FW: RHB FIC Credit Market Update - 29/10/14

29 October 2014

Credit Market Update

Hutchison Raises USD5.4bn Ahead of FOMC Meeting; Take Profit on AGRBK 12/18   

REGIONAL                   

¨      Hutchison Whampoa raised c.USD5.4bn amid softer sentiment before FOMC. USD credits saw yields rising in the region yesterday while the primary front was loaded with a 3-tranche deal from Hutchison Whampoa. Selling pressure was seen across the curve on papers like Golden Eagle (GERGHK) 23, CITICS 19, HUWHY 22 and STSP 21 where yields widened. JACI IG spread closed flattish at 188bps while HY spread ended 2bps wider at 519bps. Credit protection costs eased with iTraxx AxJ closing tighter at 112bps (-4bps). Meanwhile, UST yields rose in the overnight session (+1bp to +4bps) as gains from weaker than expected durable goods order (actual: -1.3%, consensus: 0.5%) were reversed with 7y-high consumer confidence index (actual: 94.5, consensus: 87.0). We expect Asian USD secondary trading to remain soft today while investors await cues tonight from the FOMC for guidance on rate hike. On the primary front, Hutchison Whampoa (A3/A-/A-) has successfully priced a 3-tranche deal, consisting of USD2bn 3y at T+88bps, USD1.5bn 10y at T+135bps and EUR1.5bn 7y at 68bps over mid swaps.

¨      Expected softer market as investors sidelined ahead of FOMC. The 3y and 5y SOR tightened by c.1bp (to 1.02% and 1.61% respectively) even as similar duration Treasuries widened by 1-2bps. This saw the 3y/5y spread stay mostly unchanged at 58.8bps. We observed softer flows yesterday, with investors’ interest on short-dated papers especially in the REIT arena (CCTSP, FCTSP and MLTSP). We opine that investors to stay in the sidelines with light trades despite general market view of continued dovish stance from FOMC meeting tonight. Cambridge Industrial Trust (NR) is printing a SGD4y at an initial price of 3.75% while Grand China Air (NR) is currently in investor meetings for a planned issuance.

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MALAYSIA

¨      Supply drought led to more active secondary; Light MGS/GII activities on 3y-GII reopening. Corporate flows continue its good momentum with above average trading volume of MYR539m yesterday. Buying interest were seen in AA3 rated bonds while duration remain slanted towards medium term papers. Among the top traded credits were BGSM on collective transactions of MYR100m where tranche 12/16 and 12/23 tighten to 4.2% (-1.2bps) and 5.148% (-2bps) respectively, Etiqa T2 5/24c19 broaden marginally to 4.412% (+0.4bps, MYR30m) and Manjung 11/18 edged 0.4bps lower to 4.067% with MYR30m reportedly done. Meanwhile, MGS/GII benchmarks generally settling near to its previous level yesterday on sluggish activity of MYR1.1bn prior to the reopening of MYR3.5bn 3y-GII closing tomorrow. Long-dated govies regain its attention after a few active trading session on the short-tenure MGS. We saw 10y-GII and 15y-MGS led the volume chart closing flat at 4.122% (+0.4bps, MYR440m) and 4.16% (+0.2bps, MYR181m) respectively. At the end of the day, 3y, 5y, 7y and 10y-MGS concluding at 3.481% (+0.9bps, MYR1m), 3.599% (-2.9bps, MYR1m), 3.766% (-0.9bps, MYR85m) and 3.808% (+1.2bps, MYR18m).

TRADE IDEA: USD

Bond(s)	Agricultural Bank of China Limited (AGRBK), AGRBK 12/18 (Price: 101.15; YTM: 2.43%; Z+101bps) (A1/A/A; all stable) Bank of China Limited (BCHINA), BCHINA 3.125% 1/19 (Price: 101.50; YTM: 2.75%; Z+130bps)
Comparable(s)	-
Relative Value	We suggest taking profit on AGRBK 12/18 (call dated 21-Mar 14) for a total return of 4.98% as its relative attractive has diminished. Investors may consider a switch to the more recently issued (1-Jan 14) BCHINA 1/19 for a 30bps pick-up into a similar-rated state-owned commercial bank at less than a month’s tenure extension. We would, however, suggest holding out until after the FOMC meeting results are announced overnight, although we do not expect significant surprises in forward guidance for UST short rates.
Fundamentals	BCHINA’s solid credit profile is highlighted by the following key aspects: 1)      Fourth-largest state-owned bank in China, with an estimated 10% share of system loans and assets in addition to a strong franchise in Hong Kong; 2)      Respectable profitability metrics, with NIM and ROA of 2.57% and 1.16% respectively; 3)      Sound asset quality, evidenced by its slightly below-average NPL ratio of 1.02% (industry: 1.08%) and significant loan coverage ratio of 217.02%; 4)      Stable funding and liquidity, reflected by a 75.28% loans-to-deposits ratio and historically stable levels; and 5)      Majority-owned by the Chinese government. Very strong implied systemic support assumptions given BCHINA’s 67.68% ownership by Central Huijin Investment Ltd and its significant influence over China’s financial system. *all data as of 30-Jun 14

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
Standard Chartered PLC (SC, A2/A+/AA-)	Banks/FIs	APAC	3Q14 results came in weak, with profits before tax falling 16% YoY to USD1.53bn despite returning 1% growth in revenue as a result of higher operating expenses and credit costs.	Mild Negative. We note the increase in credit costs was attributable mainly to Asian operations. We think this may have to do with the recent fall in commodity prices negatively impacting the bank’s corporate exposures, especially in India and China. Nonetheless, the bank maintains strong liquidity and capitalization vis-à-vis its improved loan-to-deposit ratio of 74.9% and T1 capital ratio of at least 10.7%, well above regulatory limits.