FW: RHB FIC Credit Market Update 140515

14 May 2015

Credit Market Update

Investors Digesting New Issuances in Secondary Space; ICBC Set for USD Offer After CCB; Value in FCTSP 4/19

REGIONAL

¨      Credits better bid as investors digesting new issuances in secondary space; ICBC to raise B3T2 in June. Credit protection costs receded as the iTraxx AxJ IG inched down 1.7bps to 107bps. Asian credits awoke to a bull flattened (2-4bps) UST curve, setting a positive tone for the trading. Overall, secondary credits were better bid in the major sectors, real estate, O&G and banking. In particular, Huawei‘s well-received 10y USD1.0bn papers were firmly traded along with CCB’s new 25c20 B3T2s, which tightened 8bps. In the O&G space, PETMK 22 and 25s saw their yields shed 11bps against unchanged crude oil prices  (Brent crude: USD66.81/bbl). We also noted Indian banks closed 4bps narrower following Moody’s statements on India’s improving credit profile and expectations that public-sector banks’ profiles will improve in the medium term. On today’s primary list, China Minsheng Bank (NR/BBB/BB+) is expected to price USD 3y notes with an initial guidance of T+165bps.  New to the pipeline, Industrial & Commercial Bank of China Ltd (A1/A/A) is planning a new USD B3T2 sale in June, following its AT1 offering in December and China Construction Bank’s T2 tap on 6-May. On economic data, US retail sales prints were disappointingly flat for April. As for China, YoY retail sales and industrial production prints of 10% (consensus: 10.4%; prior: 10.2%) and 6.2% (consensus: 6.3%; prior: 6.4%) respectively were unimproved but close to their market estimates, while new loan and aggregate financing data were 40% and 11% down respectively, giving some insight into China’s recent stimulus measures.

¨      Tighter SORs may lead to issuance pick-up. The short-to-mid swaps saw keen tightening yesterday, with the 3y and 5y narrowing between 7-10bps to close at 1.72% and 2.14% respectively. Amidst the SOR decline, we saw investors picking up IG names such as SIASP, STSP and HDBSP while interest was also seen in the FCLSP space following the recent 7y issuance. In the primaries, Sembcorp Industries (NR) printed its SGD Pnc5 at final price of 4.75%, 25bps inside initial guidance, with a BTC of slightly over 2x. Meanwhile, China Metallurgical Group Corp (Baa3) eyeing for a 2y at initial guidance of low 3% and Cambridge MTN Pte Ltd 5y at IPT of 4%.

MALAYSIA

¨      Modest secondary flows ahead of 1Q15 GDP numbers. Corporate market traded moderately at MYR583m volume, with BPMB GG complex top the chart at combined MYR100m, ended the day in between 4.081%-4.682% for maturity 9/21-9/34. Elsewhere we note tightening in banking B3T2 and long-dated tollroads such as Public 10/23c18, PLUS and Kesturi. On the sovereign front, the MGS pared previous day losses where benchmark yields fell 1bps – 12bps amid modest flows of MYR3.1bn. Flows in the GII side were muted before tender closing of the new 3y GII today. Meanwhile, investors are awaiting for Malaysia 1Q15 GDP data to be released tomorrow with our economist estimates economic activity to expand by 6% yoy for 1Q15, improving from 5.8% recorded in 4Q14.

TRADE IDEA: SGD

Bond(s)

FCTSP 4/19 (yield: 2.92%; SOR+ 100bps) (BBB+/-/-) (amt out: SGD60m)

Comparable(s)

SGREIT 2/21 (yield: 3.17%; SOR+90bps)(BBB+/-/-) (amt out: SGD100m)

Relative Value

We like FCTSP 4/19, a Singapore suburban mall REIT, due to its strong underlying fundamentals and attractive valuations. On the technical side, FCTSP 4/19 could shorten the portfolio duration, while at the same time better credit spread relative to the similarly rated SGREIT 2/21.

Fundamentals

Frasers Centrepoint Trust has strong fundamentals and outlook due to:

1)     Robust credit profile. Frasers’s has a better credit profile then its peers, with leverage at 29.3% (peers: 34%), Total Debt/ EBITDA at 6.8x (peers: 9.3x) and EBITDA Interest Coverage at 5.7x (peers: 4.6x).

2)     Strong occupancy rates.  FCT enjoys a strong occupancy rate (close to 99%), which should offset some risk emanating from its average lease duration of around 2 years.

3)     Resilient to fall in tourist arrivals and cyclical retail spending. Its six department malls are located in suburban Singapore, which we believe will be more resilient to recent volatility in consumer spending as well as the expected fall in tourism numbers which may impact the Orchard-based malls more.