FW: RHB FIC Credit Market Update - 13/10/14

13 October 2014

Credit Market Update

Safe Haven Flight as HY Spread Widened; More Active MYR Before Budget; HKLSP 1/24 to Stay Resilient Despite Unrest

REGIONAL                   

¨      Risk aversion dominates global markets. Demand for quality assets extended through Friday as UST yields continued to decline 1-3bps. Meanwhile, we expect waning risk appetite to continue following IMF’s weekend meeting which emphasized the need for more infrastructure spending and structural reforms to abate growth woes. In the USD credit space, buying was better concentrated along the mid- to long-end. In the HK/CN markets, we saw CNOOC 35, CNPC 41 and NOBLSP 20 compressing a couple of bps while in the SG space, papers traded include OCBCSP 37c17, STSP 21 and TEMASE 39 where yields headed south. Flight to quality led to a spike in JACI HY spread to 520bps (+12bps), while the IG space inched marginally upwards to 185bps (+2bp). iTraxx AxJ similarly rose a tad to 118bps (+2bps). In the pipeline, China's Hebei Iron & Steel (A1e/NR/NR) is eyeing USD bonds with investor meetings commencing in Singapore and HK today. 

¨      Softer trading expected ahead of MAS GDP numbers and monetary policy decision. The short-to-mid SGD swap curve widened by c.+2.4bps on Friday, with the 3y and 5y touching 1.15% and 1.72% respectively, while the 3y/5y stayed mostly unchanged. We observed further gains in the property complex with continued buying into names like GUOLSP, CITSP, CAPITA and REITs (CCTSP, FCTSP). We opine that general trading might be a tad softer today ahead of Monetary Authority of Singapore (MAS’s) Q3 GDP estimates and its semi-annual monetary policy decision. The market consensus is expecting growth of 2.7% (Q2: 2.4%) as well as MAS to maintain its current policy of ‘modest and gradual’ appreciation of the SGD. Our house view projects 2014 GDP growth to hit 3.3%. In the primaries, Singapore-listed AusGroup Ltd (NR), an O&G services provider, is planning to issue a SGD 2y at initial guidance of 7.5%.

MALAYSIA

¨      Active secondary amid Budget 2015 and strong IP data. Both govies and corporate space registered stronger flows of MYR2bn and MYR527m volumes amid the announcement of Budget 2015 and better than expectation Sept IP print of 6.5% (vs survey 5.1%). On the govies space, 10y-GII topped the volumes chart with MYR641m reportedly done settled at 4.121% (-0.9bps). 10y and 15y-MGS among the top performers saw yield to inched lower to 3.828% (-1.8bps, MYR208m) and 4.162% (-1.4bps, MYR90m) amid the reopening of MYR2.5bn 15y-MGS this Wednesday (15-Oct). Overall, MGS curve continued to flatten with 10y/3y MGS spread tighten to 35bps compared to 38bps on Thursday. On the PDS market, among the highly traded were banking and power sector. AAA-rated SEB 6/16 broaden 4.4bps to 4.029% saw MYR85m exchanged hands while mid-tenure Tanjung BP 8/22 ended the day lower at 4.558% (-5.8bps, MYR40m). Also seen were Turkish-bank TF Varlik 6/19 gained as yield narrowed to 5.696% (-2.1bps, MYR45m).   

TRADE IDEA: USD

Bond(s)	Hongkong Land, HKLSP 1/24 (yield: 3.62%; T+130bps) (A2/A-/-)
Comparable(s)	Swire Property, SWIPRO 6/22 (yield: 3.38%; T+125bps) (A2/A-/A)
Relative Value	We initiate a preference for USD HKLSP 1/24 which seems attractive if valued against SWIPRO 6/22, adjusting for the 1.5y difference in duration. HKLSP could offer a potential pick-up of around 10-15bps.
Fundamentals	We like HKLSP 6/22 for the following reasons:   1)     Superior credit quality, debt servicing and leverage vis-à-vis peers. The company has a better financial profile compared to similar regional property peers, with LTM EBITDA Interest Coverage at 7.6x (peers*: 6.3x) while LTM Total Debt/ EBITDA is at 5.1x (peers*:7.5x). 2)     Stable cashflows from rental income. 68.9% of operating profit is derived from commercial investment properties, mainly its Central office portfolio in HK with low vacancy rates at c.5%, while retail segment remained 100%-occupied.  3)     HK unrest deemed temporary and impact to be minimal. With 57% of profits derived from Hong Kong, prolonged unrest would have some negative impact to HK Land. Nonetheless, we view any weaknesses in prices of HKLand complex could be opportunity to have an exposure to the high-quality HK property credits.  *Peers: Shimao Property, Swire Properties, Sun Hung Kai, Capitaland, UEM Sunrise, Lippo Karawaci

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
Basel III Tier 1 Capital	Banking	Asia Pacific (Ex Japan)	S&P lowered the issue ratings on 54% of 160 hybrid capital instruments (Tier 1 capital) issued in Asia Pacific (Ex Japan), and affirmed the issue ratings on the remainder of these instruments. All ratings were lowered by one notch. The rating action reflects S&P’s view that there is greater potential for coupon nonpayment when the capital conservation buffer under Basel III or other regulatory core equity buffers apply.	Neutral. We have not observed significant and adverse price reactions to the downgrade for affected issuers under our coverage. These issuers include Australia and New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd., DBS Bank Ltd, Oversea-Chinese Banking Corp. Ltd., United Overseas Bank Ltd., Shin Han Bank, Woori Bank, and Krung Thai Bank Public Co. Ltd. The capital conservation buffer is due to phase-in in 2016, beginning at 0.625% and will escalate to 2.5% by 2019.