Subject: RHB FIC Credit Market Update - 31/12/14

31 December 2014

Credit Market Update

Market Quiet before New Year; Value in BFB 1/27

REGIONAL

¨      Kaisa bonds dipped on cash flow uncertainties. UST yields continued to inch lower (-2bps to -3bps) on risk aversion stemming from Eurozone QE and political uncertainties in Greece. In the HY credit space, Kaisa bonds have dipped c.35-40% in December amid the government’s ban on four of its projects and the resignation of its chairman. S&P has placed the company on NegWatch (BB-) and Moody's has downgraded the company to B1 from Ba3, under review for downgrade. In the USD credit space in Asia, we saw trades on BBLTB 23, TEMASE 39 and NOBLSP 20 which tightened marginally amid thin liquidity. JACI IG and HY spreads widened a tad to 189bps (+2bps) and 538bps (+3bps) respectively. iTraxx AxJ rose 2bps to 105bps.

¨      Markets largely quiet. We observed flattening in the SOR curve, with the 3y widening by +0.55bps (to 1.44%) while the 5y tightened by -1.2bps (to 1.91%). With New Year’s being celebrated tomorrow, markets are expected to be largely quiet, though we saw a smattering of interest on some property names yesterday. In China, the HSBC Dec Manufacturing PMI came in slightly lower than expected at 49.6 (consensus: 49.5), signaling potential sluggishness in parts of the economy.

MALAYSIA

¨      MGS flattened; Secondary flows remained thin. Govies space registered better flows of MYR882m, albeit still below YTD daily average of MYR2.2bn. We continue to see investors’ activity tilted towards the short-dated MGS. MGS curve flattened as yield for the short-tenure sovereign edged 4-7bps upwards with the 2y-MGS and 3y-MGS settled at 3.545% (+4.5bps, MYR122m) and 3.650% (+6.8bps, MYR90m) respectively. Yield for the mid-tenure benchmarks moved sideways – 5y-MGS (3.837%, +0.1bps, MYR9m) and 7y-MGS (4.052%, -1.3bps, MYR8m). Meanwhile, only few names exchanged hands in the PDS market on lackluster trading session of MYR119m, compared to YTD daily average of MYR439m. Among the notable names were Boustead 11/15 tighten 1.3bps to 3.886% (MYR35m); DanaInfra 11/34 inched 1.2bps upward to 4.85% (MYR20m); and HCS 5/15 closing flat at 3.984% (-0.3bps, MYR20m).

TRADE IDEA: MYR

Bond(s)

Bright Focus (BFB) 1/27 (AA2) (Last traded: 17-Dec; Price: 101.31; Yield: 5.549%; 10y-MGS+ c.142bps) (Amt O/S: MYR125m)

Comparable(s)

Kesturi 12/27 (AA3) (Last trade: 16-Dec; Price: 95.79; Yield: 5.200%; 10y-MGS+ c.107bps) (Amt O/S: MYR250m) Kesturi 12/32 (AA3) (Last trade: 9-Dec; Price: 97.96; Yield: 5.429%; 20y-MGS+ c.95bps) (Amt O/S: MYR120m)

Relative Value

BFB 1/27 may provide a tactical opportunity for pickup relative to peers.  Rated AA2, BFB 1/27 is c.35bps cheaper than AA3-rated Kesturi 12/27 for similar duration. We see room for narrowing given the one-notch rating difference despite its weak but still comfortable fundamentals.

Fundamentals

We prefer BFB’s fundamentals vs Kesturi’s, although both appear weaker than industry average in our view. BFB enjoys a long remaining concession life of 31y, better liquidity as seen with debt to EBITDA of c.28.5x as at FY12 (Kesturi: 31.4x as at FY12) and average FSCR of 8.1x (Kesturi: 5.9x), although adjusted gearing is high at 12.9x (Kesturi: 2.8x).

CREDIT BRIEF

Company/ Issuer

Sector

Country

Update

RHBFIC View

Vallianz Holdings

Oil & gas

SG

The company is planning to acquire a 45% stake in Holmen Heavylift offshore (which owns 3 submersible launch barges) for USD2.9m cash

Neutral. Vallianz has sizeable cash reserves at USD54.9m (as at 3Q2014), hence the USD2.9m transaction will not deplete and impact its reserves much. Nevertheless, we are concerned for its tighter credit metrics with its Total Debt/ EBITDA at 12.7x (OSV peers: 12.1x) and EBITDA Interest Coverage at 2.89x (OSV peers: 3.8x).