FW: RHB FIC Credit Market Update - 4/7/14

4 July 2014

Credit Market Update

Credits Spread Tightened After Series of “Unfriendly” Job Data

REGIONAL                      

¨      Asian USD credit yields rose across broad durations; quiet market expected post strong employment numbers. JACI Composite spread stood flat at 237.9bps, with IG and HY space remaining unchanged at 172.0bps and 458.7bps respectively. Asian credits generally saw better selling as yields continued to inch higher. We saw yields rising a couple of bps wider on papers such as SINOPE 18, YUEXIU 23 and UOBSP 17 senior. Meanwhile, US Treasuries saw yields rising at the short- to mid-end (+2bps) on stronger job numbers ahead of Independence Day today. Looking forward, we expect a relatively quiet session subsequent to the strong US nonfarm payroll number (actual: 288,000; consensus: 215,000) and lower unemployment rate (actual: 6.1%; consensus: 6.3%) as credits may trade on a weaker tone.

¨      SGD flows held back ahead of NFP data. SGD swap curve widened further yesterday between 4-6bps following USTs retreating overnight on further speculation amid stronger private employment. Meanwhile in the secondary space, flows waned although we noted buying interest amid slightly higher rates in perps and bank names. On the primary front, Bank of East Asia SG Branch (A2/Neg; -; -) is issuing a 3y 2.00% SGD50m Senior note.

MALAYSIA

¨      BGSM led PDS trades. Secondary trades were active yesterday with total transactions of MYR576m, fueled by buying interest in BGSM. BGSM 12/19 recorded MYR210m transactions (36% of total volumes), with yield tighten by 2bps to 5.03% since 24-June. Among the top movement were soon-to-mature SDBB 7/14 widen by 12bps to 3.83% from 3.71% on MYR30m transactions; and Ambank Senior Notes 3/15 ending at 3.87% (+8bps since 27-June) on MYR40m trades. Meanwhile, we expect Malaysia trade balance data set to be released today to moderate further due to dawdling growth in export on the back of mixed global economic recoveries.

TRADE IDEA: MYR

Bond	Tanjung Bin Power 8/19 (AA2) (price: 99.12; yield: 4.73%; spread: MGS+c.100bps)
Comparable(s)	Encorp 11/18 (AA2) (price: 100.44; yield: 4.36%; MGS+c.78bps) Imtiaz II 3/19 (AA2) (price: 99.98; yield: 4.60%; MGS+c.87bps)
Relative Value	We initiate a call on Tanjung Bin Power 8/19 which was traded relatively cheap in the AA2 space. It provides a potential pick-up value of 15bps against BNM AA2 curve (BNM 5y AA2 yield: 4.58%), while we opine that a switch from similarly rated paper, Encorp 11/18 to Tanjung Bin Power 8/19 may provide potential pickup of c.22bps, adjusted for duration differential.
Fundamentals	1)     Long-term contract with Tenaga Nasional Berhad which expires on 27 September 2031, alongside favourable terms in the contract provides comfort on long-term cash flows. Tanjung Bin Power is an independent power producer, granted the right to construct, own and operate a 2,100MW coal-fired power plant in Tanjung Bin, Johor under a Power Purchase Agreement with Tenaga Nasional Berhad. 2)     Intact credit profile with operational issues from prolonged operation at maximum capacity resolved. Tanjung Bin Power’s credit metrics remained healthy with finance service coverage ratio of 2.7x for the FY13 (FY12: 1.3x) despite available capacity payment losses and daily utilization payments suffered in FY13 (accounting for 22% of total potential revenue) due to operational issues.