RHB FIC Credit Market Update - 24/7/15

24 July 2015

Credit Market Update

Firmer session in Asia; KrungThai Bank’s Asset Quality Weakened; Value in CENSP 7/18

               

APAC USD CREDIT MARKETS                                                    

¨      Firmer session in Asia before US jobless claims. Asian credit markets remain stable with the iTraxx AxJ IG flat at 106. The UST yields fall 2-6bps as investors rush for safe haven treasury, after a series of disappointing US corporate results and softening commodities prices.

¨      In the secondary market, we observed that IG banks and corporates yields under our coverage remain unchanged at 2.18% and 3.18%. China’s VANKE 18-19s surged following the upgrade from Baa2 to Baa1 by Moody’s after strong and resilient performance amid the struggling property landscape. IG O&G names such as SINOPEC 19-43s, CNOOC 24-44s, TOPTB 23-43s saw yields tighten despite Brent oil prices to slide USD55.27/bbl.

¨      Chiba Bank; second-largest Japanese regional bank plans USD 5y bond (IPT +125 bps) while, China Oilfields (A3/A-/A) (a Chinese upstream O&G service provider) plans to sell USD 5y & 10y bond (IPT: 210bps/245bps). Additionally, Adani Ports (Baa3/BBB-/BBB-) sold USD650m 5y bond at T+195 (IPT: 210bps), taken up mainly by fund managers (45%) and banks (41%). China Minmetals (A3/NR/BBB+) priced a USD500m 5y bond at T+195 (IPT: 215 bps) and USD500m 10y at T+245 (IPT: 265bps) plus Bocom (A2/A-/A) priced a USD2.45bn AT1 bond at 5.00% (BTC: 3.4x; IPT: 5.25%).

¨      On economic data, US June jobless claims data at 255k (consensus: 278k; prior: 281k) was its lowest in 41.5 years, increasing the possibility of a Fed rate hike in September  and today’s key events to monitor include US and China manufacturing PMI.

SGD CREDIT MARKETS

¨      Interest in Chinese names. The short-to-mid SOR curves broadened, with the 3y and 5y closing at +1.75bps (to 1.75%) and +2.75bps (to 2.24%) respectively. In general, we observed more selling, led by mid-to-long dated HDBSP and CMASP papers while net buying was seen in Chinese-related names such as YLLGSP, MAGIC and PCRTSP amid improved sentiment as Chinese equities surged ahead. We view the sharp declined in Bank Negara’s foreign reserves (since 2010) to have little impact to Malaysian-based credits (such as NCLSP, MAYMK and KNBZMK) in SGD space. The markets will be eyeing the release of the SG June Industrial Production numbers this afternoon (consensus: -0.4%; May: -2.3%).

MALAYSIA CREDIT MARKETS

¨      Corporate yields inched lower amid better secondary activity; Deteriorating asset quality of Krung Thai Bank (refer Credit Update below). Corporate flows improved to MYR614m (from average of MYR231m/day in earlier of the week) as investors are returning to market after extending leave from festive Hari Raya holiday. Corporate yields generally tightened yesterday, notably in government-related entities such as Danajamin, GovCo, PTPTN and Putrajaya, which narrowed by couple of bps. We also saw BGSM 12/15 and 12/22 slipped 2bps to 3.991% and 4.829% respectively on combined MYR135m trades.

¨      On the govvies space, activity on the conventional benchmarks were rather thin with merely c.MYR200m crossed yesterday whereby the 3y-10y MGS benchmarks settling sideways at 3.20%-3.91% (flat to +2bps), as investors probably taking a breather after the rallies in the past few days.

¨      On the macro front, Malaysia’s foreign reserves fell USD5bn to USD100.5bn as of 15-Jul (from USD105.5bn in end-Jun), which equivalent to 7.9 months of imports and 1.1 times of short term external debt.

TRADE IDEA: SGD

Bond(s)	Centurion Corp; CENSP 7/18 (yield: 4.9%; SOR3y+315bps)(O/S amount: SGD65m)
Comparable(s)	Banyan Tree, BTHSP 7/18 (yield: 4.98%; SOR3y+323bps)(O/S amount: SGD70m)
Relative Value	We favour recently issued CENSP 7/18 due to its strong position and exposure to the profitable foreign workers accommodation space in Singapore as well as attractive valuations. As a fundamentally better credit with stronger outlook compared to BTHSP (exposure to the cyclical luxury travel market), we believe that that CENSP 7/18 should warrant further yield tightening.
Fundamentals	We believe that Centurion Corp Ltd is a robust company with a strong outlook due to: 1)     Strong EBITDA margins, though leverage is on the higher side. As of 1Q2015, leverage (Debt/ Assets) is at 54.5%, LTM Total Debt/ EBITDA is standing at 9.8x while LTM EBITDA Interest Coverage is at 5x. This is mitigated by rich EBITDA margins (c. 55%), which should provide some buffer from rising debt levels (2Q2015 est: ~SGD600m; FY2014: SGD431m; FY2013: SGD186m) 2)     Strong occupancy rates, low counterparty credit risks. Centurion is buffeted by the higher occupancy rate at 90%, tenancy agreements with established corporations (ie SMRT) and URA regulation that regulates that only specific dwelling can be rented out to foreign workers. 3)     Diversifying revenue base. Centurion has diversified from reliance on foreign worker accommodation in Singapore only to also include Malaysia, as well as student accommodation in the UK and Australia (collectively 17% of revenue). In addition, 50% of Centurion’s accommodation is allowed to house workers from various industries, hence no over-reliance from workers from a specific industry. 4)     Risk from regulations. Key risk would emanate from Singapore’s tightening of foreign worker regulations, which has seen its foreign worker population growth slow from around 6-7.5% in 2010/2011 to around 2.6% in 2014. In addition, with regards to Centurion’s expansion into Malaysia, the foreign worker’s accommodation policy is not as strictly regulated or enforced if compared to Singapore.

CREDIT UPDATE

Company/ Issuer	Sector	Country	Update	RHBFIC View
KrungThai Bank PCL (“KTB”) (M/S/F/RAM: Baa1/BBB/BBB/AA1)	Banking	TH	1H NP +3% to THB16.9bn. Slow YTD loan growth of 1.4%. Tighter liquidity with LDR at 95% (2014: 91%).  Asset quality weakened with NPL increased to 2.96% (from 2.82% in 1Q). Loan loss coverage increased to 125% (from 116% in 1Q). Capitalization remains strong with Tier-1 and total capital of 11% and 14.4% respectively.	Negative. Economic and political challenges in Thailand will continue to pressure the asset quality of Thailand banking system. Nevertheless, we maintain our marketweight view on KTB, premised on its strong capitalization and NPL reserves as well as 55% government ownership in KTB.  KTB’s MYR B3T2 7/25c20 was seen quoted at 4.999%.
Prasarana (GG)	Infra	MY	Proposed hike for MRT and LRT fare due to rising operating costs. The Company also allocated MYR950m for replacement of existing trains with 50 new light rail vehicles (LRV), manufactured by CSR Zhuzhou Electric Locomotive Co Ltd.	Neutral. More issuance from Prasarana is expected in view of the rolling stock replacement, while the fare review is credit positive albeit the bond comes with government guarantee. PRASA 3/30 appears the most active recently, last transacted at 4.595% (MGS15+40bps)