RHB FIC Credit Market Update 290615

29 June 2015

Credit Market Update

                                       

Risk-Off on Greek Crisis; China Eases Rates Again; MYR Markets Await Fitch Announcement; Maintain Preference for HKLSP 6/22 USD

REGIONAL                                                                                      

¨      Risk-off mode on Greek crisis, capital controls imposed; China cuts interest rates and reserve requirements again. Credit protection costs treaded higher as the iTraxx AxJ IG closed 0.5bps wider at 108.2bps ahead of meetings between Greece and its creditors, which subsequently broke down as the European Central Bank decided to cut credit lines to Greek banks; consequently, this has forced Greece to impose capital controls and shut its banks down at least until 6-Jul to contain the crisis. In Friday’s session, we saw Asian IG corporate and bank yields close 3bps wider and flat, respectively, following a week of revived primary activity. Notably, real estate and O&G credits were 4-5bps and 3bps wider. Recent issues were softer as well, including Bank of China 18, 20 and 25s, which added 2-5bps to yields. We expect risk sentiment to remain subdued on Greece’s predicament. On key developments in Asia, we noted China’s move to cut lending and deposit rates by 25bps each to 4.85% amd 2% respectively, while also cutting reserve ratio requirements by 50bps for selected banks that lend to farming and SME sectors. Over in the US, the UST curve bear-steepened 2-7bps amid increased Eurozone yields.

¨      Flows expected to be cautious this week amid mixed news.  We saw a steepening in the 3y/5y curve, with the 5y rising by a stronger +6.25bps (to 2.24%) while the 3y increased by +2.75bps (to 1.73%) as investors saw a possibility of a Greek debt resolution. We expect market to trade cautiously this week, as investors digest a slew of mixed news – from the recent PBoC rate cut last Saturday to renewed concerns on the proposed Greece referendum. Friday saw some buying into BBB names such as FCLSP, SUNSP and SMMSP as well as yielder names like UENVSP and OLAMSP.

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MALAYSIA

¨      Quiet secondary flows as investors await Fitch announcement on Malaysia. Local debt market saw investors on the sidelines, awaiting Fitch’s Malaysia sovereign rating before end of the month. Both the govvies and corporate market generally moved sideways amid the cautious sentiments while Ringgit dropped to 3.7680 against the greenback. DanaInfra complex led the volume chart with the long-tenure 11/34-11/44 tightened by 1bps-5bps to 4.669%-4.941%; although we also saw DanaInfra 7/21 broadened to 4.13% (+3bps). On the primary front, Sport Toto (AA-) priced MYR200m 4y at 4.82%, while Sunway Treasury (A2) printed MYR30m 7y at 7.25%.

TRADE IDEA: USD

Bond(s)	Hongkong Land, HKLSP 6/22 (yield: 3.47%; price: 106.87; T+148bps) (A2/A-/-) (O/S: USD500m)
Comparable(s)	Swire Property, SWIPRO 6/22 (yield: 3.40%; price: 106.37; T+138bps) (A2/A-/A) (O/S: USD500m)
Relative Value	We reiterate a preference for USD HKLSP 6/22, which we believe will benefit from continued resilience in HK office rentals, and we prefer this space over the HK retail rental and property sales space. If compared to similar duration and rated SWIPRO 6/22, HKLSP 6/22 is trading c.5-10bps wider, and we opine that further tightening is warranted from its stronger outlook.
Fundamentals	We like Hongkong Land for the following reasons: 1)     Strong-exposure to HK office space. In terms of its commercial portfolio, office space comprises close to 81% of total gross floor area (GFA), with HK office space itself around 50% of total GFA. 2)     Resilience of HK rental yield. HK office rental yields have grown by around 6% YoY (even as retail rents have slumped due to clampdown on corruption and slowing growth in China) due to continued financial convergence with China. For example, CBRE mentioned that the percentage of Chinese firms renting HK CBD offices have risen from 12% (2008) to 19% (2014) 3)     Better credit fundamentals. The property player has better credit fundamentals compared to its peers, with EBITDA Interest Coverage at 10.3x (peers: 9.2x) and Total Debt/ EBITDA at 4x (peers: 6.3x). ¨                  *Regional peers: Shimao Property, Swire Properties, Sun Hung Kai, Capitaland, UEM Sunrise, Kerry Properties

CREDIT IDEA

Company/ Issuer	Sector	Country	Update	RHBFIC View
State-owned Chinese Banks	Banks	CN	The People’s Bank of China cut lending and deposit rates by 25bps each to 4.85% and 2% respectively. In addition, China’s State Council has approved a draft amendment to scrap the 75% loan/deposit ratio (LDR) limit on banks.	Negative on the interest rate cuts; mild positive on LDR cap removal. We view the rate cuts to be negative on state-owned banks as this would serve to narrow net interest margins amid lingering pressure to keep deposit rates competitive. Meanwhile, we view the impact of the LDR removal to be neutral. On one hand, the action lowers the incentive of banks to engage in practices such as ‘window dressing’ deposit levels, offering lending arrangements outside the definition of loans and tapping shadow banking markets as a source of funding to circumvent the LDR limit. However, the action also frees lending capacity to banks which is negative in our view; nonetheless, subdued growth conditions and stricter capital requirements may help to keep excessive lending at bay.