FW: RHB FIC Credit Market Update - 20/11/14

20 November 2014

Credit Market Update

Softening Expected Post-Hawkish FOMC Minutes, Strong Primary Demand Persists; Lock-In Gains on ICBCAS 10/23c18 B3T2

REGIONAL                   

¨      Fed minutes tilted hawkish; sellers dominated USD credit space. We saw better selling across the region on USD credits particularly the mid- to long-end. In the HK/CN space, we saw trades on O&G and financial names such as ICBCAS 20 subdebt, CNOOC 19, CNPCCH 21 with higher yields. Elsewhere, selling pressure was seen on papers like KBank 16 subdebt, PSASP 19 MAYMK 29. JACI IG and HY spreads correspondingly inched wider to 180bps (+2bps) and 505bps (+1bp) respectively. Credit protection costs remained rangebound with iTraxx AxJ closing at 106bps (+1bp). We expect the upward yield pressure on Asian USD credits to continue given subdued overnight Treasury movements. UST yields added 1-3bps overnight on hawkish-tilted Fed minutes, shrugging off unexpectedly lower housing starts (actual: 1,009k, consensus: 1,025k).

¨      Persistent demand on primaries. On the USD primary front, Alibaba (A1/A+/A+) received USD20bn orders from US investors for the c.USD8bn jumbo bond issuance. The China’s e-commerce giant is expected to price up to 7 tranches today (5 fixed-rate bonds maturing 3-20y and 2 floaters maturing 3-5y). NTPC (Baa3/BBB-/BBB-) received USD2.3bn orders for USD500m 10y bonds, priced at T+205bps (initial guidance of T+230bps area). Meanwhile, Bank of China (A1/A/A) has released final guidance for its USD600m dual tranche deal - T+150bps area for 3y and T+165bps area for 5y.

¨      SOR flattened; China Nov PMI printed weaker. The SOR curve flattened yesterday as the 3y marginally widened by 0.35bps (to 1.13%) while the 5y tightened by 0.8bps (to 1.70%), which saw the 3y/5y spread tightening by 1.15bps to 57.4bps. We observed more dynamic flows yesterday on papers such as FRESHK, OLAMSP and ASPSP. We opine that markets will be trading slightly heavier today as the FOMC minutes turned out to be less hawkish (compared to the FOMC statement) than expected though the China Nov HSBC Manufacturing PMI released this morning came in slightly below consensus at 50.0 (expected: 50.3). In the primaries, Sembawang Industries Ltd (NR) priced its SGD100m 7y at final guidance of 2.94% while the SGD150m 12y was finally priced at 3.593%.

MALAYSIA

¨      Selling pressure in MGS/GII ahead of CPI release; Moderate corporate flows. Local govies recorded losses yesterday ahead of the country’s October CPI data to be announced this Friday (consensus: 3%, Sept: 2.6%). Total volumes surpassed MYR2.1bn, with the 10y benchmark being the most transacted paper where both its yield and the 10y-GII edged upward to 3.892% (+2.4bps, MYR422m) and 4.13% (+2bps, MYR719m) respectively. At the end of the day, the 3y, 5y, 7y and 15y settled 0.5-2.3bps higher at 3.583% (+1.4bps, MYR125m), 3.721% (+2.3bps, MYR51m), 3.781% (+0.5bps, MYR49m) and 4.418% (+1.1bps, MYR200m) respectively. In the corporate space, investors continued to focus on long-duration papers with total volume registering at a moderate MYR474m. A series of Kesturi papers exchanged hands as well on a combined trade volume of MYR80m, closing in between 4.799%-5.099% for the 12/24-11/29 maturities. SEB topped trades again with cumulative trades of MYR90m, ending flat at 4.75% and 5.278% for tranches 7/24 and 7/29 respectively.

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TRADE IDEA: USD

Bond(s)	Industrial and Commercial Bank of China (Asia) Limited (ICBCAS) ICBCAS 4.5% 10/23c18 B3T2 (NR/NR/BBB+) (mid-price: 101.62; mid-YTC: 4.04%; Z+261bps )
Comparable(s)	-
Relative Value	We suggest taking profit on ICBCAS 10/23c18 which has narrowed about 85bps in terms of yield (total return: 6.63%) since our recommendation to add on 6-Feb 14. We think it is timely to lock-in gains now as we expect significant incoming supply of T2 and AT1 capital from China’s major banks as part of ongoing capitalization strengthening plans. We note that ICBC has already received regulatory and board approval to issue as much as CNY35bn (USD5.7bn), which is expected to arrive somewhere next month. We also have witnessed strong appetite for higher-yielding capital over the past few months, as evidenced by Bank of China’s recent and successful jumbo issuance of USD6.5bn AT1s among others. As such, we prefer re-positioning ahead of the likely re-pricing in existing issues once new supply hits the market.
Fundamentals	-

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
Yanlord Land Group	Property	CN	S&P revised Yanlord’s outlook to BB-/Neg from BB-/Sta as continued correction in the China property market in the next 12 months will impact Yanlord’s high-end target market base.	Negative. We continue to be mildly underweight on the China property market. We have seen resolve from the China Government to avoid a plunge in the property market via its recent liquidity stimulus which cumulatively amounted to CNY700bn and pro-property changes in policy. Nevertheless, we expect the mass-market to recover first before filtering towards the high-end market, where Yanlord is in. The company’s credit metrics have deteriorated over time, with LTM EBITDA Interest at 10.1x (2013: 15.8x) and LTM Total Debt/ EBITDA at 7.7x (2013: 5.3x)