FW: RHB FIC Credit Market Update - 30/10/14

30 October 2014

Credit Market Update

Hawkish Fed Could Spur Yields Correction   

REGIONAL                   

¨      Bond yields rose as risk appetite increases. Investors were surprised by the unexpectedly hawkish Fed as 2y UST yields jumped 9bps overnight, the largest spike in 3.5 years. Meanwhile, yields on USD credits have been inching north over the past few sessions. We think the upward pressure on yields particularly the short tenure might continue as investors take into account the end of QE and possible first rate hike in 2015. Papers traded yesterday include GRWALL 17 and GERGHK 23 and OCBC 37c17 which widened several bps. Meanwhile HUWHY papers were active in view of its new issuances, although yields widened. JACI IG spread closed tighter at 185bps (-2bps) while the HY space narrowed to 514bps (-4bps) on higher UST yields. iTraxx AxJ reflected lower credit protection costs as it compressed to 110bps (-2bps). On the primary front, Indiabulls Real Estate (local rating: BBB+/A+) is meeting investors beginning 31 Oct for a potential USD 5NC3 bond offering.

¨      SGD credits tread lightly ahead of FOMC. Short-to-mid SGD swap rates stayed mostly unchanged yesterday even as Treasuries of a similar duration widened by c.7-9bps ahead of the FOMC decision to end QE3 early this morning. As expected, SGD credits treaded lightly though there was clear buying interest in the property (CAPLSP, KPLDSP) and REIT (MINTSP, FCTSP) arena. We expect some profit-taking activity today as Fed’s sounded less-dovish while remain committed to low rate for ‘considerable period’. Cambridge Industrial Trust (NR) printed a SGD100m 4y at final price of 3.5% (25bps inside initial guidance) while Grand China Air (NR) is printing a SGD3y at an initial price of 6.25%.

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MALAYSIA

¨      MGS curve flatten amid better flows; PDS market active on high quality names. Local govies’ activity breached MYR1.9bn amid the reopening of MYR3.5bn 3y-GII tender closing today. MGS curve flattened where yield for 3y and 5y-MGS edged upward to 3.481% (+2.3bps, MYR12m) and 3.599% (+3.1bps, MYR183m) while longer-tenure 7y, 10y and 15y-MGS closing flattish at 3.766% (+0.2bps, MYR162m), 3.802% (-0.6bps, MYR51m) and 4.153% (-0.7bps, MYR122m). 10y-GII remain heavily traded with MYR402m exchanged hands ending the day lower at 4.115% (-0.7bps). On the corporate space, trading momentum persist with total volume of MYR879m amid lack of primary issuances. Prasarana 3/19 topped the chart with MYR175m transactions (-1.5bps, 3.926%, 5y-MGS+33bps). Investors were also seen to be keen on good quality AAA rated bonds. A slew of Aman Sukuk ranging 4/19-2/21 settling at 3.847%-4.319% (-7.2bps to +9.2bps) on combined trades of MYR100m. Aquasar curve flatten as long-tenure 7/28 (-2.1bps, 4.729%) and 7/29 (-2.0bps, 4.819%) outperformed the 7/16 (+0.5bps, 4.107%) with collective MYR110m reportedly done.

TRADE IDEA: MYR

Bond(s)	RHB Islamic (“RHBA”) B3T2 5/24c19 (RAM: AA3) (MTM Price: 100.88; MTM Yield: 4.733%; 5y-MGS+c.113bps)
Comparable(s)	RHBBANK B3T2 7/24c19 (RAM: AA3) (MTM Price: 100.08; MTM Yield: 4.969%; 5y-MGS+c.137bps)
Relative Value	We recommend a switch from RHBA B3T2 5/24c19 to RHBBANK B3T2 7/24c19 for a pickup of c. 24bps while taking 2 months longer tenure. Furthermore, the potential merger between RHB/ CIMB/ MBSB, if materialize, could triggered rating upgrade to RHB debt papers for stronger combined entity.
Fundamentals	Fundamentally, RHB Bank Group’s credit profile is supported by: 1)     Solid banking franchise with estimate domestic market shares of 9%. 2)     Improved asset quality, as NPLs have lowered to 2.45% in Jun-14 (Dec-13: 2.81%). 3)     Adequately capitalized with Tier-1 and Total Capital stood at 10.7% and 14.0% respectively in Jun-14. 4)     Healthy funding and liquidity profile with LDR of 86%.

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
National Australia Bank (NAB, AA2/AA-/AA-)	Banks/FIs	AU	FY9/14 results saw NAB’s net interest margin fell to 1.94% (FY13: 2.03%) while its profit before tax declined 4.42% to AUD7.86bn (FY13: AUD8.22bn)	Neutral. The bank’s asset quality improved as gross impaired loan ratio fell to 0.76% (end-FY13: 1.22%). Wholesale funding reliance continues to decline, with loan-to-deposit ratio (customer deposits only) improving to 139.5% from 142.7% over FY14. We also view NAB’s plans to exit the UK market and to cut back on its underperforming wealth management business as a credit-positive step to improving asset returns.
Industrial Bank of China Ltd. (ICBC, A1/A/A)	Banks/FIs	CN	Net interest income and net income rose 10.77% and 7.33% YoY respectively in 3Q14. NIM improved to 2.63% from 2.54% in 2Q13. However, the bank’s NPL ratio has risen to 1.06% (industry, as of 30-Jun 14: 1.08%) following a 23.2% increase in NPLs from a year ago.	Neutral. The deterioration in asset quality is offset by ICBC’s strong loan coverage ratio of 216.6% and high capital buffers, evidenced by its T1 ratio of 11.8%, which are expected to improve with incoming subdebt supply. Liquidity also remains healthy as loan-to-deposit ratio registered at 68.1%.
Bank of Communications Co. Ltd. (BOCOM, A2/A-/A)	Banks/FIs	CN	Net interest income and net income rose 4.86% and 5.78% YoY respectively in 3Q14. NIM saw a QoQ improvement to 2.82% from 2.68%; however, a year ago, NIM was 2.91%. Meanwhile, loan quality deteriorated as the bank’s NPL ratio rose 0.12pp to 1.17% (industry: 1.08%) from the beginning of the year.	Neutral. The deterioration in asset quality stemmed mainly from BOCOM’s exposure to the manufacturing sector and SMEs. Offsetting the higher NPL ratio are BOCOM’s strong loan coverage ratio of 201.3% and high capital buffers, evidenced by its T1 ratio of 11.1%. Liquidity also remains sound as loan-to-deposit ratio registered at 73.9%.
Hutchison Whampoa Limited (HUWHY, A3/A-/A-)	Conglo	HK	Hutchison Whampoa Limited (HWL) has successfully issued USD2.0bn 3y and USD1.5bn 10y senior unsecured notes via private placement with a coupon rate of 1.625% and 3.620% respectively. In addition, the Group has also placed EUR1.5bn 7y at 1.375%. The total combined issuances amount to approximately USD5.4bn (HKD41.9bn).	Neutral. The proceeds of the issuances are to partly refinance the USD51.1bn bonds due in 2015/2016. For the past few years, HWL has been gradually reducing its leverage with current net debt / EBITDA is at 2.8x (FY13: 3.2x). In addition, the Group has healthy cash balances of HKD101.9bn and average 3y free cash flow of HKD14.0bn.
SK Telecom (SK, A3/A-/A-)	Telcos	KR	3Q14 revenue grew 5.87% YoY driven by LTE segment. However, EBITDA margin has fallen to 28.8% from a 3Q13’s 30.5% due to higher marketing costs. Net profit rose 5.78% YoY on the back of equity gains in its semiconductor associate, SK Hynix.	Neutral. SK’s debt/LTM EBITDA remains manageable at 1.55x compared to end-FY13’s 1.35x, moving it closer to end-FY12’s figure of 1.59x as a result of relatively smaller EBITDA and higher borrowings.
Temasek Ekslusif Sdn Bhd (TESB) – Guarantee by Gamuda (RAM: AA3)	Construction	MY	RAM assigned AA3 to TESB’s MYR1bn IMTN programme. The programme is irrevocably and unconditionally guarantee by Gamuda.	Neutral. Gamuda is gearing up for its land acquisition and construction operation plans. We are still comfortable with Gamuda’s borrowing profile where including the new MYR1bn debt facility, the Group’s pro-forma gearing ratio will increase to 0.57x and debt-to-EBITDA of 3.76x (Industry: 0.6x, 5.0x).
UniTapah Sdn Bhd (RAM: AA2)	Concession	MY	RAM assigned preliminary rating of AA2 to UniTapah’s MYR600m Sukuk Murabahah. UniTapah is the concessionaire for development and maintenance of new UITM campus in Tapah under a 23 years concession agreement. RAM projected UniTapah FSCR will maintain above 1.58x during the tenure of the bond, averaging at 1.81x.	Neutral. With sufficient cash flow coverage and low counterparty risk as the Government is the ultimate paymaster, UniTapah’s is subject to the performance risk during the maintenance period which could lead to termination of contract. However, we view that this is mitigated by moderate complexity of the maintenance job.