RHB FIC Credit Market Update - 21/5/15

21 May 2015

Credit Market Update

                                       

Dovish FOMC Minutes to Drive Flows; SGD Interest Centered on Shorter Duration Papers; Hold SGD CENCHI 5/17 

REGIONAL                                                                                      

¨      Trading activity expected to pick-up from dovish FOMC minutes. The iTraxx AxJ was mostly unchanged at 106.6 yesterday, even as the Treasuries curve tightened by between 2.5-5bps as investors digested the FOMC minutes that were released this morning. In light of the dovish bent of the minutes (FFR hike expectations in June has been ruled out, with expectations now slanted towards Sept-2015), we opine that the issuances pipeline will continue to be healthy for the time being while secondary tracking should pick-up. IG names traded tighter yesterday before the FOMC minutes release, while O&G names (SINOPE, CNOOC) traded wider amid slightly lower Brent oil prices hovering around USD65/bbl.  

¨      SGD interest in shorter duration papers.  We observed widening of around 4-5bps in the short-to-mid SORs, with the 3y and 5y closing at 1.63% and 2.07% respectively.  Keen activity was seen in shorter duration papers, especially on yielder names like TRIOIJ, YLLGSP and CENCHI, potentially on short-to-mid benchmark steepening expectations and also on issuers with recent new prints (GALVSP, GGRSP). 

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MALAYSIA

¨      Relatively quiet MGS/GII as focus on new MGS 5/35 MYR2.0bn; Active flows in corporate bonds. Investors focus shifted to the new auction of MGS 5/35 which resulted to marginal secondary flows of only MYR1.306bn. GII 3/21 was the most active at 3.87%, 3bps lower with MYR210m volume transacted. The non-benchmark GII 5/24 appear attractive (relative to 5/25) at 4.069%, or 5 cents lower with MYR160m done. The short MGS 7/16 meanwhile inched 4.6bps lower to 2.99% on constant interest. Onto corporates, total of MYR870m was reportedly done with usual focus on quasis - Cagamas complex closed almost flat with the 10/25 ended at 4.39%. There were slew of activities on CIMB complex with CIMB 23c18 shaved 3bps to 4.476% while CIMB Thai 24c19 ended 0.7bps lower to 4.933% despite lower earnings reported in 1Q15. 

TRADE IDEA: SGD

Bond(s)	Central China Real Estate; CENCHI 5/17 (yield: 6.28%; SOR+c.495bps) (Ba3/BB-/-) (O/S amount: SGD200m)
Comparable(s)	Yanlord Land Group; YLLGSP 5/17 (yield: 6.12%; SOR+c.480bps) (Ba3/B+/-) (O/S amount: SGD400m)
Relative Value	We reiterate a preference for CENCHI 5/17, which was first mentioned in our Credit Market Update (dated 8-Dec). It is currently trading around SOR+495bps, tighter then the 1y spread average of 560bps, though the 1y average is artifically high as spreads for China HY property names widened considerably in Jan-Feb 2015 due to the contagion effect from Kaisa. Fundamentally, CENCHI looks attractive if compared to YLLGSP, which saw 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)     Better credit profile then peers. The Henan-based developer’s credit profile is better than its SGD property peers, with Debt/ Assets at 28.3% (peers: 28.5%) and Total Debt/ EBITDA at 4.6x (peers: 10x), though its EBITDA Interest Coverage is weaker at 2.8x (peers: 6x). As a Henan-centric developer, CCRE has gained from the looser mortgage policies in that province (regulatory guarantee of mortgages, lower downpayments for 2nd properties). 2)     Chinese property market shows signs of improvement.  China’s looser housing market policies have started to make an impact on the Chinese property market. Following up from last year’s liquidity injections and property regulation easing, PBoC further loosened regulations in Mar-2015 by lowering the down payment for second homes (from minimum 60% to 40%) and cutting to two years (from five years previously) the length of time needed to get a tax exemption from selling the property. This has led to a gradual impact on the property space in China, with the most recent April statistics showing positive price growth in 23 cities Mar: 22 cities). 3)     Strong parentage. The company is 27% owned by CapitaLand, which should give some comfort in terms of corporate governance.