12 May 2015
Credit Market Update
Credit
Protection Costs Fell Following PBoC Cut; Huawei to Tap USD10y; New CCB B3T2
Fairly Priced
REGIONAL
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Huawei to
deliver 10y tap today; mixed performance on Monday post PBOC rates cut. Credit protection costs continued descending, with
the iTraxx AxJ IG inching down 1.5bps to 105bps yesterday, following news of
China’s 25bps rate cut. However, APAC credit markets, which opened to a bull
steepened (1-8bps) UST curve and the positive rate cut news, saw relatively
light flows and mixed performance. In IG banks, yields closed 3bps tighter led
by higher-yielding Thai and Indian names including BBLTB 29, KBANK 16, BOIIN 20
and ICICI 18. Conversely, IG real estate yields were 7bps wider, while O&G
yields added 3.6bps on average amid a marginal 0.7% decrease in Brent crude to
USD64.91/bbl. On the HY front, China-based coal importer Winsway Enterprises
Holdings defaulted on its 8.5% 2016 notes, failing to meet USD13.15m in
coupons. HY credits were generally weaker partly on this news but mostly due to
a 23bps widening in real estate yields, although we did note O&G yields
shedding 1.7bps. Interest on IG as SORs ended tighter on Friday. The
short-to-mid SOR flattened on Friday, with the 3y and 5y closing at 1.77%
(-1.9bps) and 2.18% (-3.2bps) respectively. We saw demand interest centered
towards IG names such as SPSP, HDBSP and CAPITA as the underlying SOR rates
ended the week lower. This reversed an earlier inclination for higher yield
bonds when SORs widened strongly by 15-20bps in the first half of last week.
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On the USD
primary front, Korea Development Bank (Aa3/A+/AA-) sold USD500m 5y notes
yesterday at T+72.5bps (IPT: T+80bps), its first USD tap since last September
and oversubscribed 2.6x. Today, we expect Huawei Investment & Holding Co
Ltd (NR) to lead activity with USD 10y papers at an initial price target
around T+220bps. In addition, China General Nuclear Power Corp (A3/A-/A+) will
price 10y notes at an initial guidance of T+200bps along with Agile Property
Holdings Ltd (Ba3/BB-/NR) which is supplying 5NC3 papers is starting
at an initial guidance of 9.375%. Meanwhile, Shanghai Electric Group Co Ltd
(A2/A/A) is holding investor calls today while Beijing State-Owned
Assets Management (Hong Kong) Co. (A3/A-/A) is planning USD Reg S bonds,
with investor meetings commencing tomorrow.
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SGD issuance
space quite on volatile SORs. The
short-to-mid swap curve saw a parallel decline, with the 3y and 5y tightening
by -4.5bps to close at 1.73% and 2.14% respectively. We saw demand interest in
higher-yielding names like UENVSP and HYFSP as well as buying into CENCHI,
probably from the recent PBoC interest rate cut of 25bps. The primaries
continue to be quiet as issuers stay at the sidelines due to the volatility in
the swap rates this past two weeks.
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MALAYSIA
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Slower
start on Monday for MYR bonds, index gain +0.09% as China cuts further. Only MYR1.86bn was transacted for the
govvies, with MGS 10/20 top the volume at MYR359m, ended the day at 3.581%
(-2.2bps), while GII 8/20 and 10/25 yields fell 0.3bps-1.2bps to close at 3.71%
and 3.984% respectively. We saw interesting trade on the off-benchmark 7/24 at
4.016% vs the benchmark MGS10y at 3.878% for yield pick-up of up to 13.8bps,
ceteris paribus. On the corporates, MYR597m was reportedly done, dominated by
the PLUS complex maturing 2022-28 at the range of 4.248%-4.569% worth MYR161m
in nominal. MYR80m of KLIA 1/16 changed hands, ended at 3.531% while CIMB 38c18
shaved 1.1bps to 4.646% with MYR20m transacted.
TRADE IDEA: USD
Bond(s)
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China
Construction Bank Corp (CCB, A1/A/A)
CCB
3.875% 25c20 B3T2
(price: 99.77; ytc: 3.925% ; T+234bps)(NR/BBB+/BBB+)(amount o/s: USD2.0bn)
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Comparable(s)
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CCB
Asia 4.5% 24c19 B3T2 (price: 102.19; ytc: 3.689%;
T+211bps)(Baa1/NR/A-)(amount o/s: USD750m)
BOCOM
4.5% 24c19 B3T2
(price: 102.679; ytc: 3.829%; T+225bps)(NR/NR/BBB+)(amount o/s: USD1.2bn)
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Relative Value
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We
think the recently issued CCB 3.875% 25c20 B3T2 is reasonably priced against its closest
peers after adjusting for duration and credit differences. On its own curve,
CCB 25c20 offers a 10bps pickup in yield over CCB Asia 24c19 after accounting
for the 1-notch lower rating of the former due to its full-write down
mechanism, as opposed to the latter allowing for partial write-downs in a
non-viability event (PONV). Additionally, CCB 25c20 PONV trigger falls within
China’s jurisdiction, where statutory bail-in rules have yet to be adopted
and the consensus of authorities, including the central bank (PBOC) and
regulatory bodies (e.g., CBRC), is still not firm on bail-in being the
preferred method of resolving banks and ensuring financial system stability.
In CCB Asia 24c19’s case, however, Hong Kong Monetary Authority is expected
to adopt statutory bail-in rules by the end of 2015.
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Fundamentals
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We
view CCB’s credit profile to be fundamentally strong on the following key
considerations:
1)
Second-largest
commercial bank in China by assets, with a 10% share of total system assets as well as
12% shares in both system loans and deposits;
2)
Extreme likelihood
of systemic support, given CCB’s tight
government linkage (57% state-owned), its significant size and strong
connection to the domestic financial system;
3) Above-average profitability, reflected by net interest margin and return on
assets of 2.72% and 1.57% respectively;
4) Superior capitalization, evidenced by CET1, T1 and CAR ratios of 12.5%, 12.5%
and 14.97% respectively; and
5) Good funding base and liquidity, as CCB maintains a healthy loan/deposit ratio of
71.8% (1Q14: 69.38%) under the statutory limit of 75%.
All financial data as of 31-Mar 15
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