 02/17

SIMEMK 2.053 01/18

DEWAAE 3 03/18

QTELQD 3.039 12/18

SECO 2.665 04/17

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1.5 2.0 2.5 3.0 3.5 4.0 4.5

Yie

ld (

%)




Looking at Z-Spreads …

DICUH 4.291 02/19

JAFZSK 7 06/19

EMAAR 6.4 07/19ALDAR 4.348 12/18

DPWDU 6 ¼ 07/17EMAAR 8 ½ 08/16

MAFUAE 5.85 02/17 SIMEMK 2.053 01/18

DEWAAE 3 03/18 QTELQD 3.039 12/18

SECO 2.665 04/17

0

50

100

150

200

250

1.5 2.0 2.5 3.0 3.5 4.0 4.5

Z S

pre

ad

(b

ps)




Picks and Pans

Issuer Govt.

Holding

Strategic

Importance

Recommendation Credit Profile

ALDAR 4.348% 18(Ba2/BB+/-)

44% High Overweight + Growing recurring income+ Huge landbank- High CAPEX requirement- High leverage

EMAAR 6.4% 19(Ba1/BBB-/-)

32% Moderate Overweight + Solid recurring income (Dubai Mall)+ Strategic JV with the government+ Huge landbank- High CAPEX requirement- Volatility in property cycle

JAFZSK 7.0% 19(Ba2/-/BB-)

100% Moderate Overweight + Strategically located in Jebel Ali port+ Solid revenue with long-term contract- High leverage position- Limited space to expand given its mandates

DICUH 4.291% 19(-/BB+/-)

18% Weak Overweight + Strategically located beside JAFZ+ Solid revenue with long-term contract- High leverage position- Limited space to expand given its mandates


Strategic Importance Provides Uplift on Credit Metrics

9.5

2.7

6.5

3.7

5.9

0.6

5.7

0.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Aldar Emaar JAFZ DIP

(x)

Debt/EBITDA Net Debt/EBITDA



Picks and Pans (Cont’d)

Issuer Govt.

Holding

Strategic

Importance


DIB Tier 1 6.25% 49

(Baa1/-/A)

34% High Overweight + Steady profitability with a relatively higher NIM

+ Strong liquidity base with net loan to deposits of 68.6%

+ Improving asset quality given the strong real estate recovery

+ Step-up features of MS + 495.4bps, call at 3/20

- Significant exposure in real estate

- Non-performing loan of 9.32% is still high relative to peers

INVCOR 3.508% 20

(Unrated)

100% High Overweight + Proxy for Dubai sovereign

+ Investment holdings co. with diversified portfolio

+ Large proportion of O&G assets

- High exposure in banking and transportation sectors

DEWA 3.0% 18

(-/BBB/-)

100% High Marketweight + Higher profitability with average EBITDA margin of 60%

+ Sufficient installed capacity

+ High projected FCF to cater for debt redemption

- Highly dependent on the strength of Dubai economy

- Single source of feedstock

DPWDU 6.25% 17

(Baa3/-/BBB-)

81% Moderate Marketweight + Strong market position in Middle East via Jebel Ali port

+ Less competition (High proportion of O&D vs transhipment)

+ High container throughput

- Aggressive expansion will increase future CAPEX

- Vulnerable to global trade condition


Picks and Pans (Cont’d)

Issuer Govt.

Holding

Strategic

Importance


MAF 5.85% 17

(-/BBB/BBB)

NR Weak Marketweight + Strong management team

+ Solid revenue backed by recurring income

- High CAPEX requirements

- Operates in high risk countries such as Egypt & Lebanon

ADIB 6.375% 49

(A2/-/A+)

48% High Mild

Underweight

+ Steady profitability with a relatively higher NIM

+ Strong liquidity base with net loan to deposits of 75.5%

- Aggressive retail expansion

- Weak asset quality with non-performing loan of 5.90%

- No step-up features

SECO 2.665% 17

(A1/AA-/AA-)

81% High Mild

Underweight

+ Favourable feedstock arrangements

- Unfavorable tariff adjustment

- Insufficient installed capacity

- Require more refinancing

DUGB 4.9% 17

(Unrated)

100% High Underweight + Dubai Expo 2020

+ Backed by Emirates of Abu Dhabi and UAE Federal

- Real estate prices reached peak level.

QTEL 3.039% 18

(A2/A-/A+)

69% High Underweight + Strong position in domestic market

+ Well diversified portfolio

- Competitive pressure within the industry

- High CAPEX requirements

- Emerging market risks


Conclusion

Oil & geopolitical risk have not been priced in adequately due to technicals (QE) and market being complacenct

Potential shocks in VIX Index (geopolitical, sector default & end of QE3)

Market will be watching closely the next Fed announcements

Put more weight on fundamental as compared to technicals and valuation factors

Opportunities abound in respective markets (MYR, USD & SAR)

Maintained IG and be selective for HY issuers


Important Disclosures

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad

(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions

and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to

opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer,

invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no

reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an

interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of

persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular

investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on

an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or

damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing

investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may

at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any

company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,

officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services

from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information

known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon

various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the actions

of third parties in this respect.

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RHB Fixed Income Conference 9 Sept 2014_NIK ZAKI

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