RHB FIC Credit Market Update - 2/6/15

2 June 2015

Credit Market Update

                                       

Profit Taking in Slower Monday Session; Woori Bank to Debut USD B3 AT1; Value in BHARTI 5/24 USD  

REGIONAL                                                                                      

¨      Profit taking on slower Monday. Credit protection costs via the iTraxx AxJ IG traced up another 0.8bps to 108bps. It was a quiet Monday for Asia absent new bond sales, with the investors taking the opportunity to secure profits. Both IG and HY yields closed 2-3bps wider on average, mostly due to IG and HY real estate adding 5.7bps and 4.4bps to average yields respectively. We noted Hong Kong IG real estate names like SUNHUN 20-25s, HKLSP 24-25s and SWIPRO 20-22s traded 8-9bps wider, while in the HY space, EVERRE 18, SHIMAO 21 and the new CIFIHG 20 added 12-28bps to yields. In the O&G space, RILIN 16 was biggest underperformer adding 18bps, followed by longer-dated CNOOC 25 & 45s and SINOPE 45 which traded 9bps wider. Meanwhile, IG bank papers were generally stable, supported by gains in Australian banks, WSTP 16-27s, ANZ 16 and CBAAU 19. On the primary front, Woori Bank is expected to price a USD 30NC5 B3 AT1 issuance (expected rating: Ba2/BB/NR) tomorrow, representing the first issuance of its kind from a Korean bank. In addition, Anhui Transportation Holding Group (expected rating: A3/NR/BBB+) is planning for a USD Reg S issuance, investor meetings starting today. On economic data, there was marginal improvement to Markit US PMI at 54.0 (consensus: 53.8; prior: 53.8) while PCE Core prints of 0.1% MoM and 1.2% YoY were a touch below estimates. Key releases today include US factory orders and rates decisions from both the Reserve Bank of India and Reserve Bank of Australia.

¨      SORs unchanged; lull in overall activity. The SOR curve was largely unchanged, with just the 30y rates tightening 1bp to 2.985%, while 3y, 5y and 10y rates registered at 1.61%, 2.01% and 2.55% respectively. On the secondary front, activity was muted in general, with only a handful of gainers including SIASP 20, DBSSP 22, WHARF 18, and SPSP 20 which saw their yields 1-2bps tighter at close. The key economic releases are Singapore’s May PMI and electronics sector index.  

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MALAYSIA

¨      Flows subsided; bank names led interest. Activity was muted in the secondary market yesterday with only MYR181m and MYR1.3bn reportedly done in the corporate and sovereign bond market. Banking names led the trading flows – notably, IBK 2/17 saw MYR22m crossed at 4.024% (-2.1bps); and HLB’s NIT1 Prominic 5/61c16 tightened 11bps to 4.396%. Meanwhile, MGS moved sideways with the benchmarks settled at 3.29%-3.89% (-2bps to +1bps).

TRADE IDEA: USD

Bond(s)	Bharti Airtel Limited (BHARTI) BHARTI 5.35% 5/24 (Baa3/BBB-/BBB-)(Price: 109.24, YTM: 4.11%; Z+197bps)(Amount O/S: USD1.0bn)
Comparable(s)	BHARTI 5.125% 3/23 (Baa3/BBB-/BBB-)(Price: 108.15, YTM: 3.90%; Z+192bps)(Amount O/S: USD1.5bn) TELMAL 7.875% 8/25 (A3/A-/A-)(Price: 133.29; YTM: 3.88%; Z+169bps)(Amount O/S: USD300m) PCCW 5.75% 4/22 (NR)(Price: 108.88; YTM: 4.25%; Z+238bps)(Amount O/S: USD300m)
Relative Value	We view BHARTI 5.35% 5/24 as a solid pick in the USD telco space, as it still trades with decent valuations against comparable bonds. We also do not foresee supply risks in the intermediate term being an issue given that BHARTI remains on a deleveraging course. On its own curve, BHARTI 5/24 trades at least 10bps wider against BHARTI 3/23 after accounting for the tenure difference. At the same time, TELMAL 8/25’s high cash price leads us to prefer BHARTI 5/24 despite the significant difference in credit ratings, stemming mainly from TELMAL’s sovereign support uplift. PCCW 4/22’s valuation stacks up well against BHARTI 5/24, but we prefer the latter’s leverage profile.
Fundamentals	BHARTI’s healthy credit profile is underpinned by the follow key attributes: 1)     Leading market position in India, with a c.23% market share in the mobile services segment; 2)     Resilient profitability and cash flow generation, maintaining a 5y-average EBITDA margin of 33% despite intensifying competition; 3)     Improving leverage profile, reflected by debt/EBITDA and debt/equity of 2.12x and 0.99x reducing from 3.04x and 1.19x respectively since 2011, aided by ongoing tower sales and outsourcing measures; 4)     Firm access to capital markets, given its track record of successful refinancing exercises; and 5)     Strategic support from SingTel, which holds a 32% stake in BHARTI. *all data as of 31 Mar-15.