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Sukuk: The Sharia Fixed Income
Alternative Strategy
September 2014
Strategy report
Please read Disclaimer on the back
Executive Summary
• Sukuk is an integral part of Islamic finance; the sukuk market is one of the fastest-growing sectors in global finance. The market
grew exponentially in 2011–13, with total cumulative sukuk issued exceeding USD 336.0bn, whereas the total cumulative
sukuk issuance over a 20-year period up to 2010 totaled USD 201.6bn.
• Sukuk are increasingly being used as a substitute for corporate bonds and floating rate notes as sukuk share similar characteristics
with these investment options. Both sukuk and conventional bonds have a fixed-term maturity, provide a regular inflow of
income, and are tradable on the open market at prevalent yield price.
• Sukuk markets in GCC have benefitted from improved investor sentiment, increased oil revenues, low interest rates, maturing
markets, and high levels of repatriation of Gulf funds into the GCC region after the 2008 global financial crisis. Saudi Arabia’s
sukuk market is the largest in GCC and has emerged as a key player, with issuances touching an all-time high of USD 15.2bn in
2013.
• In Saudi Arabia, the infrastructure sector, constituting power and utilities, transport, construction, was the primary contributor
to sukuk issuance and accounted for the largest amount raised in 2013. Growing capital needs in the infrastructure sector
continue to offer strong opportunities for sukuk in KSA and GCC overall.
• Sukuk’s demand would be further boosted by increased participation of institutional investors, relatively higher number of
sukuk being rated, and due to its inherent characteristic of providing safe returns, along with high yields.
• Sukuk has successfully attracted variety of institutional investors such as takaful companies, pension funds, and the corporate
sector, including financial institutions. Demand for sukuk is being driven by increased uptake by new investor segments, as
its popularity grows. With gradual and perpetual evolution of the sukuk market, its long-term success would be driven by a
broadening investor base and steady expansion of its geographic footprint.
• With several countries entering the sukuk market, preparing regulations for sukuk issuance is one of the key developments
occurring globally. High demand for Islamic finance and increasing popularity of sukuk as a mainstream asset class among
fixed-income investors in Asia and the Gulf are encouraging countries to develop a regulatory framework. Consequently, clarity
on rules is leading to higher liquidity in the markets.
• Key issues for the sukuk industry are lack of standardization of Shariah rules, high issuance costs, low liquidity in the secondary
sukuk market, and low foreign participation.
1
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AGM - Head of Research
Analyst
Abdullah Alawi
Saleh Al-Quati
[email protected]
+966 11 2256250
[email protected]
+966 11 2256046
Sukuk: The Sharia Fixed Income
Alternative Strategy
September 2014
Strategy report
Please read Disclaimer on the back
Introduction to Sukuk
Sukuk instruments adhere to Islamic laws, referred to as Shariah principles, which prohibit charging or payment of interest and
speculation. Sukuk are the Islamic equivalent of bonds and provide investors a stake in an asset, along with corresponding share
of cash flows and risk. Sukuk pay a profit rate based on income generated by an underlying asset, in contrast to conventional
bonds where the payment on the bond is predetermined. Sukuk instruments link issuers, primarily sovereigns and corporations,
with a wide group of investors, who want to diversify their portfolio beyond traditional asset classes.
Sukuk (plural of ‘sak’) have been significantly used by Muslims in the Middle Ages as papers representing financial obligations
arising from trade and other commercial activities. The current structure of sukuk is different from that followed historically, and
is closer to the process of securitization, in which a large number of investors own the underlying assets through certificates
representing a proportionate value of the assets.
Structure
Sukuk are structured in compliance with several key concepts that are central to Islamic beliefs and their interpretation may differ
according to the divergent school of Islamic jurisprudence followed by Islamic investors and Shariah scholars. Some of the key
concepts in Islamic finance are mentioned below:
Riba: Riba refers to the prohibition of charging interest on money lent as well as any unjustified increase or addition to money (for
example, a penalty).
Gharar: Gharar (or risk) refers to uncertainty, which is prohibited under Shariah law, particularly related to fundamental terms
of a contract such as price, time, delivery, and each party’s obligations and rights, which might lead to speculation (for example,
provision of insurance, which involves paying a premium for an uncertain event).
Maisir: Gambling (or Maisir) is prohibited in Islam. Hence, some contracts pertaining to futures and options are considered
unacceptable, as they could be used for speculative purposes.
‘Two sales in one’: Any transaction that is conditional upon another is not accepted. Contracts must exist independently and
should not conceal a ‘hidden purpose’.
Transfer of title: The local laws govern rules related to the nature of the title to underlying assets held or to be transferred and the
Shariah structure used. These are related to associated formalities (such as registration and the payment of associated fees or taxes)
requisite for the title transfer to be effective.
Nature of assets: The relevant underlying assets must be used by the issuer for Shariah-compliant purposes, therefore activities
relating to alcohol, pork-related products, conventional finance, and gambling, among others, are prohibited. Furthermore, the
market value of the assets on the issue date should equal or exceed the principal amount of the sukuk on offer.
Tax and Zakat: The sale of assets or transactions involving Shariah-compliant structures that lead to profits for sukuk holders could
result in capital gains taxes, residency taxes, or income taxes. In certain countries such as Saudi Arabia, zakat (a fixed portion of a
person’s wealth that is required to be donated to charity according to Islamic laws) must be paid and should be considered at the
structuring phase of the sukuk, where applicable.
Taking Saudi Arabia’s zakat rules as an example, income earned from sukuk is taxable.
• Zakat Provision:
Different types of Sukuk have different types of zakat, depending on the purpose of the Sukuk and its investment horizon.
• Withholding tax:
Withholding tax on periodic payments received is applicable when the trustee is not a Saudi. In this case, the payment of
profit collections by the investment manager to the trustee pursuant to the investment management agreement will be
subject to a 5% withholding tax. However, most transactions provide gross figures so that sukuk holders receive amounts
due without any deductions.
Governing law: The interpretation of various Islamic principles differs among scholars. As such, the market practice is that
documents be governed by the law of a particular jurisdiction rather than by Islamic law.
Tradability of sukuk: For tradability in the secondary market in accordance with Shariah principles, the sukuk should represent
a direct link with physical assets, as opposed to denoting debts. Some scholars accept assets as underlying sukuk structures,
representing at least 33% of the face value of the sukuk, while others require between 51% and 70% to be physical assets.
2
Although sukuk can be secured instruments, most of these are structured as asset-based rather than asset-backed securities.
Consequently, investors generally do not have support of the underlying assets, but do have an unsecured claim against the issuer
for the repurchase price of the assets. To understand the structure of sukuk, we have analyzed Ijara sukuk, the most popular sukuk
structure. Ijara is an asset-based structure in which the underlying assets are sold or leased, including land or tangible assets such
as plant and machinery.
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Sukuk: The Sharia Fixed Income
Alternative Strategy
September 2014
Strategy report
Please read Disclaimer on the back
The diagram below shows that the process of its issue begins with the originator who is the owner of as asset. the originator
sells the asset as ‘x’ amount and leasing it back from the SPV at “x+y”, which represents the principal and rental payment to the
investors. The investors are deemed to be the owners of this asset because they provided the money to purchase the asset from
the originator through SPV/issuer. And asset - based securitisation has now taken place in the sense that the asset has been
packaged and transformed in to unit. Investors who subscribed to these unit are purchasing a share in the asset along with all
ownership rights. Once this asset is leased back to originator, the investor are equally entitled to receive the rental payment
since they are the owners and lessors of the asset.
Figure 1: Typical Structure of Sukuk
ORIGINATOR/owner Of the asset
1
Sale of Asset
to SPV at
500$million
4
Payment of
purchase
price at
500$million
6
Payment of lease rental payments, for example, every six months
3 Payment of Sukuk proceeds
SPV/issuer
Investors
2 Issuance of Sukuk Ijarah to investor at 500$million
5 Leaseback of the asset to the originator through SPV at 500$million * [cost of fund + spread]
Source: CIMA: Islamic Capital Markets and Instruments1, AlJazira Capital
Pricing
Sukuk are issued at a premium or discount to the face value based on the fair value of the underlying assets. The issue price of
conventional bonds is based on the issuer’s credit worthiness and the seniority of the instrument. Pricing of a sukuk depends on
the underlying asset’s liquidity, or the regularity of income flow from the asset/project, leading to complexities in determining the
fair value.
Yield depends on the borrower’s credibility and interest rates. However, the coupon payment on bond is fixed. In response to the
changing risk assessment of the borrower or the market environment, a bond’s yield may vary significantly from the coupon rate
and the price will react inversely to the yield. For instance, if the bond’s yield equals the coupon rate, the issue price will be equal to
the face value. But, if for instance the demand drops, the bond’s yield will rise while the price would drop. In case of higher demand,
the yield will drop and the price will rise.
Trading
Previously, sukuk were considered a long-term investment, with majority of the institutional investors classifying it under ‘heldto-maturity’. This impacted liquidity in the secondary market, which was quite non-existent until recently. The secondary sukuk
market is nascent in Saudi Arabia due to which it is highly illiquid – there are only eight listed sukuk in Saudi Arabia, while 20 sukuk
were issued in Saudi Arabia in 2013. Low liquidity has been a major constraint in attracting institutional and retail investors to the
sukuk market.
Changing perception and rising visibility have, however, boosted demand for Islamic products. Sukuk are also increasingly being
added as an investment tool by non-Islamic investors, which should improve their tradability and liquidity. The sukuk market
is attracting conventional institutions, especially after the Eurozone debt crisis. In particular, hedge funds and conventional
investment institutions are expressing increasing interest; they invest in sukuk to either benefit from yield gains or for diversification.
Furthermore, more sukuk are being rated and listed on global exchanges, leading to rising retail sector participation and gradual
increase in the liquidity.
3
1. The text and diagram has been being reproduced with kind permission of the Chartered Institute of Management Accountants.
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Sukuk: The Sharia Fixed Income
Alternative Strategy
September 2014
Strategy report
Please read Disclaimer on the back
Comparison of sukuk with conventional financing
Sukuk versus conventional bonds
A conventional bond is a contractual debt obligation in which the issuer is mandated to pay interest and principal to bond holders
on a certain specified date. However, in a sukuk structure, the holders have claim to an equal ownership interest in the underlying
assets. Sukuk holders are entitled to a share in the revenues generated by the sukuk assets.
Flexible structure, ratability, riskiness, and default rates
Figure 2: Comparison between Sukuk and Bonds
Conventional Bonds
Sukuk
Asset ownership
Bonds are debt obligations from the issuer to the
bond holder.
Sukuk provides partial ownership of the asset to the
investor.
Investment criteria
Bonds can be used to fund any project, business,
asset, or joint venture that complies with the local
legislation.
The underlying asset must be Shariah compliant, with
restrictions on the activities it can be associated with.
Issue price
The face value of a bond is based on the issuer’s credit
worthiness and its credit rating.
The face value of sukuk is based on the current market
value of the underlying asset.
Investment rewards and
Bond holders receive regular interest income for the
returned on the maturity date.
Sukuk holders receive a share of profits from the
underlying asset as well as any share of any loss
incurred. Redemption for sukuk holders is at the
current market value, which could even be zero.
Bond holders are generally not impacted by expenses
related to the project, asset, or business they fund,
having no effect on the investor income flow.
Sukuk holders are impacted by costs related to the
underlying asset. Higher costs would translate to lower
investor profits and vice versa.
Bonds are dependent primarily on the credit worthiness
Sukuk’s value is based on the market value of the
of the issuer.
underlying asset.
Recent trend indicates lower yield compared to sukuk
instruments
Sukuk generally provide marginally higher or
similar yield returns compared with corresponding
conventional bond instruments
risks
Effects of costs
Ratings
Yield
duration of the bond, with the principal guaranteed to be
If the issuer fails to repay the interest accrued in time, it
Default Risk
is added to the principal, and thus, cumulative interest is
earned based on the time duration the funds are used by
the issuer.
In case of a default or delay in repayment, a penalty
may be charged. However, the delayed amount cannot
be added to the principal; hence, the investor faces
more challenging liquidity risk.
Source:AlJazira Capital
Sukuk’s real distinct feature compared to conventional bonds is flexibility. Sukuk can be structured according to the requirement
and preferences of investors and issuers, thereby proving their superiority along with providing other benefits.
Sukuk acts as a liquidity management tool for banks and Islamic financial institutions. Islamic banks and financial institutions park
their excess funds in the sukuk market, ensuring they maintain adequate levels of capital as sukuk is considered a part of Tier II
capital. However, sukuk are less liquid than conventional bonds which add risk.
4
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Sukuk: The Sharia Fixed Income
Alternative Strategy
September 2014
Strategy report
Please read Disclaimer on the back
Sukuk Risks
Riskiness is an inherent trait of all financial instruments, and sukuk faces several risks. Some of them are:
• Interest rate risk: One of the primary risks faced by sukuk is interest rate risk; with sukuk price being inversely proportional
to its yield based on the underlying interest rate. This risk has direct implication through any rise in market interest rates,
leading to a fall in sukuk values, and indirectly through interest rate market fluctuations as their financing operations are widely
benchmarked against LIBOR/SAIBOR.
• Currency risk: In case of a difference between the currency denomination of sukuk asset pool and that of sukuk funds,
exchange risk arises.
• Shariah compliancy risk: This risk does not exist in conventional bonds, as there is need to adhere to Shariah laws very strictly.
• Counterparty and credit risk: Under Shariah laws, the option to restructure a loan is not available, being strictly prohibited
in Islam as it can constitute interest. As these laws prohibit interest in any form, the entire transaction would become invalid if
it occurs. Hence, the risk related to credit arises, based on the assumption that the debt may be irrecoverable at the end of the
maturity period.
• Coupon (profit rate) payment risk: If the issuer does not pay the scheduled profit (coupon) on time, extra amount may be
charged and can only be used for charitable purposes. The extra charge may not be used for any other purpose as it is strictly
prohibited by Shariah laws.
• Default risk: This risk is associated with almost every financial transaction. In case of disputes over scheduled payment delays
or payment failures with sukuk, means for redressal are more complex than those for conventional notes and bonds.
For sukuk, no clear guidelines regarding the rights of investors in case of a default and a redressal mechanism exist. Generally,
English Common Law concepts and mechanisms are used for sukuk instruments, with the SPV playing a key role. The legal provision
for sukuk represents a merger of English Common Law, which is primarily used for cross-border financial transactions, and Shariah
laws, but it is sparingly used in practice. Hence, in case of default, due to limited recourse options, investors often do not have any
collateral to rely on. Furthermore, besides the risk of capital loss and/or default on profit share payments, other risks involved in
obtaining full recourse to the underlying assets include legal risks and risks related to imposition by the court ruling.
Direct link through securitization with underlying asset
Securitization (‘taskeek’ in Arabic) refers to the process of pooling together ownership rights over tangible assets or rights into units
called Special Purpose Vehicle (SPV). SPVs hold units of equal value and issue them to investors in return for funds. In other words,
securitization refers to the process of aggregating assets and packaging them into marketable securities.
In principle, securitization is in perfect harmony with Shariah principles as most Islamic financial products are asset-backed. Due to
this feature, risk and overall cost of financing are lower. This is because even in case of default by the issuer of sukuk, the investors
can recover their funds by claiming against the ownership on the underlying asset.
Under Shariah laws, any financial transaction pre-requisites direct participation in asset performance and assigns clearly defined
rights and obligations to investors, along with entitlement to receive corresponding return in the form of profit share. With sukuk
ensuring joint ownership of an asset or project in accordance with the principle of profit and loss sharing, it has become a favored
mid- and long-term investment tool for many investor classes.
5
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Sukuk: The Sharia Fixed Income
Alternative Strategy
September 2014
Strategy report
Please read Disclaimer on the back
Top 50 Sukuks in terms of yield
Price Performance (%)
Issuer Name
Senai-Desaru
Expressway Berhad
Senai-Desaru
Expressway Berhad
Senai-Desaru
Expressway Berhad
Senai-Desaru
Expressway Berhad
Senai-Desaru
Expressway Berhad
Senai-Desaru
Expressway Berhad
Senai-Desaru
Expressway Berhad
Senai-Desaru
Expressway Berhad
Senai-Desaru
Expressway Berhad
Senai-Desaru
Expressway Berhad
Senai-Desaru
Expressway Berhad
Senai-Desaru
Expressway Berhad
Senai-Desaru
Expressway Berhad
6
Yield to
Maturity
(%)
Coupon (%)
Sukuk
Structure
Type
Issue Size
(USD mn)
Country
15.83
22.7
1.35
Ijara
Malaysia
15.73
19.5
1.15
Ijara
Malaysia
15.62
17.9
1.15
Ijara
Malaysia
15.55
16.2
1.15
Ijara
Malaysia
15.48
14.6
1.15
Ijara
Malaysia
15.41
13.0
1.15
Ijara
Malaysia
15.23
11.4
1.15
Ijara
Malaysia
15.16
9.7
1.10
Ijara
Malaysia
14.59
8.1
1.10
Ijara
Malaysia
14.49
8.1
1.10
Ijara
Malaysia
14.43
6.5
1.10
Ijara
Malaysia
14.40
4.9
0.65
Ijara
Malaysia
14.34
4.9
0.65
Ijara
Malaysia
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Currency
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Issue Date
Maturity
Tenor (yrs)
Sector
Modified
Duration
Credit
Rating
Price*
31-Dec-10
31-Dec-25
15
Infrastructure
8.00
Marc BBB
24.71
-46.8%
31-Dec-10
30-Jun-25
15
Infrastructure
7.96
Marc BBB
25.18
31-Dec-10
31-Dec-24
14
Infrastructure
7.71
Marc BBB
31-Dec-10
28-Jun-24
14
Infrastructure
7.44
31-Dec-10
29-Dec-23
13
Infrastructure
31-Dec-10
30-Jun-23
13
31-Dec-10
30-Dec-22
31-Dec-10
Since
1 Year
Inception
3 Year
YTD
9.5%
-49.1%
-1.8%
-41.3%
23.0%
-40.3%
-1.6%
26.84
-40.0%
21.7%
-38.9%
-1.5%
Marc BBB
28.54
-45.0%
7.6%
-44.3%
-1.1%
7.16
Marc BBB
30.34
-36.9%
14.9%
-36.4%
-0.9%
Infrastructure
6.86
Marc BBB
32.26
-42.5%
2.7%
-44.3%
-1.0%
12
Infrastructure
6.56
Marc BBB
34.63
-33.5%
13.9%
-33.3%
-0.2%
30-Jun-22
12
Infrastructure
6.25
Marc BBB
36.63
-31.6%
13.4%
-31.3%
-0.4%
31-Dec-10
31-Dec-21
11
Infrastructure
5.95
Marc BBB
40.30
-27.4%
12.6%
-29.1%
2.4%
31-Dec-10
30-Jun-21
11
Infrastructure
5.59
Marc BBB
42.96
-25.3%
11.5%
-26.4%
1.6%
31-Dec-10
31-Dec-20
10
Infrastructure
5.23
Marc BBB
45.66
-23.3%
11.2%
-23.5%
1.1%
31-Dec-10
30-Jun-20
10
Infrastructure
4.95
Marc BBB
46.73
-19.7%
12.7%
-19.6%
0.6%
31-Dec-10
31-Dec-19
9
Infrastructure
4.55
Marc BBB
49.94
-17.3%
12.0%
-16.9%
0.1%
Sukuk: The Sharia Fixed Income
Alternative Strategy
September 2014
Strategy report
Please read Disclaimer on the back
Price Performance (%)
Yield to
Maturity
(%)
Issue Size
(USD mn)
Coupon
(%)
Sukuk
Structure
Type
Country
Senai-Desaru Expressway Berhad
14.27
1.6
0.65
Ijara
Malaysia
Senai-Desaru Expressway Berhad
13.15
1.6
0.65
Ijara
Malaysia
Senai-Desaru Expressway Berhad
11.83
1.6
0.65
Ijara
Malaysia
Senai-Desaru Expressway Berhad
11.64
1.6
0.65
Ijara
Malaysia
Senai-Desaru Expressway Berhad
11.21
1.6
0.65
Ijara
Malaysia
Aneka Gas Industries PT
11.19
31.1
9.90
Ijara
Indonesia
Asya Sukuk Company Ltd
10.96
250.0
7.50
Hybrid
Cayman
Sukuk
Islands
10.70
9.0
9.60
Ijara
Indonesia
10.61
37.7
10.40
Ijara
Indonesia
Senai-Desaru Expressway Berhad
10.51
0.0
0.60
Ijara
Malaysia
Tiga Pilar Sejahtera Food Tbk PT
10.48
30.8
10.25
Ijara
Indonesia
10.41
12.2
8.00
Ijara
Indonesia
Issuer Name
Perusahaan Perseroan (Persero)
Perusahaan Listrik Negara PT
Perusahaan Perseroan (Persero)
Perusahaan Listrik Negara PT
Perusahaan Perseroan (Persero)
Perusahaan Listrik Negara PT
7
© All rights reserved
Currency Issue Date Maturity Tenor (yrs)
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Malaysian
Ringgit
Indonesian
Rupiah
US Dollar
Indonesian
Rupiah
Indonesian
Rupiah
Malaysian
Ringgit
Indonesian
Rupiah
Indonesian
Rupiah
Sector
Modified
Duration
Credit
Rating
Price*
Since
Inception
1 Year
3 Year
YTD
31-Dec-10
28-Jun-19
9
Infrastructure
4.14
Marc BBB
53.40
-14.4%
11.7%
-13.8%
0.0%
31-Dec-10
31-Dec-18
8
Infrastructure
3.77
Marc BBB
59.46
-7.9%
10.7%
-11.3%
4.5%
31-Dec-10
30-Jun-16
6
Infrastructure
1.65
Marc BBB
81.75
8.6%
8.6%
3.5%
5.3%
31-Dec-10
31-Dec-15
5
Infrastructure
1.22
Marc BBB
86.47
11.4%
7.9%
5.6%
5.4%
31-Dec-10
30-Jun-15
5
Infrastructure
0.77
Marc BBB
91.52
14.7%
7.4%
8.5%
6.1%
18-Dec-12
18-Dec-17
5
Manufacturing
2.52
Fitch A-
96.44
0.1%
-
-
0.1%
28-Mar-13
28-Mar-23
10
BFSI
5.39
81.00
-16.6%
-
-
-11.2%
10-Dec-13
10-Dec-23
10
93.54
-9.5%
-
-
-8.1%
08-Jul-10
08-Jul-22
12
98.83
-12.4%
7.9%
-
-0.8%
31-Dec-10
31-Dec-14
4
05-Apr-13
05-Apr-18
5
05-Jul-13
05-Jul-20
7
Electric Utility
High Quality
Electric Utility
High Quality
Infrastructure
Food
Processors
Electric Utility
High Quality
5.42
4.86
Moody's
Ba3
PEFINDO
AAA
PEFINDO
AA+
0.33
Marc-BBB
96.49
17.7%
10.8%
15.8%
6.1%
2.74
PEFINDO A-
99.30
-1.0%
-0.2%
-
-2.0%
89.49
-10.3%
-9.8%
-
0.0%
4.17
PEFINDO
AAA
Sukuk: The Sharia Fixed Income
Alternative Strategy
September 2014
Strategy report
Please read Disclaimer on the back
Price Performance (%)
Issuer Name
Perusahaan Perseroan (Persero)
Coupon
(%)
Sukuk
Structure
Type
Country
10.34
18.2
12.55
Ijara
Indonesia
Summarecon Agung Tbk PT
10.21
12.5
10.85
Ijara
Indonesia
Perusahaan Perseroan (Persero)
Perusahaan Listrik Negara PT
10.17
26.8
9.00
Ijara
Indonesia
Indosat Tbk PT
9.87
18.2
11.75
Ijara
Indonesia
Perusahaan Perseroan (Persero)
Perusahaan Listrik Negara PT
9.82
33.3
10.40
Ijara
Indonesia
Perusahaan Perseroan (Persero)
Perusahaan Listrik Negara PT
9.65
14.2
11.95
Ijara
Indonesia
Perusahaan Perseroan (Persero)
Perusahaan Listrik Negara PT
9.42
21.4
13.60
Ijara
Indonesia
Perusahaan Penerbit Surat
Berharga Syariah Negara
Indonesia
9.36
905.9
6.75
Ijara
Indonesia
Perusahaan Listrik Negara PT
8
Yield to
Issue Size
Maturity
(USD mn)
(%)
© All rights reserved
Currency Issue Date Maturity
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Tenor
(yrs)
12-Jan-10
12-Jan-20
10
11-Dec-13
11-Dec-18
5
10-Dec-13
10-Dec-18
5
08-Dec-09
08-Dec-16
7
10-Jul-07
10-Jul-17
10
12-Jan-10
12-Jan-17
7
21-Jun-06
21-Jun-16
10
02-May-13
15-Apr-43
30
Sector
Electric Utility
High Quality
Home
Builders
Electric Utility
High Quality
Telecom
Electric Utility
High Quality
Electric Utility
High Quality
Electric Utility
High Quality
Publishing
Modified
Duration
3.63
3.11
3.20
1.82
2.28
1.91
1.49
9.62
Credit
Rating
PEFINDO
AA+
PEFINDO
idA+
PEFINDO
AAA
PEFINDO
AA+
Moody's
AA+
PEFINDO
AA+
PEFINDO
AA+
NA
Price*
Since
Inception
1 Year
3 Year
YTD
109.00
-1.9%
-
-
-1.9%
102.20
0.1%
-
-
-0.1%
95.95
-3.5%
-
-
-4.5%
103.82
-2.0%
5.7%
-
-0.8%
101.44
-3.1%
4.1%
-
-1.1%
104.86
-7.1%
-0.1%
-
-1.7%
106.98
-6.2%
5.1%
-
-2.2%
74.12
-10.3%
-10.0%
-
-0.5%
Sukuk: The Sharia Fixed Income
Alternative Strategy
September 2014
Strategy report
Please read Disclaimer on the back
Price Performance (%)
Issuer Name
9
Yield to
Issue Size
Maturity
(USD mn)
(%)
Coupon
(%)
Sukuk
Structure
Type
Country
TITAN Petrokimia Nusantara PT
9.29
21.8
12.35
Ijara
Indonesia
Perusahaan Penerbit Surat
Berharga Syariah Negara
Indonesia
9.28
1127.0
6.10
Ijara
Indonesia
Perusahaan Penerbit Surat
Berharga Syariah Negara
Indonesia
9.22
421.4
6.00
Ijara
Indonesia
Perusahaan Penerbit Surat
Berharga Syariah Negara
Indonesia
9.10
468.5
10.00
Ijara
Indonesia
Turkiye Cumhuriyeti
9.04
615.6
10.60
Ijara
Turkey
Perusahaan Penerbit Surat
Berharga Syariah Negara
Indonesia
8.90
239.2
10.25
Ijara
Indonesia
Perusahaan Penerbit Surat
Berharga Syariah Negara
Indonesia
8.88
135.6
5.45
Ijara
Indonesia
Perusahaan Penerbit Surat
Berharga Syariah Negara
Indonesia
8.87
87.9
8.43
Ijara
Indonesia
© All rights reserved
Currency Issue Date Maturity
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Turkish
Lira
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Tenor
(yrs)
Sector
Modified
Duration
Credit
Rating
Price*
Since
Inception
1 Year
3 Year
YTD
02-Jun-10
02-Jun-15
5
Chemicals
0.68
Fitch A+
102.29
-3.8%
-2.6%
-
-0.9%
16-Feb-12
15-Feb-37
25
Publishing
9.69
NA
70.21
-22.8%
7.1%
-
-1.0%
02-Feb-12
15-Jan-27
15
Publishing
7.58
NA
76.49
-19.1%
1.0%
-
0.7%
03-Mar-11
15-Feb-36
25
Publishing
8.81
NA
108.43
1.7%
30.1%
-
1.3%
19-Feb-14
17-Feb-16
2
Sovereign
1.24
Fitch BBB-
102.15
-1.4%
-
-
-1.4%
01-Apr-10
15-Mar-30
20
Publishing
7.47
NA
111.29
3.7%
33.0%
-
1.7%
02-Feb-12
15-Jan-22
10
Publishing
5.50
NA
81.68
-13.3%
3.7%
-
0.3%
25-Mar-14
25-Mar-29
15
Publishing
7.57
NA
96.39
-5.0%
-
-
-5.0%
Sukuk: The Sharia Fixed Income
Alternative Strategy
September 2014
Strategy report
Please read Disclaimer on the back
Price Performance (%)
Issuer Name
Perusahaan Penerbit Surat Berharga
Syariah Negara Indonesia
Perusahaan Perseroan (Persero)
Perusahaan Listrik Negara PT
Perusahaan Penerbit Surat Berharga
Syariah Negara Indonesia
Perusahaan Perseroan (Persero)
Perusahaan Listrik Negara PT
Mitra Adiperkasa Tbk PT
Perusahaan Penerbit Surat Berharga
Syariah Negara Indonesia
Perusahaan Penerbit Surat Berharga
Syariah Negara Indonesia
Perusahaan Penerbit Surat Berharga
Syariah Negara Indonesia
10
© All rights reserved
Yield to
Issue Size
Maturity
(USD mn)
(%)
Coupon
(%)
Sukuk
Structure
Type
Country
8.81
746.8
4.45
Ijara
Indonesia
8.77
42.0
15.00
Ijara
Indonesia
8.71
364.6
5.91
Ijara
Indonesia
8.65
17.8
9.70
Ijara
Indonesia
8.63
4.1
13.00
Ijara
Indonesia
8.55
339.0
7.16
Ijara
Indonesia
8.54
165.5
10.25
Ijara
Indonesia
8.53
232.0
8.00
Ijara
Indonesia
Currency
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Indonesian
Rupiah
Issue Date Maturity
Tenor
(yrs)
Sector
Modified
Duration
Credit
Rating
Price*
Since
Inception
1 Year
3 Year
YTD
2.98
NA
87.12
-10.1%
0.2%
-
0.6%
108.04
-11.5%
-3.0%
-
-2.2%
84.47
-10.4%
1.9%
-
0.0%
100.88
-0.6%
2.9%
-
0.1%
101.38
-6.3%
2.0%
-
-1.4%
16-Feb-12
15-Feb-18
6
09-Jan-09
09-Jan-16
7
21-Mar-12
21-Mar-22
10
08-Jul-10
08-Jul-15
5
16-Dec-09
16-Dec-14
5
Retail Stores
0.29
17-Oct-11
17-Oct-21
10
Publishing
5.10
NA
92.59
-1.1%
-
-
-1.1%
21-Jan-10
15-Jan-25
15
Publishing
6.24
NA
111.59
13.2%
8.7%
39.0%
1.7%
11-Apr-11
11-Apr-21
10
Publishing
4.72
NA
97.33
-18.3%
-4.5%
-
-0.2%
Publishing
Electric Utility
High Quality
Publishing
Electric Utility
High Quality
1.16
5.45
0.78
PEFINDO
AA+
NA
PEFINDO
AA+
PEFINDO
A+
Sukuk: The Sharia Fixed Income
Alternative Strategy
September 2014
Strategy report
Please read Disclaimer on the back
Price Performance (%)
Issuer Name
Perusahaan Penerbit Surat Berharga
Syariah Negara Indonesia
Yield to
Issue Size
Maturity
(USD mn)
(%)
8.51
216.4
Coupon
(%)
11.95
Sukuk
Structure
Type
Ijara
Country
Indonesia
Currency
Indonesian
Rupiah
Issue Date Maturity
26-Aug-08
15-Aug-18
Tenor
(yrs)
10
Sector
Publishing
Modified
Duration
3.06
Credit
Rating
NA
Price*
111.42
Since
Inception
15.1%
1 Year
3 Year
-0.1%
34.1%
YTD
-0.8%
Source: Reuters Eikon, Zawya, Bloomberg, AlJazira Capital; Please Note: Only the Sukuks following AAOIFI standards are considered; NA: Not Available
Note: Marc: Malaysian Rating Corp; Fitch: Fitch Ratings; PEFINDO: PEF Indonesia Credit Ratings; Moody’s: Moody’s Credit Rating Agency
*Price is as of 19th August 2014
11
© All rights reserved
Sukuk: The Sharia Fixed Income
Alternative Strategy
September 2014
Strategy report
Please read Disclaimer on the back
Annexure
Major Types of Sukuk
Types of Sukuk
Structure and Mechanism
Ijarah
Most popular and widely traded due to its simplicity, it is a certificate of ownership in leased assets.
Ijarah sukuk is based on sale and leaseback, which entails buying equipment and leasing to a customer.
This sukuk provides its owners the right to own real estate, receive the rent, and sale of the sukuk
without affecting the right of the lessee, i.e., it is tradable.
Istisna
Istisna sukuk certificates are issued to raise funds required for producing products that are owned by
the investors. As practiced in some regions such as Malaysia, these sukuk refer to debt securitization
that is the receivables owed to the contractor.
Isthimar (Hybrid)
These hybrid sukuk combine financial assets such as Murabahah receivables and tangible assets such
as Ijarah leased asset in a specific proportion. In general, under AAOIFI rules, the portfolio must have
at least 33% Ijarah sukuk to be tradable in the secondary market; however in many cases, a more
conservative interpretation is used, where 51% of the portfolio must be Ijarah.
Manafae
The Manafae Sukuk structure is based on rights over underlying assets. The underlying asset is the
capacity or rights of commercial activities, and allows for the use of intangibles.
Mudarabah
These sukuk are a participatory type of investment sukuk that represent ownership of units of equal
value in the portfolio, and their returns are based on the proportion of share ownership. The owners of
such Sukuk are the Rabbul-mal (financier). Mudaraba Sukuk is used for enhancing public participation
in mega-investment projects.
Murabaha
Under this structure, the certificate issuer is the seller of the Murabaha commodity, the investors are
the buyers of that commodity, and the realized funds are the purchasing cost of the commodity. The
investors own the Murabaha commodity and are entitled to its final sale price upon the re-sale of the
commodity. This structure cannot be traded freely on the secondary market, as it reflects debt trading
instead of asset trading.
Musharaka
Musharaka sukuk are the second-most popular type of sukuk structures used after Ijarah sukuk. They
are used for mobilizing funds to establish a new project, develop an existing one, or finance a business
activity on the basis of equal partnership. Investors are the owners of the project or the assets of
the activity according to their respective shares, with all considered as financers. These Musharaka
certificates can be treated as negotiable instruments, and can be bought and sold in the secondary
market.
Project Sukuk
These are instruments intended to finance large infrastructure projects, and may include rights to
future assets, which are recognized as Shariah compliant.
Wakalah
The investors appoint an agent (wakeel) to invest their funds into a pool of investments or assets, and
the wakeel lends its expertise and manages those investments on behalf of the principal for a particular
duration to generate an agreed upon profit return. Due to structural issues relating to the Wakalah
structure, it has not been a popular structure.
Source: International Centre for Education in Islamic Finance (INCEIF)
12
© All rights reserved
RESEARCH DIVISION
BROKERAGE AND INVESTMENT
CENTERS DIVISION
RESEARCH
DIVISION
Senior Analyst
Analyst
Abdullah Alawi
Syed Taimure Akhtar
Sultan Al Kadi
+966 11 2256250
[email protected]
+966 11 2256146
[email protected]
+966 11 2256374
[email protected]
Senior Analyst
Analyst
Analyst
Talha Nazar
Saleh Al-Quati
Jassim Al-Jubran
+966 11 2256115
[email protected]
+966 11 2256046
[email protected]
+966 11 2256248
[email protected]
General manager - brokerage services and sales
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
Ala’a Al-Yousef
brokerage
Brokerage
+966 11 2256000
[email protected]
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256277
[email protected]
+966 12 6618400
[email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
AGM - Head of Institutional Brokerage
Central Region
Abdullah Al-Rahit
Samer Al- Joauni
Sultan Ibrahim AL-Mutawa
+966 16 3617547
[email protected]
+966 1 225 6352
[email protected]
+966 11 2256364
[email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and
operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct
securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory,
and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied
the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira
Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and
International markets, as well as offering a full suite of securities business.
1.
RATING
TERMINOLOGY
AGM - Head of Research
2.
3.
4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target.
Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels
over next twelve months.
Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target.
Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve
months.
Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks
rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve
months.
Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further
analysis of a material change in the fundamentals of the company.
Disclaimer
The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for
any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation
to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake
risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on
his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or
microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face
some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by
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condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness
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targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might
increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might
get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special
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