FW: RHB FIC Credit Market Update - 18/9/14

18 September 2014

Credit Market Update

APAC Flows Balanced Ahead of FOMC Meeting; Switch to CCB Asia 7/19 from AMMMK 7/19

REGIONAL                      

¨      APAC credit investor net positions ahead of FOMC. The JACI Composite widened 1bp to 239.8bps led by the IG which rose 1.2bps to 172.3bps while the HY stayed virtually unchanged at 465.1bps. In general, there were balanced flows across the region as investors were seeking to net their positions ahead of the FOMC meeting. In China, we observed selling activity though there was continued buying into the Banks/ FI space on names like ICBCAS, BCHINA and CCB resulting from the CNY500bn stimulus announced by the PBOC while HK saw interest centred on HK property names like SUNHUN, SWIRE and WHARF. In Singapore, names like TEMASE, CAPITA and STSP traded a couple of bps tighter. Treasuries fell, with 2y and 10y yields rising by 3bps (to 0.57%) and 2bps (to 2.62%) respectively as the Fed continued their stance on maintaining interest rates for a ‘considerable amount of time’, though investors are speculating, based on the Fed’s dot plot, that once Fed rates are raised, the quantum will be higher.

¨      In the primary APAC USD market, HK insurer - Fwd Ltd (Baa2/NR/NR) issued a 10y REG S USD325m at a final guidance of T+245bps while Chong Hing Bank Ltd (Baa2/NR/BBB) planned an ATC1S at initial guidance of 6.875%. In the pipeline, the Bank of Communications (A2/A-/A) is meeting with investors for a planned USD and EUR issuance. First-timer, Honghua Group Ltd (B1/NR/BB) an oil & gas land drilling rig and component provider set to test the market with a 5NC3 at hi-7% area.

¨      SGD rates may tilt upward; China Coal eyes SGD 2y at c.7.75%. Performance on SGD swap rates were mixed yesterday, tilting lower on the short end (unchanged to -1bp), while long end yields rose 1-2bps, leading to a steeper 3y/5y spread of 64.5bps (from 63.3bps). Nevertheless, rates were seen higher this morning (+4bps to +6bps) as investors focused on slight upward revisions to Fed’s interest rate forecasts (median forecasts for end 2016: from 2.5% to 2.875%). In the credit space, accounts were fairly active across the space, picking up names like CAPLSP 19, KRISSP 18 and DBSSP Pc18. Meanwhile, Frasers Centrepoint (NR) has successfully printed SGD600m Pnc5 at 4.88%. In the pipeline, China Coal Solution is eyeing an SGD 2y offering at 7.75% area, guaranteed by CCS Supply Chain Management (NR).

MALAYSIA

¨      Investors stayed sideline ahead of MPC meeting. Secondary activities remained sluggish with below average trading volume of MYR506m and MYR208m for MGS and corporate market as investors probably remained cautious before CPI data released late yesterday and MPC meeting today. Malaysia’s inflation rate edged marginally higher to 3.3% y-o-y in Aug (July: 3.2%) could trigger another OPR hike, although we maintain our opinion that OPR adjustment, if any, could be in 1H15. We saw mixed tone on MGS benchmark – yield for 5y (3.73%) and 10y (4.0%) decreased by 0.1-0.8bps while 7y (3.87%), 20y (4.31%) and 30y (4.68%) increased by 0.1-0.6bps. On corporate space, investors were focused on high quality AAA and GG papers. Aquasar led the volume chart on combined MYR60m transactions – 7/26 and 7/28 ended the day at 4.713% (-3.5bps) and 4.779% (flat) respectively. Meanwhile, yield for BPMB 9/29 widen by 3.9bps to close at 4.749% with MYR35m reportedly done.

TRADE IDEA: USD

Bond(s)	China Construction Bank (Asia) Corporation Limited (CCB Asia) CCB Asia 3.25% 7/19 Senior (A2/NR/NR; all stable) (Price: 99.84; YTM: 3.29%; Z+137bps)
Comparable(s)	AmBank (M) Berhad (AMMMK) AMMMK 3.125% 7/19 Senior (Baa1/Sta; BBB+/Neg; NR) (Price: 100.05; YTM: 3.11%; Z+119bps)
Relative Value	We shift our call (dated 2-Jul 14) on AMMMK 7/19 Senior and recommend a switch to the CCB Asia 7/19 Senior. We think a switch is viable as CCB Asia 7/19 looks about 37bps cheap in terms of z-spread against AMMMK 7/19 after adjusting for a 2-notch rating differential (10bps/notch). We also find CCB Asia 7/19’s yield to be attractive compared to Thai and Indian issuers within the USD senior debt space.
Fundamentals	CCB Asia’s standalone credit profile benefits from strong capitalization (end 1H14 Tier 1 capital ratio: 16.3%) and good asset quality (gross impaired advances ratio: 0.1%). We also see strong support ties with its parent, China Construction Bank Corporation (CCB). CCB possesses a solid credit profile for its: 1)     Market position as China’s second-largest commercial bank, with shares of 12% in system loans and deposits as of 31-Dec 13; 2)     Relatively high capitalization with a tier-1 capital ratio of 11.21% (industry: 10%) as of end-1H14; 3)     Still healthy asset quality, reflected by an NPL ratio of 1.04%; 4)     Robust funding profile, evidenced by a loan-to-deposit ratio of 70.93%; and 5)     Very high likelihood of systemic support due to strong linkage and strategic importance to the government as it effectively owns 57.3% of CCB via Central Huijin Investment Ltd. NPL Ratio (%) Loan Loss Coverage (%) LTM NIM (%) Tier 1 Capital Ratio (%) Loans-to-Deposits (%) CCB 1.04 248.87 3.29 11.21 70.93 AMMMK 1.86 127.42 2.09 11.19 99.54 *all financial figures as at end-1H14.

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
Australian Banking System	Banking	AU	The Australian Financial System Inquiry's (FSI) publication of submissions from the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA) on 29-Aug 14 revealed a nuanced stance towards introducing a statutory bail-in regime. Based on the submissions, policymakers appear cautious about the high costs associated with the implementation of a bail-in regime, particularly because of Australian banks’ interconnectedness and significant reliance on confidence-sensitive offshore wholesale funding.	Mild Positive. We see this as a positive for creditors at least for the short-to–intermediate term (6-12 months) as the likelihood of statutory bail-in implementation is reduced. Nonetheless, Australia's membership in the Financial Stability Board (FSB) raises the probability that Australia may ultimately adopt a bail-in regime over the longer term.
Indonesian plantation law	Plantation	ID	The draft bill to limit foreign ownership to 30% from 95% has been reportedly scrapped.	Neutral. Foreign companies operating in Indonesia may heave a sigh of relief as foreign ownership limits remain status quo. Nevertheless, we opine that regulatory changes remain one of key risks to planters in Indonesia.