RHB FIC Credit Market Update - 27/4/15

27 April 2015

Credit Market Update

Reliance Communications, CLP Power to Price New USD; Maintain Preference for CENCHI 5/17 SGD

                                                                                               

REGIONAL                                                                                      

¨      Yields hold firm post-China defaults; Reliance Communications to deliver USD 5.5y at 6.5% IPT. Asian USD CDS premiums closed 0.9bps tighter at 106bps last Friday. Over in the US, the UST curve ended 2-5bps flatter despite better durable goods orders of 4% YoY (consensus: 0.6%; prior: -1.4%) as a drop in shipments of non-defense capital goods led market observers to cut their 1Q15 GDP estimates. Secondary markets regained attention as primary activity took a breather. We noted yields on both IG and HY fronts holding firm in general despite China’s recent default cases. In the IG space, recently issued SINOPE 5-30y notes were narrower 2-6bps in yield, while Pelindo II’s new USD 10y and 30y notes pressured Pelindo III 24s yields wider by 2bps. Meanwhile, DBS 15s and 19s were 3-5bps firmer ahead of its firm financial results today. ICICI bank is also expected to deliver its financial results today, its bonds’ yields holding flat on Friday. Elsewhere, we noted S&P’s outlook revision of AEON Credit Service (Asia) Co Ltd to negative from stable mainly on expectations that its parent, AEON Financial Service (AFS) Group, will face higher economic risks if it continues aggressively expanding its EM credit exposure. On the primary front, Reliance Communications Ltd (Ba3/NR/BB-) is expected to sell USD 5.5y notes today at an initial price target of 6.5% while Hong Kong-based CLP Power HK Financing is expected to sell today USD300m 10y notes, guaranteed by CLP Power HK Ltd (A1/A/NR) at an IPT of 145bps. In the week ahead, we look forward in particular to the US 1Q15 GDP print and FOMC statement on Wednesday and Thursday evening respectively. In China, manufacturing and non-manufacturing PMI data is expected this Friday.

¨      Active secondary flows seen in yielder names. We observed widening in the short-to-mid SORs, with the 3y and 5y broadening by c.1bp to close at 1.51% and 1.87% respectively.  Flows picked-up with interest slanted towards OLAMSP and GALVSP as well good secondary demand seen in the recently issued UENVSP 18’ which was heavily oversubscribed in the primaries. SG’s outlook for industrial production continues to look sluggish, though better than expected with Mar IP numbers coming in at -5.5% (consensus: -5.8%; Feb: -3.6%).

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MALAYSIA

¨      MARC affirmed Malaysia’s sovereign rating at AAA; Gain in Ringgit bonds amid strong flows. Govvies rallied with total transaction surpassed MYR4.5bn last Friday as MYR strengthened against the greenback, following series of weak US data released last week which may signal further delay in interest rate hike. On corporates, RHB LT2 4/25c20 tightened by 2bps to 4.825% amid the upcoming issuance of MYR500m B3T2. Trading activity were active at MYR659m, led by government guaranteed Prasarana 3/19 and PTPTN 2/30 which settled at 3.829% (-0.1bps) and 4.6% (-4bps) respectively. Separately, in response to recent market speculation, MISC’s management indicates that they have no plans to divest its petroleum tanker subsidiary, AET.

TRADE IDEA: SGD

Bond(s)	Central China Real Estate; CENCHI 5/17 (yield: 6.37%; SOR+c.510bps) (Ba3/BB-/-) (O/S amount: SGD200m)
Comparable(s)	Yanlord Land Group; YLLGSP 5/17 (yield: 6.23%; SOR+c.500bps) (Ba3/B+/-) (O/S amount: SGD400m)
Relative Value	We reiterate a preference for CENCHI 5/17 which has widened by c.18bps since first mentioned in the Credit Market Update (dated: 8-Dec). This is in comparison to its other SGX-listed peer, which has broadened by c.90bps over the same period on concerns of its high-end market exposure to a slowly recovering Chinese market and recent downgrades in outlook in Nov-2014 (BB-/Neg from BB-/Sta) and rating in April-2015 (B+/Sta from BB-/Neg).
Fundamentals	We believe that Central China Real Estate (CCRE) will continue to be a robust pick as: 1)     Stable and improved financials. The Henan-based property developer’s Total Debt/ EBITDA improved in FY2014 to 4.4x (FY2013: 5.0x) while EBITDA Interest Coverage is at 4.6x (FY2013: 2.9x). This is in comparison to Yanlord which has not fared as well, with its respective ratios in  FY2014 at 7.3x (FY2013: 5.3x) and 11.4x (15.8x); 2)     Slow recovery in China property market.  Recovery in the China property market has been sluggish, even as we saw property loosening regulations such as the favourable mortgage refinancing framework and liquidity injections in 4Q2014, with only +9 (out of 70 cities) cities showing MoM housing price improvement in Feb-2015 (Feb-2014: +55 cities). In lieu of this, we opine that CCRE, a mass-market property developer, will comparatively gain more from these policy changes compared to a high-end developer; 3)     Strong parentage. The company is 27% owned by CapitaLand, hence we opine that CCRE will benefit from this strategic tie-up with the well-known and established Singaporean developer.