FW: RHB FIC Credit Market Update - 18/11/14

18 November 2014

Credit Market Update

Spreads Rangebound Ahead of FOMC Minutes Release; Value in TNBNE 5/30

REGIONAL

¨      Credits consolidated; focus on primaries. Asian space continued to trade in consolidation mode yesterday with spreads moving rangebound. Investors focused along the mid- to long-end in the HK/CN space, with yields generally heading north. Papers traded include HUWHY 22, CNOOC 19 and SINOCE 24. On the other hand, trading was firm in the MY and TH space at the long end, such as PETMK 26 and PTTTB 35 where yields declined. JACI IG spread closed flat at 180bps (3m average: 180bps) while the HY space ended 2bps higher at 506bps (3m average: 494bps). Credit protection costs remained flattish at 106bps (3m average: 104bps). Over in US, Treasury yields rose 2bps (mid to long) on the backdrop of mixed econ data (stronger empire manufacturing and weaker industrial production). We expect investors to continue trading rangebound ahead of the FOMC minutes release tomorrow, which may provide more details on the potential rate hike.

¨      Primary activities rose; more names added to pipeline. On the USD primary front, Shanghai Huayi (Baa2/BBB/BBB) has hired banks for a potential debut of USD bond offering. Meanwhile, Westpac (Aa2/AA-/AA-) has printed a dual-tranche deal - USD1.35bn 3y fixed notes at T+55bps and USD650m 3y floaters at 3mL+37bps. Shui On (NR) has priced USD500m 3y at 8.70%, well inside initial guidance of 9.00% area; while India’s Axis Bank (Baa2/BBB-/BBB-) printed USD500m 5.5y at T+170bps (T+c.195bps initial guidance).

¨      Tepid SGD flows ahead of FOMC. The short-to-mid SORs inched tighter yesterday as the 3y and 5y closed at 1.1% (-1bp) and 1.69% (-1.5bps) respectively. We saw lighter SGD trading on Monday due to tepid larger macroeconomic flows ahead of the FOMC minutes release and China HSBC Manufacturing PMI on Thurs. Nonetheless, we still observed two-ways flows across banking papers like UOBSP and OCBCSP perps as well as buying into OLAMSP. Buying interest was also centered on HK-related papers such as HKLSP and SUNHUN as the HK courts have ordered demonstrators to clear from protest sites. Aspial Corp (NR) is issuing a SGD4y at initial price of 5.625%.

MALAYSIA

¨      AAA and AA3 bonds drove PDS activity; MGS yields moved sideways. We saw modest activity in the corporate space, with total volume registering at MYR444m, 42% higher compared to that of last Friday’s session (YTD daily average: MYR441m). Transactions were skewing to AAA- and AA3-rated bonds like Kesturi 11/29 closing flat at 5.089% (MYR50m); Prasarana 11/16 tightening 0.8bps to settle at 3.691% (MYR40m); and RHBA B3T2 5/24c19 ending 0.8bps tighter at 4.698% (MYR33m). Local govies benchmark yields generally moved sideways on thin flows of MYR917m (YTD daily average: MYR1.57bn) following the stronger-than-expected 3Q GDP print of 5.6%. Topping the volume chart was the 10y-GII, which edged 0.8bps down to 4.107% (MYR300m). At close, the 3y, 5y, 7y and 10y settled at 3.569% (+4.1bps, MYR92m), 3.669% (unchanged, MYR37m), 3.778% (-1.1bps, MYR10m) and 3.868% (unchanged, MYR60m) respectively.

TRADE IDEA: MYR

Bond(s)

TNBNE 5/30 (MARC: AAA) (Price: 92.76; Yield: 5.099%; 15y-MGS+ c.96bps)

Comparable(s)

PLUS 1/29 (MARC: AAA) (Price: 101.35; Yield: 4.827%; 15y-MGS+ c.69bps)

Relative Value

We see value in TNBNE 5/30 which offers an immediate pick up of c. 27bps for 1.3 year longer tenure. At 5.099%, TNBNE 5/30 is trading 18bps cheaper than our proprietary AAA curve.

Fundamentals

TNBNE credit fundamental is enhanced by sponsor’s completion support and rolling guarantee from its ultimate parent company, Tenaga Nasional Bhd (TNB). The construction TNBNE is progressing in line with the initial schedule at 82.3% as at Sept-14. Meanwhile, TNB possesses solid credit fundamentals based on:

1)     Strategically important as the Peninsular Malaysia principal electricity provider.

2)     Strong financial profile on the back of low gearing and debt-to-EBITDA of 0.74x and 2.7x respectively in FYE8/14.

3)      Current low coal prices could further strengthen its financial profile where coal on average represents about 40% of TNB’s generation mix in FY14.