RHB FIC Credit Market Update - 27/7/15

27 July 2015

Credit Market Update

           

APAC Credit Sentiment Dampened on Weak Chinese PMI; Value in Grand Sepadu 6/20    

APAC USD CREDIT MARKETS                                                    

¨      Risk appetite dampened by Chinese PMI. Asian credit markets jittered as regional equity markets reacted to the disappointing Chinese manufacturing data last Friday to a 15-month low as the iTraxx AxJ IG added 2bps to 108.1.

¨      In the secondary market, IG banks and Corporates yields under our coverage remain unchanged at 2.18% and 3.15%, with notable trades at the longer end such as CNOOC 32s, PTTEPT 42s, KORELE 29s, RILIN 45s and KORGAS 42s. We observed that HY credits saw yields widened by 1-2 bps.

¨      On primary front, China Merchants (Baa1/BBB+/NR) plans to sell USD700m 5y (IPT: 220bps) and 10y (IPT: 265bps) bond, similarly Sri Rejeki Isman (B1/BB-/NR) with a USD420m bond sale. China Oilfields (A3/A-/A) priced its USD500m 3.5% 5y bond at T+195, with its other offering of USD500 4.5% 10y at T+225. Furthermore, eHi Car Services (NR/BB-/BB-) plans meet with investors for a USD bond issuance this week.

¨      Parkson’s BB- ratings under Negative Watch by Fitch following a restructuring deal, whereby Parkson Retail Group will buy 67.7% Parkson Retail Asia for SGD228m. Once the acquisition is completed, Parkson’s rating will be downgraded by 1-notch as its liquidity position will weaken further. We opine the domestic retail industry in China will continue to face headwinds in tandem with the slowdown in the Chinese economy.

¨      FOMC meeting to set direction of credit markets this week, while US and UK GDP data could potentially set the timing of monetary policy actions in the coming months.

SGD CREDIT MARKETS

¨      Active property bonds on better sentiment post-Vanke upgrade. We saw a keen flattening in the short-to-mid curve, with the 3y rising by 3.25bps (to 1.78%) while the 5y was broadly unchanged at 2.24%. With more active flows on Friday, we saw interest in real estate names like OHLSP, FCLSP and VANKE (due to Moody’s upgrade of its senior unsecured debt rating to Baa2/Sta from Baa3/Sta).

¨      Meanwhile, Viva Industrial Trust (VITSP) a SG-based industrial REIT, was downgraded by S&P to BB/Sta from BB+/Neg. This is the second negative rating event in 3 months in the SG industrial REIT arena, with Sabana Sukuk’s (SSREIT) outlook being revised down by S&P (BBB-/Neg from BBB-/Sta) in May. The outlook for the Singapore industrial space continues to look weak, with the most recent June Industrial Production numbers coming in much weaker than expected (actual: -4.4%; consensus: -0.4%), the fifth consecutive month in decline. We could see investors reassessing their positions in the other industrial REITS (SBREIT, CREISP, AREIT, MINTSP).

¨      In the primaries, Century Sunshine Group (NR), a China-based fertilizer company, is reopening the existing CENSUN 7.2% 6/18 at final guidance of 100.60. 

MALAYSIA CREDIT MARKETS

¨      GG-bonds tighter on rally in MGS. Credit market ended mixed with a total of MYR558m crossed on Friday. We continue to see tightening by couple of bps of GG bonds such as MDV, BPMB and Danga. Elsewhere, WCT 10/22 and 10/23 fell 1bps-2bps lower to 4.809%-4.907% following positive outcome for the Meydan arbitration case which saw WCT awarded with MYR1.2bn compensation.

¨      MGS curve steepened on profit taking and duration shortening last Friday, with the 3y/10y spread widened to 79bps. At the end of the day, the 3y conventional benchmarks fell 6bps to 3.14%; while 10y-MGS settled 3bps higher at 3.94%.

TRADE IDEA: MYR

Bond(s)	Grand Sepadu (NK) Sdn Bhd (“GSNK”) GSNK 6/20 (MARC: AA-) (Last trade: 30-Jun; Price: 99.87; Yield: 4.786%; MGS5y+ 132bps) (Amt O/S: MYR60m)
Comparable(s)	Besraya 7/20 (RAM: AA3) (Last trade: 14-Jul; Price: 101.44; Yield: 4.398%; MGS5y+93bps) (Amt O/S: MYR60m) Kesturi 12/21 (Marc: AA-) (Last trade: 15-Jun; Price: 98.2; Yield: 4.575%; MGS10y+111bps) (Amt O/S: MYR80m)
Relative Value	We see value in the newly issued GSNK 6/20 which continue offers pick-up of 39bps over similarly rated Besraya 7/20 and 21bps higher over one-year longer tenure Kesturi 12/21. We view that there is room for tightening, supported by its reasonably good fundamental.
Fundamentals	GSNK’s credit profile is supported by the following: 1)     Mature expressway with good traffic. GSNK is the concession holder for the 17.5km New north Klang Straits Bypass Expressway (NNKSB) linking North Port to Bukit Raja in Klang with concession tenure ending 2032. For 2014, NNKSB registered average ADT of 87,531, about 1% higher than last year. 2)     Strict distribution covenant. Minimum post-distribution FSCR of 1.75x will prevent excessive dividend payment to its shareholders. 3)     Reasonable ability to withstand traffic reduction. Based on our back-of-envelop calculation, GSNK able to withstand a 13% reduction from its current traffic before breaching the covenanted FSCR of 1.75x. 4)     Regulatory risk. The next toll hike is scheduled in Jan-16. Any toll hike deferments could constrain GSNK payment capability. Nevertheless, we view that the government will honor its obligation under the concession agreements or pay compensation. The government had previously paid compensation following non-toll rate hikes in 2008.