FW: RHB FIC Credit Market Update - 25/8/14

25 August 2014

Credit Market Update

Balanced APAC Credit Flows; New PACRA 8/18 Could Offer Some Pick-up

REGIONAL                      

¨      Balanced flows across APAC credits; UST curve flattened. The JACI Composite tightened 1.6bps (to 244.3bps), with corresponding movement in the IG by 2.2bps (to 175.7bps) while the HY was marginally wider by 0.8bps (to 472.8bps). In China/HK, we observed that flows were largely two ways, with some buying interest into China oil benchmarks while HK saw selling on HUWHY and SUNHUN papers. In the SG USD market, investors were selling into short-term TEMASE while simultaneously buying into long-term TEMASE. The UST curve flattened as the 2y rose 2.4bps to 0.49% while the 10y stayed broadly unchanged at 2.40%. Yellen’s speech at Jackson Hole had a dovish bent as she while she acknowledged clearly improving US conditions, ‘there is significant room for more improvement’.

¨      Yields ended the week lower; Pacific Radiance printed 4y at 4.30%. The SGD swaps curve saw yields declining 2-5bps across broad durations last Friday, although the short to mid-end saw upward yield pressure this morning (+3bps to +4bps). The 3y/5y spread steepened to 64.45bps (previous: 61.9bps). Meanwhile, the credit space similarly saw buying interest, with new CAPLSP 24, UOBSP 26c22 and UOBSP Pc19 inching a couple of bps tighter. Meanwhile, Pacific Radiance (NR) priced SGD100m 4y at 4.30%, inside guidance of 4.50%. Looking ahead, investors may be eyeing SG inflation release today, which is expected to improve (consensus: 0.3%; previous: -0.7%) and potentially pressuring yields upwards.

MALAYSIA

¨      Secondary market fueled by Aquasar. Local credit closed the week with average trading volume of MYR392m compared to YTD daily average of MYR380m. Shorter-dated Aquasar topped the volume chart on combined transaction of MYR135m. Aquasar 7/15 and 7/17 inched higher by 4.9bps and 1.4bps  to 3.953% and 4.681% respectively, while Aquasar 7/16 saw debut trade to close at 4.021%. We also noted long-end Plus 1/23-1/38 tighten 0.1- 5.4bps ending the day at 4.44%-4.9% with MYR55m reportedly done.

TRADE IDEA: SGD

Bond	Pacific Radiance (PACRA) 4.30% 8/18 (NR) (price: 99.9; yield: 4.33%)
Comparable(s)	EZISP 4.6% 8/18 (NR) (price: 101.4; yield: 4.19%) Dyna-Mac (DMHLSP) 4.25% 8/17 (NR) (price: 101.2; 3.81%)
Relative Value	Pacific Radiance’s new 4y issuance could be tightly priced relative to peers. Quoted at 4.33%, we opine that the pricing of PACRA 18 could be the reflection of its high leverage relative to DMHLSP and its smaller size relative to EZISP. While we are neutral on the new bond, we see some headroom for yield to inch marginally lower by c.5-15bps given its comparable credit metrics with EZISP.
Fundamentals	We view Pacific Radiance’s credit profile as mildly positive, supported by: 1)     Young and diverse fleet. The group’s young age of its wholly-owned vessels of average 4y may be more appealing to customers, compared to industry average age of 13-14y. Further, the diverse fleet allows the group to provide services across different phases of an oil field’s life cycle. 2)     Healthy credit metrics. The company’s leverage and liquidity ratios have been improving over the years, as reflected by its debt/EBITDA ratio of 3.7x for 1Q14 (FY13: 4.1x; FY12: 6.1x) and EBITDA/Interest ratio of 6.5x (FY13: 4.2x; FY12: 3.7x).