RHB FIC Credit Market Update - 1/7/15

1 July 2015

Credit Market Update

                                       

APAC USD Stood Firm; Fitch Revised Malaysia’s Rating to A-/Stable; Value in Bharti 6/25

REGIONAL                                                                                      

¨      APAC USD market stood firm; refinancing needs to drive supply in July. Yesterday’s session saw slight improvement as IG credit yields held flat while HY papers shed 1-2bps on average, with Chinese HY credit taking cues from the equity market rebound following news of measures by China to bolster market confidence which comprised a reported liquidity injection (CNY50bn) via reverse repo, enabling its endowment fund to buy A-shares, cutting stamp duties on trading, and tightening IPO processes. Over in the US, UST rates rose 2-3bps amid improved consumer confidence of 101.4 (prior: 95.4) and news of Greece’s EUR1.67bn missed payment to the IMF. Meanwhile, Asian credit risk sentiment was marginally improved as the iTraxx AxJ IG declined 1.1bps to 113.8bps. Additionally, new bond sales remain held back although we note maturing USD corporate debt of around USD3.98bn in July for a number of issuers including PCCW, KT Corp, PTTEP, CCB and Berau Coal. On key economic data, China PMI turned out to be generally stable, with manufacturing and non-manufacturing figures of 50.2 (50.4) and 53.8 (prior: 53.2) respectively, but the numbers portend sustained accommodative stance from the PBoC to avert potential slowdowns. In the Eurozone, CPI and inflation data registered at 0.2% (prior: 0.3%) and 11.1% (11.1%). Key economic releases today include US ADP employment and ISM manufacturing, China HSBC composite and services PMI as well as Eurozone manufacturing PMI.

¨      Accumulation seen in real estate papers. The short-to-mid curve fell concurrently by around 2bps, with the 3y and 5y closing at 1.71% and 2.2% respectively. We observed buying interest into property names like CITSP, FCTSP and CAPLSP as well as SPSP while some selling was seen in OLAMSP and NOLSP. We may see lighter flows today and Thursday, with HK out due to a public holiday today while investors will be eyeing the US June NFP to be released tomorrow. The SG June PMI is to be released tomorrow, with consensus expecting a print at 50.2 (May: 50.2), signifying continued expansion expectations.

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MALAYSIA

¨      Govvies rallied before Fitch revised Malaysia’s rating to A-/Stable; WCE set up new debt facilities up to MYR4.74bn. Local govvies ended the month on positive tone ahead of Fitch’s decision on Malaysia sovereign rating. The 5y-10y MGS benchmarks fell 3bps-8bps to 3.60%-4.01%, where strong volume were seen particularly in the 7y MGS. Fitch, meanwhile, revised Malaysia rating to A-/Stable (from negative), reversing their earlier view of “more than 50% probability of being downgraded”. Subsequently, the Ringgit rallied to 3.73 level against USD this morning, from 3.77 yesterday’s closing. Corporate market were rather quiet at MYR332m volume. On the banking sector, we saw Maybank LT2 5/24c19 tightened 6.1bps to 4.477%; while CIMB Bank LT2 12/25c20 moved opposite direction settling at 4.697% (+4.8bps). On corporate news, West Coast Expressway Sdn Bhd established up to MYR4.74bn debt facilities for the construction cost of c.RM5.9bn Build-Operate-Transfer (BOT) West Coast Expressway Project – of which Government Support Loan (MYR2.24bn), syndicated term loan (MYR1.5bn) and Bank Pembangunan/Danajamin Guaranteed MTN Programme (MYR1bn).

TRADE IDEA: USD

Bond(s)	Bharti Airtel Limited (BHARTI) BHARTI 4.375% 6/25 (Baa3/BBB-/BBB-) (Price: 98.541, YTM: 4.559%; Z+213bps) (Amount O/S: USD1.0bn) BHARTI 5.35% 5/24 (Baa3/BBB-/BBB-) (Price: 106.326, YTM: 4.477%; Z+197bps) (Amount O/S: USD1.0bn)
Comparable(s)	BHARTI 5.125% 3/23 (Baa3/BBB-/BBB-) (Price: 104.949, YTM: 4.399%; Z+217bps) (Amount O/S: USD1.5bn) TELMAL 7.875% 8/25 (A3/A-/A-) (Price: 131.170; YTM: 4.070%; Z+169bps) (Amount O/S: USD300m) PCCW 5.75% 4/22 (NR)(Price: 107.454; YTM: 4.467%; Z+240bps) (Amount O/S: USD300m)
Relative Value	We think BHARTI 6/25 could offer cushy buffer against shocking movement in US Treasuries, offering an absolute 8bps pickup to BHARTI 5/24 which is fair given the longer duration, but at lower cash outlay given the cheaper price.  Similarly, TELMAL 8/25’s high cash price leads us to prefer BHARTI 6/25 despite the significant difference in credit ratings (primarily due to sovereign support uplift). Meanwhile, we prefer BHARTI 6/25’s credit profile over PCCW 4/22 despite the latter’s relatively attractive valuation.
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.