RHB FIC Credit Market Update - 17/4/15

17 April 2015

Credit Market Update

CDS Ended Flat Amidst More Supply in USD; Highlights from SEB Briefing; Value in WHEELK 9/21

REGIONAL                                                                                      

¨      Strong ongoing support for new China supply; more USD deals to come.  Asian USD CDS premiums ended flat at 106bps amid subdued secondary activity. UST rates continued to be generally supportive, with the 3-7y rates marginally tightening 1-2bps overnight while the 10y was flat and the 30y rose 3.6bps. The changes occurred amid mixed US data that showed an improvement in housing starts of 2% MoM (prior: -17%) but an increase in initial jobless claims to 294K from 281K. Meanwhile, secondary trading yesterday was sidelined by new deals from China Cinda Asset Management (NR/BBB+/NR) which drew a combined orders of USD13.3bn for its USD1.3bn 5Y bonds priced at T+190bps (IPT: T+215bps) and USD1.7bn 10Y bonds at T+240bps (IPT: T+265bps) as well as  Industrial Bank of Korea (Aa3/A+/AA-) which received USD2.75bn orders for its USD700m priced at T+75bps (IPT: T+90bps). However, we did notice yields on PETMK 19-25s close 5-8bps tighter, benefitting from the recent rallies in crude that have raised Brent prices to USD63/bbl. In the pipeline, Nonghyup Bank (A1/A/A-) is looking at a possible USD issuance, no further details at this preliminary stage. Elsewhere, Reliance Communications (Ba3/NR/BB-) is set to meet investors on 20-Apr for a potential offering.

¨      Stronger new home sales led interest on property names (see Credit Brief). We saw a steepening in the short-to-mid swap curve, with the 3y tightening by -1.25bps (to 1.4%) while the 5y widened by +1.5bps (to 1.79%). There was moderate flows yesterday, with some buying interest in seen in real estate names like GUOLSP and FCLSP as well as oil & gas player VALSZP. The March NODX surprised the market with a YoY rise of 18.5% (consensus: -1.1%), largely driven by the electronics sector, which may prove a positive for bond names such as AMTENG.

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MALAYSIA

¨      Tightening in toll road complex. We saw relatively thin trading volume of MYR442m and MYR2.4bn in the corporate and sovereign space, amid lack of short-term investment catalysts. Credit yields remain supported, ended in tightening trend particularly towards the mid-to-long duration. Notably, yields fell 4bps-44bps in toll road bonds such as PLUS, BFB and Kesas, on combined MYR102m transactions in the sector. On the govvies front, benchmark yields ended flattish (-0.8bps to +0.4bps). Top traded were new 5y-MGS inched 1bps lower to close at 3.647%.

¨      Key highlights from Sarawak Energy Bhd’s (“SEB”) briefing on 16-Apr:

·         Overall, better financial result registered in FY14 with PBT increased by c.45% to MYR709m.

·         We estimate c.70% of the SCORE Phase 1 Power are allocated. PPA signed to-date demand for 2,576MW, another 150MW more to be signed in 2Q15 with Malaysian Phosphate Additives. These increased total demand to 2,726MW (vs Phase 1 current total capacity of 3,944MW from Bakun, Murum and under-construction Balingian). Another 2 CCGT power plants to be built under Phase 1 in the future (Lutong: 200MW, Tanjong Kidurong: 350-450MW). In long run, the management plan to maintain a reserve margin of 16%-20%.

·         Closed to 70% of the signed customers has yet to achieve COD (expected COD between 2015-2018). The management added that the signed PPA generally has tenure of ranging 10-25 years while concentration risk of SCORE customers which mainly involved in cyclical manufacturing industry is mitigated by the strong business and financial profile of the customers such as Press Metal.

·         In terms for future capex, the management said that total capex for Phase 1 is estimated to be at MYR12.5bn, vs total programme size of MYR15bn. Based on the current bond outstanding of MYR7bn, we derive that another MYR5.5bn of capex to be spent in the next few years.

·         A question raised in regard of the competitiveness of SEB as a hydropower provider, in comparison to other source of renewable energy (e.g. solar, wind, biofuel). The management said that cost for the other renewable energy sources are generally much higher at this moment, and hence are not competitive unless subsidized by the government. In addition, solar power is less suitable/reliable for tropical country like Malaysia which are cloudy and rainy. Hydropower on the other hand has higher life expectancy of up to 100 years, in comparison to solar power of c.20 years.

·         Meanwhile, in reply to bondholders’ concerns on the higher gearing profile of SEB, the management replied that this is normal for a growth company. The management reiterate their commitment to keep the gearing level under control with most signed PPAs carried a good margins given to their lower operating cost/kWH.

TRADE IDEA: USD

Bond(s)	WHEELK 9/21 (ytm: 3.88%; SOR+c.195bps; outstanding: SGD350m)(NR)
Comparable(s)	WHARF 7/21 (ytm: 3.47%; SOR+c.155bps; outstanding: SGD260m)(NR)
Relative Value	We advocate a preference for WHEELK 9/21, which provides an attractive entry into the Wheelock-Wharf space, whereby Wheelock owns 55% in Wharf. The paper has widened marginally by 6bps since first initiated in our Credit Market Update (dated: 16-Feb). WHEELK 9/21 currently trades at a spread premium of around 40bps compared to WHARF 7/21 (1y spread average: 18bps)
Fundamentals	We like Wheelock & Co after considering the following: 1)     Robust fundamentals. The property player exhibits a fundamentally strong credit profile if compared to its SGD property peers, with LTM Debt/ EBITDA at 7.1x (peers: 9.3x) and EBITDA Interest Coverage at 10.1x (peers: 9.3x). 2)     Reorienting towards HK property developer. Wheelock has previously been more of a property investment company, but it has been making concerted moves towards property development (revenue sources are currently close to equal between property development and investment). This can be seen via Wheelock’s sale (HKD5.8bn in Aug-2014) of Crawford House to Wharf to free up cash flow.  3)     Property headwinds expected when Fed raises interest rates. HK’s property grew in 2014 by around 45% YoY in transaction volume, with growth expected to hold (though at a slower pace) in 1H2015. Nevertheless, due to HK’s exposure to the Fed rates (via its peg to the USD), the rising interest rates environment will have a sizeable impact on the property market there.   *Sun Hung Kai Properties, Henderson Land Dvlp, Capitaland, City Developments, Cheung Kong (Hldg), The Wharf, Keppel Land