RHB FIC Credit Market Update - 18/5/15

18 May 2015

Credit Market Update

Strong Week for APAC Credit; Jambatan Kedua to Raise MYR1.8bn; Malakoff 12/19 MYR Remains Attractive   

REGIONAL                                                                                      

¨      Good week for APAC credits. The iTraxx AxJ IG ended 2.7bps lower at 105bps amid plentiful demand for China IG issues. Despite general weakness in DMs, the UST curve bull flattened 3-14bps WoW due to disappointing economic data; weak prints came out of the US, including industrial production at -0.3% (consensus: 0%; prior: -0.6%) and consumer sentiment falling to a 7-month low of 88.6 (consensus: 95.9; prior: 95.9). Meanwhile, APAC credit performed well with yields paring 2-5bps on average. New issues were well bid in the secondary market, where we saw the new CHIMIN 18 settled 17bps inside reoffer, together with the AGRBK 18 and 20s traded 7bps and 11bps inside issuance levels respectively. In the O&G space, the PETMK complex saw yields narrow 6bps amid sturdy oil prices (Brent: USD66.81/bbl. On the primary front, China Aoyuan Property Group Ltd (B2/B/B+) is expecting to sell today USD 3y bonds for refinancing at an initial target of 11.625%, while Garuda Indonesia (NR/NR/BBB+) is planning a USD Reg S sukuk issuance. As for economic data, this week’s relevant data releases include US housing starts, jobless claims, home sales and inflation. Meanwhile, China’s data load will be lighter with April property price data and HSBC manufacturing PMI pending.

¨      Benchmark SORs yields fell in tandem with correction in UST. Key benchmark gain 4-6bps for the SOR 3y and 5y on Friday, ended at 1.595% and 2.028% respectively. Meanwhile, Cambridge MTN Pte Ltd (BBB-) printed SGD130m of 5y at 3.95%, or 5bps inside the initial guidance with 2.12x subscription. 52.1% of allocation went to Singapore investors and 47.7% to Malaysia. Major chunk of the bond was subscribed by the Fund Managers and Banks (90.6%).

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MALAYSIA

¨      Jambatan Kedua is planning to raise up to MYR1.8bn. MGS closed 0.2bps to 2.6bps lower last Friday following better than expectation GDP growth of 5.6% for 1Q15 (consensus: 5.5%). The top performer was 7y-MGS which fell 2.6bps to 3.779% on MYR405m trades. Meanwhile, corporate flows were relatively thinner at MYR422m (vs YTD daily average of c.MYR500m). We note generally tightening in the long-dated toll road bonds from Anih, BFB and PLUS. On the banking space, KT Kira 5/20 gained by 0.04 sen, settling at 5.71% on its debut trade. Elsewhere, Jambatan Kedua is planning to raise bonds with expected issue size of up to MYR1.8bn, from its new MYR4.6bn Government Guaranteed Sukuk Programme.

TRADE IDEA: MYR

Bond(s)	Malakoff Power 12/19 (AA3) (Last trade date: 12-May; Price: 101.58; Yield: 4.663%; 5y-MGS+c.109bps) (Amount o/s: MYR670m)
Comparable(s)	Tanjung Bin Energy (“TBEI”) 3/19 (AA3) (Last trade date: 17-Apr; Price: 101.16; Yield: 4.541%; 5y-MGS+c.97bps) (Amount o/s: MYR30m)
Relative Value	We reiterate our preference on Malakoff Power 12/19 amid deleveraging post IPO.  At 4.663%, Malakoff 12/19 is trading at a decent 12bps in yield over its similarly rated subsidiary TBEI 8/19, with the latter is still under construction. Malakoff’s recent MYR1.8bn IPO will be a good upside catalyst. In addition, Malakoff Power 12/19 may provide better liquidity on the back of its larger tranche size.
Fundamentals	Fundamentally, Malakoff’s credit profile is supported by: 1)     Diversified portfolio of 5 independent power producer subsidiaries (Segari, GB3, Prai Power, Tanjung BP, TBEI) with generating capacity of 5,393 MW including the under-constructing TBEI; 2)     The impact from delay of TBEI by 6-12 months to be minimal to Malakoff’s repayment profiles in the next 5 years as TBEI is expected to contribute only c. 5% to the operating cash flow during the period. Malakoff, however, dismissed reports of delays and stated that it will deliver the 1,000MW coal plant by March 2016; 3)     IPO to support deleveraging as the proceeds will be allocated to redeeming MYR1.8bn of Junior Sukuk, which currently account for additional finance costs of MYR113.4m per annum (6.3% coupon rate). We expect Malakoff’s pro-forma debt/equity ratio to reduce to 2.8x from 4.4x as of 31-Dec 14 based on consolidated borrowings of MYR18.23bn and shareholders’ equity of MYR4.18bn. However, we acknowledge that the IPO need to be completed before the repayment of MYR1.3bn TBEI’s equity bridging loans in 2017; and 4)     Stable and recurring cash generating capability mitigates its moderately geared balance sheet with gearing ratio and debt/EBITDA of 4.4x and 7.3x respectively. We expect the listing exercise to reduce debt/EBITDA to 6.6x on a pro-forma basis.