FW: RHB FIC Credit Market Update - 13/11/14

13 November 2014

Credit Market Update

Asian Credits Ended Mixed, HK/CN Yields Widened; Value in New BOC 11/24 B3T2

REGIONAL                   

¨      Subdued risk appetite led to higher HK/CN yields. We saw better selling in the HK/CN space as bargain hunting on HY space eases, while buyers were seen in most other parts of Asia. The secondary HK/CN space saw yields rising for papers like CMHI 18, CNOOC 35 and SUNHUN 17. In the MY, TH and SG space, papers generally tightened such as IOIMK 22, UOBSP 20 senior and TOPTB 15. Credit protection costs retraced with iTraxx AxJ rising 3bps (108bps). Over in US, we saw mild movements as UST yields were unchanged to +1bp overnight, providing little catalysts to the Asian USD markets today. On the primary front, Beijing Infra Investment (A1/A+/A+) is looking to issue USD benchmark 3y at T+190bps and 5y at T+195bps. Looking ahead, we expect some pressure on yields with potentially stronger retail sales prints tomorrow night, although initial jobless claims print tonight to may tilt marginally higher.

¨      Better buying on SGD credits. SOR curve declined 1.7b-3.5bps with the 3y/5y spread inching a tad flatter to 58.9bps (from 59.5bps). In the secondary space, we saw better buying overall with GALVSP 16, CITSP 22, OLAMSP 19 tightening. On the primary front, Ezion (NR) printed SGD150m Pnc4 at 7.00%. SG retail sales will be released tomorrow which is expected to soften.

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MALAYSIA

¨      MGS yield edged upward ahead of 10y-MGS reopening; Slow primary supported corporate flows. On the govies market, selling bias pressured yield to move upward across the short-to-mid tenure benchmarks before today’s book closing of the MYR3.5bn 10y-MGS reopening. Although, we also saw 10y-MGS recouped previous day losses as yield moved 10bps downward to 3.806% (MYR88m) as investors continue to speculate before the closing of the tender. Other benchmarks generally inched upward where 3y, 5y and 7y-MGS ended the day at 3.532% (+0.9bps, MYR200m), 3.654% (+2.2bps, MYR123m) and 3.755% (+1.8bps, MYR303m). Overall, activity in the MGS/GII space remain strong with total trades surpassed MYR2.8bn (YTD daily average: MYR1.5bn) ahead of the 3Q GDP data with expectation to clinch lower to 5.2% (in-house view), scheduled to be announced tomorrow (14-Nov). Meanwhile, a slow primary market continues to drive the actions on the corporate space with total volumes of MYR681m compared to YTD daily average of MYR439m. Transactions were skewed towards long-dated GRE bonds such as 1MDB 5/39 tighten 5.1bps to 5.05% (30y-MGS+46bps, MYR200m); and DanaInfra 10/33 settling at 5.206% (-7.4bps, 20y-MGS+99bps). Other notable names include AA3-rated CIMB Thai B3T2 7/24c19 and IJM 6/22 ending the day at 5.206% (-7.4bps, MYR75m) and 4.663% (-0.4bps, MYR60m) respectively.

¨      On the primary front, Premium Commerce printed MYR182m Class A Notes (1y-7y, 4.05%-4.7%, AAA), MYR4m Class B Notes (7y, 5.25%, AA2) and MYR12.25m Class C Notes (7y, 3%, NR). This increased YTD total issuances to MYR70.8bn compared to total issuance of MYR82.7bn in 2013.

TRADE IDEA: USD

Bond(s)	Bank of China Ltd (BOC, A1/A/A) BOC 5.00% 11/24 B3T2 (price: 101.28; mid-yield: 4.84%; Z+240bps)
Comparable(s)	BOC 5.55% 2/20 B2 LT2 (price: 109.68; mid-yield: 3.51%; Z+195bps)
Relative Value	We initiate a preference for the just-issued BOC 11/24 B3T2, which presently looks attractive from an absolute yield standpoint within the USD T2 space. We estimate the current PONV premium (in Z-spread) to be about 45bps after tenor adjustments (5bps/year) over the outstanding BOC 2/20 B2 LT2. In addition, the new-style’s issuance size is larger at USD3.0bn versus its B2 counterpart’s size of USD2.5bn.
Fundamentals	BCHINA’s solid credit profile is supported 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 2.26% and 1.16% respectively; 3)     Sound asset quality, evidenced by its slightly below-average NPL ratio of 1.07% (industry: 1.08%) and significant loan coverage ratio of 229.35%; 4)     Stable funding and liquidity, reflected by a 76.53% loans-to-deposits ratio and historically stable levels; 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-Sep 14

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	RHBFIC View
Singapore Telecommunications Limited (SingTel, Aa3/A+/NR)	Telcos	SG	SingTel’s 6MFY3/15 group revenue and EBITDA rose 3.5% and 2.7% YoY respectively, while EBITDA margin was relatively flat at 30.6% (6MFY3/16: 30.7%). Net profit surged 19% on exceptional gains from equity dilution in SingPost. Singapore blended APRU fell 2.6% to SGD49. 30-Sep 14 Debt/LTM EBITDA rose to c1.76x from 1.59x last year.	Neutral. SingTel’s ratings appear intact based following this financial showing, with net debt/LTM EBITDA of 1.65x still below Moody’s threshold for downward rating pressure of 1.75x. We also see a fair degree of headroom regarding S&P’s base case debt/EBITDA of 1.7-1.9x for 2015. SingTel’s capex/revenue of 13% is also within S&P’s 12-14% per annum base case expectations.
SingTel Optus Pty Ltd (Optus, A1/A/A)	Telcos	AU	Optus’ 6MFY3/15 revenue and EBITDA increased 1.7% and 1.2% YoY respectively, with EBITDA margin up 90bps to 29.6%. Blended APRU saw a 2% increase QoQ but remained flat on a YoY basis at AUD41. 4G subscriber base increased 13% to 2.74m. 30-Sep 14 Debt/LTM EBITDA saw an uptick to c.1.12x from 0.95x last year.	Neutral. We expect Optus’ ratings to remain intact despite debt/LTM EBITDA rising to c.1.12x, as this figure is well below Moody’s threshold of 1.75x and still lower than S&P’s base case expectations of 1.2-1.3x. Capex guidance
Golden Agri-Resources (Ba2/NR/NR; sta)	Plantation	ID	3Q14 results recorded a 86% decline in net profit to USD4.4m (3Q13: USD32.5m) despite higher revenue of USD1.8bn (+17%) and relatively stable EBITDA of USD110m (-4%).	Negative. The sharp decline in net profit is set to pressurize GAR’s already tight credit profile. Apart from weaker average CPO prices and  challenging oilseed business in China, we think the culprits include a significant rise in foreign exchange loss (3Q14: -USD29.3m; 3Q13: -USD6.2m) which could be due to stronger USD against CNY and forex losses on its Indonesian operations. GAR remains under pressure with its debt/assets ratio rising to 20.0% as at 3Q14 (2Q14:19.5%) and EBITDA to interest cover declining to 3.1x (2Q14: 4.2%).