RHB FIC Credit Market Weekly - 17/4/15

17 April 2015

Credit Market Weekly

Chinese Credits Flooded the Market as GDP Eased in 1Q15; Relatively Quiet in SGD and MYR   

                                                                       

REGIONAL

¨      Streak of new IG deals emerged; market showed strong appetite for Chinese prints. CDS protection costs experienced a slight uptick of 1.88bps to 107bps over the new deal-heavy week. UST rates also stayed supportive, lowering 2-10bps across on mixed data releases including improved housing starts of 2% MoM (prior: -17%), increased initial jobless claims to 294K from 281K, a reversal of the negative trend in US retail sales advance which rose to 0.9% MoM (consensus: 1.1%), and weaker US industrial production of -0.6% MoM (prior: 0.1%). Over in Asia, risk appetite was still supported despite China’s weaker export print, which fell 15% YoY (consensus: 9%; prior: 48.3%), slightly lower GDP growth of 7% YoY (prior: 7.3%), lower-than-expected retail sales and industrial production of 10.2% YoY (consensus: 10.9%) and 5.6% YoY (consensus: 7%) respectively.

¨      Primary deals took center-stage this week and generally weighed down on secondary activity. We noted new bond sales of USD9.87bn led, in order of arrival, by Standard Chartered Plc (A2/A-/AA-) with USD750m 3y bonds priced at T+85bps (IPT: T+90/95 area), USD250m 3Y FRNs at 3ml+64bps, USD1.25bn 5Y bonds at T+90bps (IPT: T+100bps area) and USD750m 10Y bonds at T+130bps (IPT: T+140bps area). This was followed by China Communications Construction Co. (A3/NR/A-) selling USD1.1bn PNC5s at 3.5%, 30bps inside its initial price target of 3.8%; Central China Real Estate (Ba3/BB-/NR) pricing USD300m 5NC3 notes at 8.75% (IPT: 9.125%); Formosa Plastics Corp (expected issue rating: NR/BBB+/NR) pricing USD1.0bn 10y notes at T+157bps (IPT: T+180bps); and Haitong International Finance Holdings 2015 Ltd (expected issue rating: NR/BBB/NR) pricing USD670m 5y bonds at T+220bps (IPT: T+245bps area). Later in the week, China Cinda Asset Management (NR/BBB+/NR) 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) while Industrial Bank of Korea (Aa3/A+/AA-) received USD2.75bn orders for its USD700m bonds priced at T+75bps (IPT: T+90bps).

¨      Meanwhile in the secondary space, we saw a significant decline in EIBKOR 16 and 18 of between 17-55bps adjusting to new Korean bank supply hitting the market. In the tech space, TENCNT 16-25s stayed firm, tightening 1-3bps amid news of Tencent CEO, Ma Huateng, cutting his stake by 10m shares. Elsewhere, PETMK 19-25s tightened 5-8bps, benefitting from rallies in crude prices that have pushed Brent to USD63/bbl from USD58/bbl over the week. On the losing end, NOBLSP 15 and 20s were battered by negative research reports, widening 170bps and 41bps in yield respectively. Over in the HY space, Kaisa 18 notes gained (yields declined 45bps) on news that its founder, Kwok Ying Shing, has returned as chairman.

¨      More deals in the pipeline as uncertainty ebbs post-MAS decision. Primary space was relatively quiet this week, with issuance by UOL Group (NR) SGD175m 3y at 2.5% and Indus Gas (NR) with a SGD100m 3y at 8%. In the pipeline are two Indonesian names with power/ commodity exposure, PT Medco Energi Internasional (NR) and Sinar Mas (NR). Brent oil prices jumped by nearly 10% to USD63.5/bbl from a week ago, with buying seen in O&G names like KRISSP, VALSZP, IOCLIN and SWIBSP 6/15. We also saw some buying into UOLSP 5/17 ahead of its 3y issuance and TRIOIJ. The March NODX printed with a surprise stronger number of +18.5% (consensus: -1.1%), largely driven by the electronics sector, which may prove positive for bond names like AMTENG moving forward.

¨      Strong dip in short-term SOR expected to reverse. The short-to-mid SOR curve steepened, with the 3y tightening by a larger -13.8bps (to 1.4%) compared to the 5y with -6.7bps (to 1.79%), even as the similar duration Treasury curve marginally flattened. Post-MAS standing pat, the 3y/5y spread has now widened by around +10bps to 40bps. The decline in the 3y was mostly due to the unwinding of SGD positions, hence we view that short-term rates will reverse and rise in tandem with US Fed Fund Rate projections. Key upcoming data include the China Apr HSBC Manufacturing PMI and SG Mar CPI (Apr-23) and SG Mar Industrial Production (Apr-24).

MALAYSIA

¨      Quiet MYR bond market in the secondary space amid busier primary issuances from the Government. Secondary activity were relatively quiet this week as investors focused on the issuances of 5.5y MGS and Malaysia Global Sukuk.  The TR MYR Bond Index settled flat at 140.45, compared to last Friday, as gain in the credit market offsetted by the rise in the govvies yields following the lower Developing East Asia growth projected by World Bank. A total of MYR2.25bn transacted this week in the corporate space, skewing toward high quality AAA and quasi government bonds. Among the notable gainer were Korean names such as Kexim and Hyundai Capital after Moody’s revised Korea’s sovereign outlook to positive last week; while we also note tightening in toll road names. Market players continue to concentrate on mid-to-long end of the curve for carry play amid the dovish global interest rate environment.

¨      On the primary market, we saw a total MYR1.2bn issued this week, bringing total YTD issuance to MYR18.1bn. Point Zone (NR) – SPV for KPJ (RAM AA3) MYR800m was privately-placed during the week while other issuances were perpetual bonds from Boustead (MYR66m) and DRB Hicom (MYR100m).

¨      Meanwhile, we attended Sarawak Energy’s briefing (RAM AA1) on the 16-Apr. The following were the highlights:

·         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.