RHB FIC Credit Market Update - 5/6/15

5 June 2015

Credit Market Update

                                       

Investors Hold Out for NFP Guidance; Bernas Downgraded to A3/Neg; Hold SUNHUN 2/22 USD 

REGIONAL                                                                                      

¨      Credit activity slows ahead of NFP guidance; new bonds better bid. Credit risk aversion as per the iTraxx AxJ IG picked up slightly by 0.78bps to 108bps. Overnight, USTs bull flattened 2-6bps amid US and EU equity market selloffs. Secondary credit markets were generally quieter as investors were sidelined, pending guidance from non-farm payroll data later today. Yesterday’s session saw average IG yields virtually unmoved. Meanwhile, new bonds were fairly well-bid, including the new Bharti 25s shedding 3bps from its reoffer spread of 210bps and China Three Gorges’ 25 notes narrowing 13.5bps from its reoffer yield of c.3.705%. On the primary front, we noted China National Bluestar Group (Baa3/BBB-/BBB-) tapped for USD500m 3y and USD500m 5y bonds at T+250bps and T+270bps respectively; the 3y and 5y notes were oversubscribed 3.8x and 2x respectively. Also seen was Anhui Transport Holding Group (A3/NR/NR) tapping USD300m in 3y notes at T+195bps (IPT: T+225bps).

¨      SORs tracked UST higher; credit yields up. The SOR curve bull steepened yet again with the 3y, 5y and 10y rates widening 7.5bps, 9.5bps and 14bps to 1.76%, 2.22% and 2.815% respectively. IG yields seen generally widening in secondary trading. Widening was notably seen for CAPLSG 20-25 and NUSSP 18-20; while TGRSP Pc20 and OLAMSP Pc17 and 18-19 tightened. Primary markets had KEONG HONG (NR), a mixed developer and construction services in Singapore and Maldives, raising SGD50m 3y at 6%.  

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MALAYSIA

¨      MGS curve moved upward; PDS traded sideways on moderate flows; Bernas downgraded to A3/negative (RAM). The MGS curve inched upward yesterday, tracking the UST curve as ECB maintained its QE pace and negating any positive sentiment stoked by Coeure’s earlier suggestions. The 10y MGS breached 4.04% before ending the day at 3.97% (+2bps) while investors focused on the reopening of the 10y MGS 9/25 auction (tender closing today). Meanwhile, corporate yields moved sideways with a tightening bias amid modest flows of MYR520m. We saw debut trades in the new Jambatan Kedua 10y, which crossed at 4.38% (8bps above coupon).  Elsewhere, A2-rated Sunway Treasury issued a small tranche of MYR20m 7y at 7.25%. Finally, RAM issued a downgrade on Bernas to A3/negative (from AA3/negative), underpinned by an unexpected deterioration in its financial profile arising from the extension of financial support to its parent, Tradewinds (M) Bhd, as well as adverse industry developments.

TRADE IDEA: USD

Bond(s)	Sun Hung Kai Properties, SUNHUN 2/22 (M/S/F: A1/A+/A) (yield: 3.305%; Z+125bps) (Amt o/s: USD900m)
Comparable(s)	Hongkong Land, HKLSP 6/22 (M/S/F: A2/A/NR) (yield: 3.320%; Z+123bps)(Amt o/s: USD500m) Swire Property, SWIPRO 6/22 (M/S/F: A2/A-/A) (yield: 3.336%; Z+124bps)(Amt o/s: USD500m)
Relative Value	We see value in SUNHUN 2/22 which is trading merely 1bps-2bps discount in term of z-spread, despite higher rating than HKLSP 6/22 and SWIPRO 6/22.
Fundamentals	Fundamentally Sun Hung Kai credit profile is supported by: 1)     Developer with solid track records. 2)     Solid debt servicing from recurring income portfolio. SUNHUN’s net rental income to interest coverage stood at c.4.6x for the 12m ending December 2015, almost flat to 4.7x in FY June 2014. Debt to EBITDA is below 4 years, significantly less than its average debt maturity profile. 3)     Strong liquidity. Sun Hung Kai has cash of about HKD23bn as at Dec-2014, more than enough to redeem its financial obligations in the next 12 months, including the lumpy maturity of HKD7bn in 2016 without tapping the capital markets. SHKP boosted its financial flexibility by entering into a HKD10bn loan facility in January 2015.