Oil Heads for First Weekly Drop Since September on European Debt Concern

Oil headed for the first weekly decline since September in New York as signs Europe’s debt crisis is spreading countered speculation economic recovery in the U.S. will boost demand in the biggest crude consumer.

Futures were little changed, after slipping as much as 0.8 percent, and headed for the first weekly drop in seven weeks. Prices fell below $100 a barrel yesterday as European bond yields rose, signaling leaders are struggling to stem the crisis that threatens economic growth and demand for commodities. Claims for U.S. unemployment benefits decreased to the lowest level in seven months, the Labor Department said.

“Europe is clearly where eyes are focused for all markets at the moment,” said Michael McCarthy, a chief market strategist at CMC Markets Asia Pacific Pty. in Sydney. “The potential for it to knock global growth prospects significantly is still there. We could see a pullback from these levels before heading higher again.”
Crude for December delivery declined as much as 81 cents to $98.01 a barrel in electronic trading on the New York Mercantile Exchange and was at $98.91 at 1:35 p.m. Sydney time. The contract yesterday dropped $3.77, or 3.7 percent, to $98.82, the lowest settlement since Nov. 14. Prices are down 8 cents this week. The December contract expires today. The more-active January contract slid 5 cents to $98.88.

Brent oil for January settlement was at $108.17 a barrel, down 5 cents, on the London-based ICE Futures Europe exchange. The European benchmark contract’s premium to U.S. futures was at $9.26, compared with a record $27.88 on Oct. 14.

Debt Crisis

“Oil benchmarks plunged on fears of contagion from Europe’s debt crisis,” Mark Pervan, head of commodity research at Australia & New Zealand Banking Group Ltd. in Melbourne, said in a note today. “Bearish sentiment in Europe outweighed solid U.S. data.”

New York crude may fall next week on heightened concern that Europe’s debt crisis is spreading and will hurt demand, according to a Bloomberg News survey. Eighteen of 36 analysts forecast oil will fall through Nov. 25. Eleven predicted a gain, and seven said there will be little change. Last week, 58 percent of those surveyed projected a drop.

Applications for jobless benefits decreased 5,000 in the week ended Nov. 12 to 388,000, Labor Department figures showed yesterday. Housing starts decreased 0.3 percent to a 628,000 annual rate in October, according to the Commerce Department. The median estimate of economists surveyed by Bloomberg News called for a drop to 610,000. Building permits, a proxy for future construction, jumped 10.9 percent. (Bloomberg)

Malaysia Fund: RHB Islamic Bond Fund Steps Out of Recommended Fund

Key Points:

• RHB Islamic Bond Fund (the Fund) invested RM8 million nominal value in Ample Zone Class C Sukuk, and constituted 13.65% of the fund size.
• The credit rating of this Class C Sukuk has been downgraded by Malaysian Rating Corporation Bhd (MARC) from B+IS to B-IS.
• This reflects that there is a heightened risk that the Class C Sukuk may fail to honour repayment when it matures on 27 January 2012.
• We remain unclear on whether RHB Islamic Bond Fund will do any impairment or write-down if Ample Zone fails to repay its repayment in January 2012.
• We advise potential new investors not to buy into this Fund.
• We will also remove the Fund as our Recommended Fund under the category of Malaysia Bond Islamic.
• Our advice for existing unit holders, after considering the potential default of Ample Zone is to switch to another Islamic bond fund. Fund to consider is AmBon Islam. 
   
   
  What is Our Concern?
  As at 30 September 2011, RHB Islamic Bond Fund (the Fund) has an investment in Ample Zone Class C sukuk of RM5 million and RM3 million holdings in nominal value which were purchased on 13 May 2005 and 18 May 2005 respectively. Ample Zone Class C Sukuk is the largest holdings of the Fund and constituted 13.65% of the fund size. 
  
  
  The credit rating of this Class C Sukuk has been downgraded by Malaysian Rating Corporation Bhd (MARC) from B+IS to B-IS to reflect that there is a heightened risk that the Class C Sukuk may fail to honour repayment when it matures on 27 January 2012. 
  
  
  Who is Ample Zone?
  According to MARC, Ample Zone is a special purpose vehicle established in 2005 for the sole purpose of raising fund via issuance of RM150 million Sukuk (refer to Table 1). 
  
  
  Table 1: Breakdown of Ample Zone Sukuk 

          Class A                        RM50 million
          Class B                        RM25 million
          Class C                        RM75 million
          Class D                        RM150 million
Source: MARC, iFAST compilations

The proceeds from the Sukuk were used to acquire four properties, namely,

1. Menara Maxisegar
2. Wisma Talam
3. Midpoint Shopping Complex
4. Pandan Kapital Shopping Complex

The properties were subsequently leased back to the respective sellers, which includes three subsidiaries of Trinity Corporate Bhd (Trinity - formerly known as Talam Corporation Bhd) and one private company.

As Wisma Talam was disposed in January 2008, the RM50 million Class A Sukuk and part of Class B Sukuk were redeemed at the same time. The remaining properties supporting the Sukuk are Menara Maxisegar, Midpoint Shopping Complex and Pandan Kapital Shopping Complex, which are now leased to Trinity. 

How is The Sukuk Structured?

Based on MARC, Ample Zone Class C Sukuk was structured based on expected cash surplus from the rental payments, after profit payments to the Class A and B Sukuk and all relevant expenses of Ample Zone.

An Option Agreement is given by Trinity to the Sukuk Trustee, where the Sukuk Trustee can require Trinity to purchase the properties if the sellers fail to honour their payment obligation. 

If Trinity are unable to honour its obligations on exercise of the Option Agreement, property agents will be appointed by Sukuk Trustee or Ample Zone to dispose off the properties in order to raise proceeds to meet the payment obligations for the Sukuk.

Why Ample Zone May Miss The Repayment?

Due to the continued non-payment of rentals from Trinity, the Sukuk Trustee has exercised the option given by Trinity to require Trinity to purchase the properties. However, due to its strained financial position, Trinity will only be able to honour its obligation by disposing the properties to external parties. 

Referring to the announcement from MARC, the Sukuk Trustee has initiated the disposal of the remaining three properties since 1Q 2010 but has not been successful in concluding a sale of any of the three properties. Ample Zone, the issuer of the Sukuk, is dependent on the disposal of properties to meet its repayment obligations that are due on 27 January 2012. As such, failure to dispose the properties before the payment date may trigger Ample Zone to default on its repayment. Total repayment for Class B and Class C Sukuk amounted to RM88.5 million, of which RM84.6 million relates to principal repayment.

What Are The Impacts to RHB Islamic Bond Fund?

As there is insufficient information on occupancy rates, rental rates and tenant diversification, current market value of these three properties cannot be estimated. Based on MARC’s valuation in 2006, the market value and the forced-sale value of the three properties are RM176.0 million and RM139.2 million respectively. This is more than enough to cover the RM88.5 million of repayment.

Table 2 shows the possible treatments of RHB Islamic Bond Fund in recoginising the Sukuk Value under different assumed situations.

Table 2: Impacts to RHB Islamic Bond Fund under different assumed situation
              Situations                                               Possible Treatment
1. Manage to dispose the properties before            No impairment and write-down
    payment date and the proceed is enough 
    to repay RM88.5 million. No default on 
    Ample Zone Sukuk    

2. Manage to dispose the properties before           Possible impairment or no action taken
   payment date but the proceed is only 
   enough to repay part of RM88.5 million.
   Partial default on Ample Zone Sukuk 

3. Not manage to dispose the properties               Possible impairment or write-down or no action
    before payment date.                                        taken
    Default on Ample Zone Sukuk  

Source: iFAST assumptions

We believe that situation 2 and 3 are likely to happen going forward. The adverse impacts to RHB Islamic Bond Fund are much depended on the treatment of the Fund in recognising the Sukuk value after the default. The Fund may impair or write-down the Sukuk value after the default or may have no action taken due to the reason that the Sukuk is pledged by properties, which could be disposed later and subsequently repay the Sukuk holders. 

Having said that, we remain unclear on whether RHB Islamic Bond Fund will do any impairment or write-down if Ample Zone fails to repay its repayment in January 2012. Any impairment or write-down will trigger a sharp decline on the Net Asset Value (NAV) of the Fund.

Remove RHB Islamic Bond Fund as Recommended Fund

Going forward, the outlook for RHB Islamic Bond Fund remains uncertain and the Fund faces the risk with regards to impairment or write-down of the Ample Zone Class C Sukuk. As such, we advise potential new investors not to buy into this Fund. Meanwhile, we will also remove the Fund as our Recommended Fund under the category of Malaysia Bond Islamic.

In our previous article, Dissecting The Recent Drop in RHB Islamic Bond Fund, we advised existing unit holders of RHB Islamic Bond Fund to hold on the Fund. Our advice for existing unit holders, after considering the potential default of Ample Zone is to switch to another Islamic bond fund. Fund to consider is AmBon Islam. (Source: fundsupermart.com)

METALS OUTLOOK: Gold Expected To Continue To Rise Next Week

 Gold prices could continue to find buying interest next week as investors are likely to stay nervous regarding the European sovereign debt situation and start to turn their attention to the U.S. “super committee” charged with federal spending cuts.

On the week, December gold futures prices on the Comex division of the New York Mercantile Exchange settled at $1,788.10 an ounce, up 1.88% on the week. December silver settled at $34.682 an ounce, up 1.75% on the week.

In the Kitco News Gold Survey, out of 34 participants, 22 responded this week. Of those 22 participants, 18 see prices up, while two see prices down and two see prices sideways or unchanged. Market participants include bullion dealers, investment banks, futures traders and technical chart analysts.

Market participants are keeping an eye on Europe after the Greek prime minister stepped down and Italy’s prime minister is planning to leave. Analysts at Brown Brothers Harriman said the political uncertainty appears to be easing gradually, with a technocratic government – that is a government run by people based upon how knowledgeable and skillful they are in their chosen field – slated to take over in Greece. Italy could see the same type of government in place next week following votes on austerity packages.

The easing of the political worries helped yields on Italian 10-year bonds pull back to under 7%, which many analysts said is key as that level is where Greece and Portugal need to reach out for help.

Tensions over Europe’s situation may have eased for the moment, but it doesn’t mean all is well. Analysts at Commerzbank said “it is still unclear whether a new government in Italy will be able to successfully consolidate its budget without external help. Gold should therefore continue to profit from the persisting high uncertainty.”

Rich DeFalco, president, West Cooper Asset Management, concurred, adding that gold prices should continue to move higher because of the turmoil in Europe is so entrenched.

If the European Central Bank has to expand its balance sheet to shore up ailing European economies, gold is likely to hit new records into 2012, said TD Securities. “We would undoubtedly have markets worrying that inflation will be used to address Europe’s fiscal problems. It is also likely that governments may want to create above trend inflation in order to reduce the real value of the debt issued by Greece, Italy, Spain, etc. We would also expect that real yields move lower and short-term rates remain at near-record lows for years,” they said.

Gold prices rallied sharply on Friday, supported by the dollar weakening and the stock market rallying. Charles Nedoss, senior market strategist at Olympus Futures, said that with no fresh headlines out of Europe there was less need for investors to seek safety in the dollar.

Gold fell earlier in the week, but DeFalco and some other market watchers said that may have been related more to the problems regarding customer funds at now-bankrupt firm MF Global than to the near-term desirability of gold. Customer accounts have been moved to other clearing firms, but not all positions or monies have accompanied the move and that might have caused accounts that do not have sufficient margin to sell other assets to top off the accounts. Market watchers said that seems to be the case in other markets besides precious metals, too, as prices for some commodities seem to be lower than fundamentally justified in the short-term.

Market watchers said by the end of next week, many more investors will keep an eye on the back and forth between the selected members of the Joint Select Committee on Deficit Reduction, known as the super committee. The group is charged with the task of cutting $1.2 trillion from the budget over the next decade. If they cannot come to an agreement, automatic cuts of that size kick in. The uncertainty that might surround what this group is doing could support gold, especially if it comes down to the last-minute, which could happen given past history of other Congressional decisions.

Economic news for next week includes retail sales and inflation data. Official inflation data remains subdued, with consumer price index estimates for October suggesting to be flat versus a rise of 0.3% in September. (Kitco News)