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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 © All rights reserved 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. © All rights reserved 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. © All rights reserved 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 © All rights reserved 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 © All rights reserved 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 © All rights reserved 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 Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be 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 or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price 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 circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. 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One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations. Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: Madinah Road, Mosadia، P.O. Box: 6277, Jeddah 21442, Saudi Arabia، Tel: 02 6692669 - Fax: 02 669 7761 Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37