FW: RHB FIC Credit Market Update - 9/7/14

9 July 2014

Credit Market Update

Better Buying in Credits Amid Uncertain Recovery Momentum

REGIONAL                      

¨      Asian USD credits continue to see flows at long-end. JACI composite spread was broadly unchanged (-0.8bps to 231.8bps) with mixed movements on the IG (-1.6bps to 166.5bps) and HY space (+2.2bps to 449.4bps). We saw most USD IG bonds rallying particularly at the long end as yields inched lower, suggesting that investors remain unconvinced towards the sustainability of the current recovery momentum and may be expecting dovish FOMC meeting minutes tomorrow. Primary movers in the China/HK space include CNOOC 33 and CHIOLI 42 while in the Singapore IG USD space, STSP 31 and OCBCSP 24 subdebt similarly saw yields declining. Meanwhile, US Treasuries continued to rally at the mid- to long-end (-4bps to -6bps) amid a selloff in US equities. Looking forward, we expect the credit markets to remain firm although investors may take a cautious view ahead release of FOMC meeting minutes.

¨      SGD credits fairly active despite lack of catalysts. SGD swap rates tightened 1-3bps across the curve as USTs rallied overnight amid speculation that recent uptick in inflation and jobs data will not be compelling enough for an early rate hike. Meanwhile, secondary credit activity was relatively firmer as we noted movements in SUNHUN, DBSSP, TEMASE and CHEUNG perps. In addition, the new Pacific International Lines traded up slightly with PBs adding more of the stock while Geo Energy closed below par.

MALAYSIA

¨      Ringgit credits focused on the belly; power and financial names led the market. Yesterday credit flows rebounded to MYR710m (versus YTD daily average c.MYR370m). We saw investors’ interest focused on the belly of the curve (50% of trades) with power and financial names continue to drive the interest. Hong Leong Islamic B3 T2 6/24c19 continues to trade lower at 4.76% (-3bps since 30-June) on MYR30m transactions while Turkish-bank TF Varlik 6/19 saw MYR11m done to end the day flat at 5.7% (since 4-July). Meanwhile, OCBC old-style T2 11/20c15 was the most active bond yesterday on MYR90m volumes closing flat at 4.05% (since 2-July) and TNBWE 1/30 ending 4bps tighter at 5.14% since 20-June with MYR50m activities.

TRADE IDEA: MYR

Bond	Noble 4.50% 10/15 (AA2) (price: 99.96; yield: 4.53%; spread: MGS+c.116bps)
Comparable(s)	Encorp 4.17% 11/16 (AA2) (price: 100.23; yield: 4.07%; spread: MGS+c.67bps)
Relative Value	We reiterate our call on Noble 10/15 (since 14-Apr) as it remains attractive relative to the AA2 space, despite tightening c.20bps in credit spread since our call on 14-Apr. Meanwhile, a switch from Encorp 11/16 offers an attractive pickup value of 46bps in yield and 49bps in credit spread; while holding Noble 10/15 itself to maturity could provide a pick-up of 4bps as price converges to par.
Fundamentals	1) Disposal of 51% of its loss-making agri business (pending regulatory approval) is credit positive, as i) deconsolidation could drive up earnings substantially; ii) proceeds from the sale (USD1.5bn) could lower debts and hence, financing costs; and iii) reduce sensitivity and vulnerability to external factors in relation to the agricultural unit. 2) Credit profile set to improve. At end-2013, Noble’s leverage was on the high side prior the transaction, with total debt at USD6.14bn (2012: USD5.65bn), total debt/ total assets at 20.75% in 2013 (2012: 22.67%) and interest coverage at 2.46x (2012: 2.48x). Nevertheless, we expect its credit profile to improve substantially following the divestment (expected completion in 2H14) , if approved by the regulatory.