FW: RHB FIC Credit Market Update - 8/10/14

8 October 2014

Credit Market Update

Safe Assets Supported amid Dovish Fed and Lower IMF Growth Forecast; Take Profit in Bumitama 3/19

REGIONAL                   

¨      Risk-off mode expected on dovish Fed, lower global growth outlook. Safer assets are poised for gains on global growth fears as IMF cut its global growth outlook for 2015 to 3.8% from 4.0% amid a dovish Fed and continued sluggishness in the Eurozone (German industrial production). Furthermore, UST yields declined further by 2-8bps, while tonight’s dovish FOMC minutes for 16-17 Sep meeting and higher expected jobless claims may support the USTs further. In the Asian USD credit space yesterday, we saw better buying across the space in both O&G and financial names. Papers traded include PTTEPT 18, STSP 21 and OCBC subdebt 22c17 where yields headed south. JACI IG spreads tightened to 182bps (-2.2bps) while HY spreads remained unchanged at 499bps. Meanwhile, iTraxx Asia was similarly flattish at 114.7bps. Looking ahead, we expect higher activities in both the primary and secondary space as CN markets reopen today following a week-long holiday. On the primary front, Korea Exchange Bank (A1/A-/A-) attracted more than USD3bn for its USD300m B3T2 offering, pricing at T+185bps (well inside guidance of 210bps area). 

¨      More buying on property credits. The 3y and 5y SGD swaps narrowed by -0.4bps (to 1.22%) and -1.6bps (to 1.79%) as the 3y/5y swap tightened by c.1.2bps in alignment with the global risk-off sentiment emanating from lower IMF global growth forecasts and hawkish speculation over the FOMC minutes (to be released on Thurs). Buying picked up as SG markets returned post-Hari Raya Haji holidays on Monday, with interest centered on mid-duration property papers like CAPLSP, GUOLSP and CENCHI, partially reversing last week’s sell-off after the lackluster 3Q2014 SG residential property price index results (current: 208.1; 2Q: 209.4). In the primaries, Swissco Holdings Ltd (NR), an offshore O&G services provider, is planning to print an inaugural SGD 3.5y at initial guidance of 6%.

MALAYSIA

¨      Quiet secondary market before 7y-SPK reopening, industrial production data and Budget 2015. MGS/GII market registered lackluster trading activity of MYR769m amid the 7y-SPK reopening tomorrow (Primary tender: MYR1.4bn; Private placement: MYR2bn) with WI yields quoted in wide ranges from 4.10% to 4.18%. Among the most active were 10y-GII (MYR130m) and 30y-MGS (MYR132m), both closed marginally lower at 4.127% (-0.3bps) and 4.684% (-0.7bps) respectively. Overall, we saw flattening trend on the MGS curve as yield edged higher for mid-tenure 5y-MGS (+21.4bps, 3.9%, MYR26m) and 7y-MGS (+16.2bps, 3.801%, MYR18m) while 10-MGS ended the day lower at 3.864% (-2.1bps, MYR41m). Similarly, we saw sluggish secondary transactions of MYR337m on the corporate space after extended weekend while awaiting for August industrial production (Consensus: 5.1%; Previous: 0.5%) and Budget 2015 on Friday. Only few names were seen traded with Danajamin-Guaranteed Kapasi 6/15 made its debut trade since issuance back in Dec-2011 closing at 3.522% (21.8bps below coupon, MYR145m). Others were broadly flat – PASB 2/19 (-0.3bps, 3.956%, MYR100m) and Sime Darby 10/27 (-0.1bps, 4.819%, MYR40m).   

TRADE IDEA: MYR

Bond(s)	Bumitama 3/19 (price: 101.3; yield: 4.92%) (AA3)
Comparable(s)	Golden Agri 8/19 (price: 101.2; yield: 5.07%) (AA2) FRL 6/20 (price: 98.4; yield: 4.66%) (AA2)
Relative Value	We suggest to taking profit on Bumitama 3/19, following 31bps of yield tightening since initiation on 28-Mar (total return: 3.42%). At 4.92% (last traded on 2-Oct), Bumitama 3/19 appears fair relative to our indicative AA3 curve (5y: 4.91%) and slightly pricey relative to peer Golden Agri 8/19 given the one-notch rating difference. Further, we see the opportunity to close position ahead of an expected 25bp rate hike in OPR in 1Q15.
Fundamentals	Fundamentally, we still like Bumitama based on the following: 1)     Young maturity profile: Bumitama’s plantation profile is attractive with average tree age profile of c.6y, among the lowest in the industry. 2)     Production growth: Track record shows commendable operating yields despite being a relatively new player in the industry. Bumitama’s current below industry FFB yield of 17.4% (industry average: 20.9%) is likely to improve over the short-to medium term as trees enter into maturity and peak yield age. 3)     Leveraged expansion cushioned by strong margins: We noted the relatively high leverage with debt-to-assets ratio of 35.0% (industry average: 28.6%) although liquidity conditions remained solid, with EBITDA/interest ratio of 9x for FY13 (FY12: 7x) and among the highest EBITDA margin of 36.0% (industry average: 24.2%). 4)     CPO price may head higher: CPO price has rebounded above RM2,000/MT to RM2,200/MT. We believe there is room for CPO price to head higher as soybean supplies get absorbed and demand improves on zero export tax and biofuel demand.

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
Keppel Corporation Ltd	Oil/gas	SG	Keppel Offshore & Marine (a fully-owned subsidiary of Keppel Corporation) has won contracts totaling SGD195m from repeat customers.	Neutral. We like Keppel Corporation as this contracts has added to Keppel Corporation’s order book of SGD14.1bn (as of June-2014). In addition, Keppel Corp fundamentals are robust with EBITDA interest coverage at 22.4x while the Total Debt/ EBITDA at 2.9x.