FW: RHB FIC Credit Market Update - 30/7/14

30 July 2014

Credit Market Update

All Eyes on FOMC Meeting and US Q2 GDP Before Credits 

REGIONAL                      

¨      Cautious trading expected ahead of US Q2 GDP and FOMC meeting. JACI spreads opened marginally wider on Monday (+c.2bps) before reversing tighter yesterday as investors struggled for direction. JACI Composite spread ended 2bps tighter at 234.1bps while the IG and HY space narrowed 3bps to 167.8bps and 1bp to 456.0bps respectively yesterday.  In the secondary space, we saw generally mixed trades with a tilt towards lower yields. China/HK IG USD papers were better bid, such as new Huarong (HRAM) 17 and HUWHY 22. Primary movers in the Singapore IG USD space include OCBCSP 37c17 and DBSSP 37c15 seniors which traded a couple of bps tighter. Meanwhile, US Treasury curve flattened as yield rose c.4bps at the short-end vis-à-vis declining yields along the mid- to long-end (-1bp to -3bps). Looking ahead, investors are likely to trade cautiously before US Q2 GDP release and FOMC meeting today amid ongoing Ukraine geopolitical tensions. We expect the GDP number to show a rebound in growth following a harsh weather-induced 1Q14 GDP, amid continuous QE tapering and broadly mixed home sales and job data this week.

¨      Active Asian USD supply. On the primary front, Singapore’s Olam International (NR) priced 5.5y USD300m at T+295bps. Meanwhile, we also saw high yield names tapping the USD space, such as Indonesian developer - PT Modernland (B2/B/B) and China’s KWG Property (B1/B+/NR). In the pipeline, China Merchants Bank (CHINAM) (Baa1/BBB+) has hired banks to arrange investors’ meetings for a potential USD bond offering.

¨      Further SGD swap curve flattening expected. The SGD swap rate flattened with short-to-medium yields gaining 0.5-2bps while the long-end tightened by 2bps, mirroring the long-end UST yields which have tightened by 2-3bps. We expect further flattening tendencies from short-term upwards rates pressure ahead of the FOMC policy statement that is due today. In the SGD credit market, we saw relatively light flows with buying interest in the newly-issued offshore marine Dyna-Mac, DMHLSP 17’ and property names like OUE 17’ and CMASP 17’ while we observed profit-taking on NOLSP 20’ and CHEUNG Pc16’.

MALAYSIA

¨      Ringgit corporates quiet ahead of long Raya break. Only few names traded on Friday whereby total activities were sluggish at MYR225m before the long Hari Raya holiday. Transaction was concentrated on mid- duration bonds such as Prasarana 3/19 closing 3bps tighter to 3.97% on MYR30m transactions; a series of Aquasar ranging 7/18-7/22 with total activities of MYR60m ending the day at 4.19%-4.68%; and IJM 6/22 saw MYR25m done closing flat at 4.80%.

TRADE IDEA: MYR

Bond	Sabah Credit Corporation (SCC) 6/22 (RAM: AA1) (Price: 95.45; Yield: 5.10%; Spread: MGS+c.129bps)
Comparable(s)	YTL Power 3/23 (RAM: AA1) (Price: 96.77; Yield: 4.95%; Spread: MGS+c.114bps); Kimanis 8/22 (RAM: AA3) (Price: 99.86; Yield: 4.97%; MGS+c.116bps)
Relative Value	We reiterate our overweight view on SCC 6/22 in the AA1 space, which provides an attractive opportunity to pick up c.35bps relative to the BNM’s indicative yield adjusted for maturity (BNM’s 8y adjusted-yield: c.4.75%). We think that the paper remains attractive given its unchanged yield (last traded on 16-Jun) since our last call on 9-Jun and still-wide spread. Further, we noticed that it is priced cheaper than some AA3 papers such as Kimanis 8/22, which is not accounted for given SCC’s 2-notch rating difference and relatively strong fundamentals in our opinion.
Fundamentals	1.     Systemic support highly likely. SCC primarily benefits from the high likelihood of systemic support from the State Government of Sabah (which owns 100% of SCC), given the extension of letters of support for SCC’s debt securities and expressed intention to maintain full ownership of SCC throughout their debt tenures. 2.     Healthy standalone financials. On a standalone basis, SCC exhibits improved financials as seen with its healthy Tier 1 and total capital ratios of c.18% and c.20% respectively as at end Dec-13, stronger pre-tax profit of MYR68.8m (+22%) and lower gross impaired-financing (GIF) ratio of 4% (source: RAM). Nevertheless, its stronger performance was mainly spurred by the rapid growth of the lucrative personal-financing segment, which could also pose downside risk on its GIF ratio in the future.