2. Table of Contents
2
1. Introduction Page 3
2. Benchmarks Page 4
a) Central Bank of Kuwait Discount Rate
b) 3-Month USD LIBOR
c) JP Morgan Emerging Markets Bond Index
d) Citigroup MENA Broad Bond Index
e) Citigroup Sukuk Index
f) Conclusion
2. Investment Guidelines Page 10
4. Sample Portfolio - Sukuk Page 12
a) Methodology
b) Portfolio versus index
c) Securities
3. Introduction
3
The Treasury department of Company K provides services to both the firm’s
internal departments and clients in both the International and Domestic markets.
It is responsible for the management of the firm’s assets and liabilities, cash flow,
provide money market and foreign exchange services both internally and to
clients, as well as invest in global bonds and sukuks.
This proposal is to increase the funds allocated to the treasury department to
invest an additional proportion into fixed income securities. The objectives are
the following:
Invest in income generating papers with downside protection and upside participation
Top down approach to investing with bottom up expertise to select the papers with a
higher excess return per unit of risk
Utilize Company K’s global links to source deals globally
Utilize Company K’s cost of funding, and provide an additional 150-200 basis points
return as a minimum return of investment
Adhere to the investment guidelines set forth and agreed by the Assets and Liabilities
committee.
4. Benchmarks
4
There is no legal requirement for Company K to benchmark its portfolio
against any index. However as a guide, there is numerous benchmarks to
be used as a basis for establishing investment guidelines and performance
monitoring. For example:
1. CBK Discount rate:
a. The cost of funding for Company K’s departments in KWD is the CBK’s discount
rate plus 50 basis points which equals to 2.5%. Cost of funding in US$ is 0.75%
+ 50 basis points which equals to 1.25%
5. Benchmarks
5
2. 3-Month USD Libor:
a. Most common benchmark index for various debt instruments including
government and corporate bonds, mortgages, loans, to derivatives. Currently
0.36%.
6. 6
Market Cap: US$ 657.4 Bn
Number of issues: 437
Countries: 61
Sovereign Allocation: 74.83%
Corporate Allocation: 25.17%
Average Yield to Worst (%): 5.11
Average Duration (years): 6.94
3. JP Morgan Emerging Markets Bond Index (EMBI):
a. This index constitutes the hard currency issues of Emerging Markets. The
market weighted index covers global papers that are over US$ 500M, and each
country is weighted depending on its number of issues and value of the bond
issuances.
7. 4. Citigroup MENA Broad Bond Index (MENAABBI)
a. This index measures the performance of both investment-grade and high yield US$
denominated debt issued by governments, agencies, and corporations domiciled in the
MENA region. Minimum issue size of at least US$250M and at least one year until maturity
are conditions to be included in this index.
• Market Cap: US$ 148.4 Bn
• Number of issues: 163
• Countries: 18
• Sovereign Allocation: 41.05%
• Corporate Allocation: 58.95%
• Average Yield to Worst (%): 3.81
• Average Duration (years): 5.05
7
8. 4. Citigroup Global Sukuk Index
a) This index measures the performance of US$ denominated global sukuks that are at least
BBB- in credit quality and over US$200M in issue size.
• Market Cap: US$ 59.44 Bn
• Number of issues: 70
• Countries: 11
• Sovereign Allocation: 52.26%
• Corporate Allocation: 47.74%
• Average Yield to Worst (%): 2.82
• Average Duration (years): 4.36
53%
20%
17%
10%
0% 10% 20% 30% 40% 50% 60%
MENA
Asia
G20
Others
8
9. Note on Index Calculations:
Indices are based on weighted average market value of bonds and sukuks according to the
index’s guidelines. For example, Saudi Arabia’s Electricity Company (SECO) has a total of
6 issues that fit the guidelines of Citibank’s Sukuk Index. The current market value of those
issues constitute over 10% of the overall index. The majority of the sukuks are MENA
based, hence the large weigh of the index on the MENA region. The index is constantly
changed to reflect market changes of both issues and market value of papers. For
example, if the number of issues out of Asia during 2016, outnumber those in MENA, than
the Citibank Sukuk Index will become more Asia skewed than MENA.
Conclusion:
Given that the majority of the investments will be made in USD, we believe that the right
benchmark would be Company K’s US$ cost of funding which currently stands at 1.25%. In
the case Company K will be borrowing in Kuwaiti Dinars and exchanging the funds into
USD, then the CBK Discount rate + 50 basis points will be used as a benchmark.
From the above indexes we propose using the Citibank Sukuk Index as a basis for
constructing Company K’s investment guidelines with the Rating and Sector distribution of
the Citibank MENA Broad Bond Index to take advantage of the number of unrated papers
in the region that are backed by rated institutions.
9
10. Investment Guidelines
10
Given the nature of Company K's portfolio to invest in bonds and sukuks with no
legal requirements to benchmark against an index, the investment guidelines set
forth were based on combining the best measures taken by several treasures and
fund managers of highly reputable financial institutions. Existing indexes were
used as a guideline, however the aim of Company K's portfolio is to beat the
index, hence modeling our guidelines to achieve that aim
The guidelines on the next page were set as a basis that our investment in any
particular exposure to a geography, indusrty, or credit rating do not exceed the
maximum threshhold
Portfolio Rationale
Portfolio Objective
The Portfolio aims to provide returns in excess of Company K's US$ Cost of funding
plus 200 basis points.
Portfolio Strategy
The Portfolio's assets are actively invested in fixed income securities issued by
sovereign, qusai sovereign, and corporate issuers in accordance with the agreed
upon guidelines by the Asset and Risk Committee
11. Investment Guidelines
11
Investment Criteria * Country Exposure
Up to (%)
MENA 55%
Asia 50%
G20 Countries 30%
Other 30%
* Sector Exposure
Up to (%)
Government/Quasi/Supranational 100
Financial Services 60
Real Estate 50
Other sectors 30
* Credit Rating Exposure
(S&P format, range includes - and +)
Up to (%)
AAA/AA 100%
A 80%
BBB 55%
Investment Grade
Unrated and High Yield 25%
* Sukuk rating will be based on S&P, Moody's, and Fitch. In the case of a discrepancy the lower
rating will apply
* No more than 10% of the overall portfolio shall be allocated to any one Sukuk
* No more than 10% of the overall Sukuk shall be allocated to the portfolio
12. 12
Methodology:
1. Out of 390 active Sukuks with an outstanding issue of at least US$ 200Million, 112 were
selected for further screening.
2. The 112 Sukuks met the following criteria:
a) Hard Currency (USD, Euro, GBP, AED)
b) Settlement enabled through Euroclear or Clearstream
3. 64 sukuk papers were selected for further screening based on:
a) Underperforming versus peers
b) Attractive coupon versus peer
c) Attractive Yield to Maturity versus peer
4. 48 sukuk papers have been proposed
Sample Portfolio - Sukuks
13. Sample Portfolio - Sukuks
Portfolio outcome based on the set investment guidelines:
1. Number of sukuks: 48
2. Portfolio rating: BBB+
3. Weighted coupon: 4.12%
4. Weighted duration: 4.26
5. Weighted Yield to Maturity: 4.03%
A relatively low risk portfolio with a duration of less than 5 years takes into account market volatility.
Only US$ denominated papers were selected which removes the exchange rate risk.
Sector No. of papers Region No. of papers
Government 15 MENA 25
Financial 15 Asia 10
Real Estate 5 G20 9
Other 9 Snat 4
Snat 4
Total 48 48
13
14. Sample Portfolio vs. index
Proposed Portfolio Citi Sukuk Index Citi MENA Index
Number of papers 48 70 163
Average Coupon (%) 4.12 3.56 4.97
Average Life (Years) 5.89 5.42 6.77
Average Yield to Maturity (%) 4.03 2.82 3.81
14
15. Securities
15
Number Security Region Sector S&P Rating Comments
1 ADIBUH 6.375 2049 Mena Financial N/A Abu Dhabi Islamic Bank Perpetual
2 ALBRK 6.25 2019 G20 Financial BB AlBaraka Bahrain's bank in Turkey
3 ALDAR 4.348 2018 Mena Real Estate BBB- Abu Dhabi's largest real estate developer
4 ALHILA 3.267 2018 Mena Financial N/A Islamic bank based in Abu Dhabi
5 ASYAKA 7.5 2023 G20 Financial N/A Turksh Islamic bank
6 BHRAIN 6.273 2018 Mena Government BBB- Governement of Bahrain
7 DAMACR 4.97 2019 Mena Real Estate BB Regional real estate developer based in Dubai
8 DANAGS 9 2017 Mena Other N/A Regional oil company based in Abu Dhabi
9 DARALA 5.75 2018 Mena Real Estate B+ Riyadh based, Saudi real estate developer
10 DIBUH 2.921 2020 Mena Financial N/A Islamic bank based in Dubai
11 DIFCAE 4.325 2024 Mena Financial BBB- Financial sector of Dubai
12 EIBUH 4.147 2018 Mena Financial N/A Islamic bank based in dubai
13 EMAAR 6.4 2019 Mena Real Estate BBB- Regional real estate developer based in Dubai
14 EMAARM4.564 2024 Mena Real Estate BBB- Mall management arm of Emaar properties
15 GARUDA 5.95 2020 Asia Other N/A Indonesia's national carrier
16 INDOIS 3.3 2022 Asia Government BB+ Government of Indonesia
17 INDOIS 4 2018 Asia Government BB+
18 INDOIS 4.325 2025 Asia Government N/A
19 INDOIS 4.35 2024 Asia Government N/A
20 INDOIS 6.125 2019 Asia Government BB+
21 INVCOR 3.508 2020 Mena Financial N/A Investment arm of the government of Dubai
22 ISDB 1.357 2017 Snat Snat AAA Islamic Development Bank
23 ISDB 1.535 2018 Snat Snat AAA
24 ISDB 1.8118 2019 Snat Snat N/A
25 ISDB 1.831 2020 Snat Snat N/A
16. Securities
16
Number Security Region Sector S&P Rating Comments
26 KFINKK 5.162 2019 G20 Financial N/A KFH's Turkish bank
27 MAFUAE 4.5 2025 Mena Other BBB Dubai's argest mall operators and family conglomerate
28 MAFUAE 5.85 2017 Mena Other BBB
29 MUMTAK 4 2021 Mena Government BBB- Investment arm of the government of Bahrain
30 NOORBK 2.788 2020 Mena Financial N/A Islamic bank based in Dubai
31 PETMK 2.707 2020 Asia Other A- National oil company of Malaysia
32 PKSTAN 6.75 2019 Asia Government B- Government of Pakistan
33 QIBKQD 2.754 2020 Mena Financial N/A Islamic bank based in Qatar
34 RAKS 3.094 2025 Mena Government N/A Government of Ras Al Khaima
35 SECO 3.473 2023 Mena Other AA- Saudi Arabia's utility company
36 SECO 4 2024 Mena Other AA-
37 SECO 5.06 2043 Mena Other AA-
38 SECO 5.5 2044 Mena Other AA-
39 SIB 2.843 2020 Mena Financial N/A Islamic bank based in Sharjah
40 SIB 2.95 2018 Mena Financial BBB+
41 SIMEMK 2.053 2018 Asia Government A- Diversified multinational based in Malayasia
42 SIMEMK 3.29 2023 Asia Government A-
43 SOAFSK 3.903 2020 G20 Government BBB- Government of South Africa
44 TUFIKA 3.95 2018 G20 Financial N/A Saudi Arabia's NCB Turkish entity
45 TUFIKA 5.375 2019 G20 Financial N/A
46 TURKSK 2.803 2018 G20 Government NR Government of Turkey
47 TURKSK 4.489 2024 G20 Government N/A
48 TURKSK 4.557 2018 G20 Government N/A
