FW: RHB FIC Credit Market Update - 21/8/14

Credit Market Update

APAC Credits Sidelined Ahead of FOMC and Yellen’s Speech

REGIONAL                      

¨      APAC credits sidelined ahead of FOMC meeting; FOMC minutes reveal slightly hawkish tone. The JACI Composite ended relatively unchanged at 247.6bps (+0.3bps) amid marginally higher risk appetite as HY spreads tightened 0.5bps to 474.7bps while IG spreads inched up 0.5bps to 179.4bps. In the US, we saw the 5y and 10y UST yields increase 5.4bps and 2.7bps overnight respectively as FOMC minutes raised the possibility of an earlier-than-anticipated rate hike, which will depend on further positive economic data. Meanwhile, the market is awaiting more clarity from Fed Chair Janet Yellen’s speech (this Friday) which will touch on the latest data on labour markets. In the secondary APAC credit space, sentiment appeared generally stable. In China, we noted keen interest in CNOOC but selling bias in property names DALWAN, GRNLGR and POLYRE. In HK, we saw NOBLSP and WHARF marginally advance. As for SG, yields rose a touch higher for the market in general, including STSP, BOCAVI and CAPITA.

¨      On the APAC primary front, Yingde Gases Investment Limited is pricing an offer for USD250m 5.5NC3.5 senior guaranteed notes at an initial guidance in the high 7% area while MCC Holding (Hong Kong) Corporation Limited is pricing a 3Y SBLC note at CT3Y+200bps.

¨      SGD credits maintained positive tone. Yesterday’s SGD swap rates rose 1-7bps across the curve in line with the overnight UST movements. In the credit space, there was buying in the new Nam Cheong as well as CAPLSP 19 and DBSSP Pc18. In addition, we observed interest in GGRSP 17s and KNBZMK 20s. On new issues, CapitaLand Ltd is pricing an SGD 10Y at an initial guidance of 4%.

MALAYSIA

¨      MYR market remained quiet. Secondary market flows further decelerated down to MYR110m amid below-average MGS flows of MYR1.7bn (60-day moving average: MYR2.1bn). Secondary activity was concentrated in Ara Bintang 12/19, which saw MYR66m transacted and last done 0.5bps tighter at 3.848%. Additionally, there was some interest in AISL 9/21c16 B2T2, which closed 0.2bps tighter at 4.948% on MYR15m traded.

TRADE IDEA: USD

Bond	SUNHUN 11/20 (YTM: 3.39%; Z spreads: 135.4bps) (A1/A+/A)
Comparable(s)	SWIPRO 6/22 (YTM: 3.42%; Z spreads: 125.0bps) (A2/A-/A) HKLSP 6/22 (YTM: 3.39%; Z spreads: 111.1bps) (A3/A/A)
Relative Value	We reiterate our call on SUNHUN 11/20 relative to its closest comparables, which include SWIPRO 6/22 and HKLSP 6/22. In line with our strategic allocation, In line with our current allocation strategy, we prefer mildly underweighting duration for cyclical corporates. We see SUNHUN 11/20 providing a potential yield pickup of 40-50bps in addition to reducing duration by c.0.5 years and moving to a higher credit rating by 1-2 notches.
Fundamentals	We like SUNHUN for the following reasons: 1)     Balanced source of income via property sales and investments, which provide steady cash flows to buffer against property cyclicality. The Group proportion of recurring income accounts for 46% of total net profit in FY14. 2)     Potential improvement in credit metrics. We opine that leverage could be improved on the back of warrants issued by the Group on April 24, 2014 which can be exercised by shareholders for an amount of up to HKD22.0bn. The amount could be utilized for business expansion which reduces reliance on further borrowings. 3)     Better credit metrics compared to peers. The Group’s debt/EBITDA of 3.4x in FY14 is currently better than Swire Properties and Hong Kong Land which have debt/EBITDA of 4.0x and 5.1x respectively. Meanwhile, we expect the Kwok Brothers’ legal case may take a longer time to resolve. The legal case relates to the conspiracy to commit misconduct in public office which was brought against the Group’s Chairman and Managing director in 2012. We believe the process for high profile prosecution may take at least 7 years to resolve with appeals on both sides.