FW: RHB FIC Credit Market Update - 3/7/14

3 July 2014

Credit Market Update

Mild Profit Taking Seen USD APAC Before NFP as ADP Grew Stronger

REGIONAL                      

¨      Selling pressure on USD credits ahead of NFP; Treasuries lost ground on stronger private employment. JACI Composite spread narrowed 4.3bps (237.9bps), with IG and HY space tightening 4.0bps (172.0bps) and 5.7bps (458.7bps) respectively partly due to rising UST yields.  In the secondary space, Asian USD credits saw better selling as absolute yields generally widened a couple of bps. In the Singapore IG USD space, selling pressure on long papers was seen on OCBCSP subdebt 24 and DBSSP 37c14 senior. Meanwhile, US Treasuries yields rose along the mid- to long end (+5bps to +6bps) on significantly stronger-than-expected ADP employment (actual: 281,000; consensus: 205,000; prior: 179,000). This firms up the backdrop of an improving US economy as investors brace for potentially stronger trade balance and nonfarm payrolls tonight.

¨      Interest in bank names amid slower primary flows. SGD swap rates yesterday inched up 0.6bps across the curve following overnight UST rates widening amid better factory data from major economies, with China’s June PMI growing at its fastest pace this year. In the secondary credit space, investors sought quality bank names including DBSSP 23, ICICI 20 and EXIMBK 17. In addition, the new SHGSP 17 was last seen at 4.98%, 27bps inside its re-offer yield of 5.25%. On the primary front, Geo Energy Resources Ltd (NR) has plans for a new SGD issuance following its establishment of a SGD300m MTN programme, more details to be announced.

MALAYSIA

¨      Moderate secondary credit flows; focused on financial and toll road sector. Trading activities were moderate yesterday at MYR490m amid active primary market with new issuances of B3 T2 from RHB (MYR1bn) and CIMB Thai (MYR400m) as well as Sabah-based Sepanggar Bay Power (MYR468m). We saw high activities in financial and tollroad bonds with investors’ interest skewed towards mid-to-long duration. Among the highly traded bonds were Plus with total transaction of MYR90m maturing 01/19-01/38 ending at 4.19%-5.35%; NBAD 12/27 narrowed by 3bps to 4.97% (since 26-June) on MYR40m activities; and Kesturi ranging 12/19-11/29 closing at 4.71%-5.58% on combined transactions of MYR44m.

TRADE IDEA: MYR

Bond	Sabah Development Bank (Sabah Dev) 8/19 (AA1) (price: 97.92; yield: 4.76%; spread: MGS+c.108bps)
Comparable(s)	Sabah Dev 5/16 (AA1) (price: 99.59; yield: 4.37%; MGS+c.87bps) IJM 4/21 (AA3) (price:100.69; yield: 4.73%; MGS+c.84bps)
Relative Value	We initiate a call on Sabah Dev 8/19 in the AA1 space which offers pickup value of c.23bps relative to BNM’s indicative AA1 curve (BNM 5y AA1 yield: 4.38%), having adjusted for 1y duration differential. Further, we noted it is priced broadly at par with AA2 and some AA3 papers, which is not accounted for given its relatively stronger fundamentals in our opinion. On a relative valuation basis, Sabah Dev 8/19 is 3bps cheaper than property player IJM 4/21 (AA3) despite the former’s slightly shorter duration and 2-notch rating difference.
Fundamentals	1)     High likelihood of systemic support from the State Government of Sabah (which owns 100% of Sabah Dev), given large deposit placements and provision of letters of support for Sabah Dev’s debt securities. 2)     Moderate financials on stand-alone basis. Sabah Dev recorded adequate Tier 1 RWCAR ratio of 17.7% as at end Aug-13 but weaker gross impaired loan ratio of 13.2% (source: RAM). Meanwhile, we noted its heavy dependence on wholesale borrowings with a large portion of loans extended to state government-related agencies or projects, but view the state government’s support as readily available if needed