FW: RHB FIC Credit Market Update - 22/9/14

22 September 2014

Credit Market Update

Better Buying in APAC Credits Post Scottish Voting; Take Profit on CENCHI 5/17

REGIONAL

¨      Better buying in APAC credits post Scottish referendum. In general, there was better buying post the Scottish referendum results (released early Fri afternoon) and also the Fed Sept meeting. The JACI indices saw concurrent tightening by about 4bps in the JACI Composite (to 236.2bps), IG (to 169.0bps) and HY (to 460.3bps). In China/HK, we observed buying interest into China oil-benchmarks and HK property players like SWIRE, SUNHUN and HKLSP. Meanwhile, papers like TEMASE, STSP and SPSP traded a couple of bps narrower in Singapore.  The 10y UST narrowed by 4bps (to 2.58%) while the 2y stayed virtually unchanged (at 0.56%) even as markets digest the Fed’s position post last week’s FOMC meeting.

¨      SGD rates opened lower; mixed flows seen on credits. The SGD swap rates added 3-5bps across the curve last Friday while the 3y/5y spread climbed to 66.4bps (from 64.5bps). With UST yields declining 2 -6bps, fixed income investors took comfort this morning as SGD swap rates opened encouragingly lower by 3-6bps, reversing the increase seen last Friday. We saw mixed flows on the corporate bonds with sellers on UOBSP Pc18 and NOLSP 21c16 and buyers on MUTAFA 17 and OUE 19c16, ahead of SG inflation numbers tomorrow. In the pipeline, Tata International (NR) is in the midst of issuing its first SGD Senior unsecured perpetual, subject to market condition.

MALAYSIA

¨      PDS active on GG and AAA papers; selling bias on 30y-MGS. Investors traded actively in high quality GG and AAA-rated papers last Friday boosted the total transactions to MYR543m. Among the most active were PLUS on combined activities of MYR250m – 1/38 (+1.9bps, 4.889%), 12/38 (-24.8bps, 4.950%) and 1/25 (-1.3bps, 4.584%). Followed by PASB 6/18 saw MYR100m tighten marginally to 3.940% (-0.9bps). On MGS space, yield curve inched downward in general with the 2y, 5y, 7y, and 10y MGS decreased to 3.314%-3.946% (narrowed 4-6bps), although we also saw selling bias on 30y-MGS  as yield increased 5.4bps to 4.723%. Overall, the MGS market was active at MYR3.27bn in trading volume.

TRADE IDEA: SGD

Bond(s)

China Central Real Estate, CENCHI 5/17 (ytm: 5.93%; price: 101.0; SOR+469bps) (Ba3/BB-/NR)

Comparable(s)

N/A

Relative Value

We prefer to lock-in profit on CENCHI 5/17 which was mooted in our Credit Market Update (dated 19-May) and has gained c.55-60bps in yield pick-up and a total return of around 3.43%.

Fundamentals

We prefer to take profit now as:

1.        Property prices have dropped in 68 out of 70 Chinese cities for August, including Tier 1 cities like Beijing and Shanghai and Tier 2 cities like Zhengzhou (capital of Henan). China Central Real Estate (CCRE) has its predominant business in the Tier 2 city of Henan, a city north of Beijing.

2.        Sales to stay sluggish in the near term. Though the People’s Bank of China recently announced a CNY500bn stimulus for the top 5 banks, we believe that there will be a gestation period before the positive impact will be felt by the property market.

3.        Nonetheless, fundamental are intact. CCRE’s Last 12M EBITDA interest coverage is at 3.7x and Total Debt/ EBITDA at 5.8x. Nevertheless, we maintain that this is still an opportunity to lock-in profit due to the macro drivers of the China property market as mentioned earlier.