RHB FIC Credit Market Update - 26/6/15

26 June 2015

Credit Market Update

                                       

Credits Trading Flat; Sumitomo Corp Downgraded to A2; Value in CREISP 5/20 SGD

REGIONAL                                                                                      

¨      Defensive tone felt as Greek dilemma continues; new issues trading flat. Credit protection costs eased 0.4bps, with the iTraxx AxJ IG closing at 107.7bps despite regional equity markets weakening on renewed concerns over Greece’s debt situation, for which negotiations with creditors remain unresolved and talks have been extended. USTs were up 1-4bps following a strong response to the 7y auction while economic prints came in dull, reflected by stagnant PCE Core MoM and YoY, slightly higher initial jobless and continuing claims, and weaker composite and services PMI. In Asian USD credit markets, IG corporates and banks were generally defensive, with yields holding flat or inching up 1bp on average. On this week’s new issues, SingTel’s 2025 closed flat at 3.355%, with spread tightening 0.8bps from reoffer level, while the new BCHINA 3y, 5y and 10y bond yields saw no significant changes although the 3y outperformed the other tranches as spreads shed c.10bps.

¨      China Life taps USD1.28bn; Korean issuers in the pipeline. China Life Insurance (Aa3/AA-/A+) sold yesterday USD1.28bn 60NC5 notes at 4% (IPT: 4.375%) which were oversubscribed about 4.2x; this is the second Asian insurer to tap for USD papers this year. On the HY front, Wuzhou International Holdings (B2/NR/B) tapped for additional USD100m 13.75% 2018 bonds on top of an outstanding USD200m for refinancing and general purposes. In the pipeline, Korea Gas Corp (Aa3/A+/AA-) and Korea National Oil Corp (Aa3/A+/AA-) have engaged banks for new USD bond deals, while Kookmin Bank (A1/A/A) is testing demand for covered bonds which which will convert household debt (mostly floating rate loans) to long-term, fixed rate loans with the objective of reducing interest rate risk burden on Korean households.

¨      Sumitomo Corp rating cut to A3; S&P withdraws ratings on Kaisa. On rating news, Moody’s lowered Sumitomo Corpdue to high leverage and earnings volatility. Elsewhere, S&P discontinued its D rating on Kaisa due to insufficient information provided by the latter needed to carry out rating surveillance.

¨      Interest seen in property names. We saw mild dips in the 3y and 5y SOR, which closed at 1.70% (-1.45bps) and 2.17% (-0.5bps) respectively. We saw mild buying interest into real estate names such as GUOLSP, HKLSP and CAPITA while some selling was seen in DBSSP. We opine that flows next week will trade sideways ahead of the US June NFP numbers release.

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MALAYSIA

¨      Investors stayed cautious before Fitch’s verdict; AAA bonds fueled PDS market. Govvies generally moved sideways as investors remained sidelines before Fitch finalizing Malaysia’s sovereign rating by the end of the month. Meanwhile, the 5y GII reopening issue size came within market expectation of RM3bn with auction closing next Monday, 29-Jun. On the corporate market, total volume breached MYR636m with investors were seen active in AAA-rated bonds. Notably, a total of MYR190m Aquasar 7/19-7/22 exchanged hands at 4.233%-4.491% (-11bps to +2bps); while Manjung 11/19 closing flat at 4.069% on MYR110m trades.

TRADE IDEA: USD

Bond(s)	Cambridge Industrial Trust; CREISP 5/20 (yield: 3.72%; SOR5y+154bps)(-/BBB-/-)(O/S amount: SGD130m)
Comparable(s)	Mapletree Industrial Trust; MINTSP 3/19 (yield: 2.44%; SOR4y+46bps)(-/-/BBB+)(O/S amount: SGD125m)
Relative Value	We initiate a preference for CREISP 5/20, which provides richer valuations while being one of the fundamentally stronger names in the weaker industrial REIT space. We believe that the REIT’s stronger operating and financial profile (as elaborated below) will buffer it against further inclement headwinds from the industrial space.
Fundamentals	We believe that Cambridge Industrial Trust has a stronger profile due to: 1)     Robust credit and operating profile. Even though the leverage profile at 36.4% is higher than the REIT average (32%), we take comfort that the fixed rate debt portion is higher at 85% (SGD REIT peers: 70%). In addition, it has an average operating lease profile of 4.2 years with occupancy rates of 95%, higher than the industrial REIT space of around 3.6-3.8y and 90% respectively. 2)     Able to weather inclement industrial headwinds. The industrial space in Singapore has been weaker, with three consecutive months of decline in the industrial production numbers. May’s IP, which is to be released today, is expected to come in negative too (consensus: -2.6%). Cambridge’s strong profile should enable it to weather through this temporary dampness. 3)     Stable credit rating The REIT’s rating was recently affirmed as BBB-/Sta by S&P in May-2015, which should alleviate any rating risk as was recently suffered by another industrial REIT. Sabana Sukuk’s outlook was revised down to BBB-/Neg from BBB-/Sta by S&P in June-2015 due to a weaker operating profile. ¨