RHB FIC Credit Market Update - 10/6/15

10 June 2015

Credit Market Update

                                       

Mixed Flows as Primaries Inactive; ICBC and BOCOM Subdebt in Store; Gas Malaysia Raises Tariff; Hold Malakoff 12/19 MYR 

REGIONAL                                                                                      

¨      New supply hiatus sees mixed market tone; more bank capital in the pipeline. Credit markets held their sluggish tone as primary markets were inactive and sentiment was generally subdued by a lack of upside catalysts, further weakness in Chinese economic data as CPI fell to 1.2% YoY (prior: 1.5%), and growing concerns over the Greek debt deadlock; protection costs quoted a tad wider with the iTraxx AxJ IG settling at 110bps. Also seen were UST rates pushing higher overnight as the curve bear steepened 3-6bps, still tracking steeper core Eurozone yields. Asian IG credit yield movements were mixed for yesterday’s session, where we noted 2-3bps widening in the non-bank space while bank credits saw 2-3bps of tightening. We may continue to see neutral-to-bearish patterns in IG credits this week given steeper UST rates, tighter risk appetite and slower primary activity. Meanwhile on today’s primary front, Goldwind New Energy HK Investment Ltd (NR) is expected to sell up to USD300m 3y notes, backed by a standby letter of credit from Bank of China Ltd (A1/A/NR). In the USD pipeline, Axis Bank Ltd (Baa3/BBB-/BBB-) is planning for investor meetings this month as issuance details unfold. We also expect more subdebt issues in the coming weeks, with Industrial and Commercial Bank of China Ltd (A1/A/A) planning a USD T2 sale this month, and Bank of Communications Co Ltd (A2/A-/A) eyeing a USD AT1 issuance.

¨      O&G services a couple of bps wider. We observed a flattening of the short-to-mid swap curve, with the 3y and 5y tightening by -2.7bps and -4.35bps to close at 1.78% and 2.25% respectively. We saw continued buying into higher quality papers such as SPSP, NUSSP and HDBSP amidst the climate of uncertainty while some O&G names like NCLSP, EZRASP and KRISSP traded a couple of bps wider even as Brent oil prices hovered lower below USD65/bbl yesterday. In the primaries, BPCE is issuing a 10.5Nc5.5 B3T2 (Baa3/ BBB/A-) at initial guidance of 4.5%.

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MALAYSIA

¨      Credit yields widened; MGS curve flattened; Average gas tariff for non-power sector increased by c.10%. Corporate flows stayed strong yesterday at MYR873m during the quiet primary session. Credit yields generally closed higher, particularly for quasi-govvies, maintaining a week of ongoing steepening. Notably, BPMB 9/24 and DanaInfra 7/24 broadened 9bps-11bps, settling at 4.358% and 4.381% respectively. We also saw yesterday’s top-traded AAA names, BLand 12/17, Cagamas 10/28 and KDB 2/16, trading 2-20bps wider. On the sovereign front, MGS rebounded together with the MYR as Governor Zeti Akhtar commented that the latter’s recent weakness does not reflect economic fundamentals and its depreciation should be temporary. The MGS curve flattened with 7y and 10y conventional benchmarks decreased to 4.02% (-7bps) and 4.10% (-5bps) respectively. Elsewhere, Gas Malaysia increased the average natural gas tariff for the non-power sector in Peninsular Malaysia to MYR21.80/MMBtu (+c.10% from MYR19.77/MMBtu previously), effective 1-Jul.

TRADE IDEA: MYR

Bond(s)	Malakoff Power 12/19 (AA3) (Last trade date: 10-June; Price: 101.81; Yield: 4.605%; 5y-MGS+c.94.5bps) (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.88.1bps) (Amount o/s: MYR30m)
Relative Value	We reiterate our preference on Malakoff Power 12/19 with yields having tightened 5.8bps since our reiteration last month. We are still convinced the bond can realize another 6bps pickup against TBEI 8/19 on the basis of its recent MYR1.8bn IPO. Confidence in the shares is building up as the price sustains around IPO price of MYR1.80 (+/- 10sen) despite Maybank officially ceasing stabilization on 5 June, with the last purchase made on 20 May. We also note its superior liquidity based on 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.