CONFIDENTIAL
S UKUK B OND I NDEX C RE ATION
March 05, 2010 Submitted by: Sutherland Global Services C-2, Wagle Industrial Estate, MIDC, Thane – West, Mumbai 400 604, India
Table of Content SCOPE OF THE PROJECT .......................................................................................... 3 SUKUK BOND INDEX CREATION METHODOLOGY (FOR MENA)..................................... 3 Screening 1- Defining the universe ............................................................................................. 3 Screening 2- Security selection ................................................................................................... 3 Index Weighting........................................................................................................................... 4 Rebalancing ................................................................................................................................ 4 Return Computation .................................................................................................................... 4
APPENDIX 1 ............................................................................................................ 5 Universe selection methodology & rationale ............................................................................... 5
APPENDIX 2 ............................................................................................................ 6 List of countries included in MENA region: ................................................................................. 6
Scope of the project Sutherland to assist in the development and maintenance of Sukuks indices – MENA Sukuk Index Global Sukuk Index Steps in the creation of the above mentioned indices starting with instrument universe identification to total index rate of return calculation methodology. Identifying the Sukuk bond universe Instrument selection process Index weighting Portfolio rebalancing Security & Index return calculations
Sukuk Bond Index Creation Methodology (for MENA) Screening 1- Defining the universe We would select the securities to be included in the index based on two parameters: Issuer type – The indices should only constitute of Sukuks issued by corporates. Shari’ah compliance – Only those Sukuks which are classified as Shari’ah compliant by Bloomberg have been selected. Of the 1500+ sukuks listed on Bloomberg, 140 are Shariah compliant.
Screening 2- Security selection Current face amount outstanding – The Shari’ah compliant Sukuk bonds will be further narrowed down by selecting only those issues having the current face amount outstanding of USD 250 mn and above. If any issue’s current face amount outstanding drops below this mandate due to either scheduled retirement or the principal amortization, the security will be truncated from the index at the next month-end rebalancing date. Those existing issues which augment in size through reopening will be considered for index inclusion subject to satisfying the minimum current face outstanding criteria. Time to Maturity – Securities with maturities of atleast one year will be considered for inclusion in the index. Currency Denomination – We can make this a US$ denominated index as majority of the sukuks are either USD denominated or in a currency pegged to it (SAR). The shortlisted set of securities constitute of only four currencies: USD (36%), MYR (27%), AED (18%) and SAR (18%). Quoted price availability – The client to provide us with daily bid prices from 3 dealers. In situations where reliable prices during a period become unavailable, it will be subsequently truncated from the index at its next month-end rebalancing date.
Index Weighting Traditional Approach – The weight of each security in the index is determined by evaluating the proportion (%) of the issue’s market capitalization to the total index’s market capitalization. Market capitalization of each security is calculated by multiplying its bid-side settlement price to its face amount outstanding value. Liquidity Adjusted Ratings – Liquidity ratings of Sukuks can be acquired from independent agencies, which can be thereafter used to calculate liquidity-adjusted market capitalisation
Rebalancing Addition of new securities (Timing) – New issues that adhere to the index inclusion criteria would be added to the listing on the first month-end business date post its th issuance. However, its issue date must fall before a specified date (say 15 ) of the month. New securities that fall post this specified date would be included in the index on the last business day of the following month. Increase/Decrease in amount outstanding – When a security’s current face outstanding drops below the minimum threshold value requirement of USD 250 mn due to retirement or principal amortization, the sukuk will be removed from the index. In the ensuing period if a sukuk increases in size to qualify the minimum current face amount outstanding requirement, the same will be considered for inclusion in the index
Return Computation Rate of Return calculation for individual security: Total Rate of Return: [(Period End Value/Beginning Period Value)-1] x 100 Where Beginning period value includes Beginning of period price and Accrued interest Where Period End value includes Period End price, Accrued interest, Principal payments, coupon payments and Reinvestment income The computation of total returns is based on the assumption that every security is purchased at the beginning period & redeemed at the end of the period For multi-currencies, currency movements are also included in total return Return calculations will incorporate currency fluctuations on a day to day basis
[Total Rate of Return X (FXi,t / FXi,t-1 -1)] (where FXi,t is Foreign currency exchange rate for currency i measured in U.S. dollars per unit of foreign currency)
Rate of Return calculation for the index: The daily index value is calculated based on the daily total return of each individual security and its weight the index is based on the market capitalization of the security at the close of previous business day
Appendix 1 Universe selection methodology & rationale
From a list of 1,500+ corporate Sukuks enlisted in Bloomberg, Shari’ah compliant Sukuks were short-listed. The total Sukuks selected at this stage were 140
Country of risk Bahrain Kuwait Malaysia Pakistan Qatar Saudi Arabia Supra-National UAE United States Grand Total
AED 7 7
MYR 87 2 2 91
PKR 3 3
SAR 9 9
USD 5 6 1 2 3 1 12 30
Grand Total 5 6 88 3 2 14 1 19 2 140
The 140 Sukuks selected were then screened on the basis of amount outstanding. We selected Sukuks with amount outstanding of USD 250million and above since these comprised 82% of the total amount outstanding (universe of 140). The resultant number was 37 Sukuks The last level filtering adopted was Sukuks with maturity greater than 1 year. There are 33 Sukuks meeting the criteria Of the final list of 33 Sukuks, 23 belong to the MENA region. The graph shown below displays the country-wise split of the final 33 Sukuks 3% 3% 30%
21%
42%
Bahrain
Qatar
Saudi Arabia
Malaysia
UAE
No currency constraint will be imposed on the index as the currencies of the Sukuks in this index are fairly distributed as can be seen in the graph below.
18% 36%
18%
27%
SAR
AED
MYR
USD
The return calculation will accordingly appropriately incorporate day-to-day currency rate fluctuations.
Appendix 2 List of countries included in MENA region:
Algeria Bahrain Cyprus Djibouti Egypt Iran Iraq Israel Jordan Kuwait Lebanon Libya Morocco Oman Palestinian territories (the West Bank and Gaza Strip) Qatar Saudi Arabia Syria Tunisia Turkey United Arab Emirates Yemen