RHB FIC Credit Market Update - 28/7/15

28 July 2015

Credit Market Update

           

China Merchants Priced Ahead of FOMC; CENSUN Retap SGD 7.2% 4/18c17 for Tactical Positioning 

APAC USD CREDIT MARKETS                                                    

¨      UST rise as Chinese equity markets weakness persists. Investor’s confidence dented as the significant rout in Chinese stock markets especially the Shanghai composite and Shenzhen CS300, leading to the iTraxx AxJ IG added 4bps to 111.7. Overnight, the UST rallied 2-6bps across the curve as investors move towards safe haven assets, fueled by the weak commodity prices and volatile global equity markets.

¨      In the secondary market, IG banks and Corporates yields under our coverage tightened 1-2bps at 2.18% and 3.15%. Malaysian IG corporate yields tightened 1-3bps following S&P’s affirmation of Malaysia’s sovereign rating at A- with a stable outlook. On the other hand, the average yield of HY credits rose on average by 22bps as investors took cues from the Chinese equity markets. Brent oil continue to plunged lower by 2.1% to USD53.47/bbl on rising oil supply, as IG O&G names continue to be stable with the exception of KOROIL 24-30s.

¨      In the primary market, China Merchants (Baa1/BBB+/NR) priced its USD200m 5y bond at T+195 (IPT: 220bps) and USD500m 10y at T+255 (IPT: 265bps).

¨      Fitch placed Bright Food’s BBB- rating on evolving watch to reassess linkages between Bright Food and Shanghai’s State-owned Asset Supervision and Administration Commission (SASAC), as Bright Food’s recent acquisition and restructuring weaken its linkages with Shanghai SASC. Fitch believes the reassessment will result in a change in ratings of Bright Food. Additionally, Baa3 ratings of SK Innovation and SK Global Chemical were raised by Moody’s to Baa2 (Stable outlook), on significant reduction in debt and improvement in profitability, supported by supportive industry fundamentals.

SGD CREDIT MARKETS

¨      Selling in commodity-related names from oil rout.  There was a parallel downward shift in the 3y and 5y benchmark curve, closing at 1.77% (-1bp) and 2.22% (-2bps) respectively. Yesterday saw some selling into commodity-related names like OLAMSP, VALSZP and SWIBSP even as Brent oil prices ended lower c.USD53.5/bbl due to the Chinese equity rout, and into existing AREIT and CENSUN as both issuers printed yesterday.

¨      Ascendas REIT (A3/-/-) issued a SGD100m 5y at a final price of 2.95% while Century Sunshine Group (NR), a China-based fertilizer company, reissued the existing CENSUN 7.2% 6/18 at final guidance of 100.60 (issue size now standing at SGD125m).

MALAYSIA CREDIT MARKETS

¨      Credit yields ended mixed; MAHB Pc24 gain despite problems at KLIA2. Flows were moderate with trading volume of MYR418m. Investors were active in AAA-rated bonds - notably, long dated PLUS 1/24-1-36 settling flat at 4.387%-4.958%; while Cagamas 3/16 closing at 3.6% on its debut trade. Elsewhere, MAHB Pc24 inched 1bps lower to 5.039% despite news on land sinking and cracking of KLIA2.

¨      MGS moved sideways with lackluster trading volume of MYR1.5bn amid lower oil prices and weaker MYR. The local currency fell to the new low of 3.8145 against USD yesterday, the weakest level since 1998, as falling oil prices (with Brent and WTI slipped to USD53/barrel and USD47/barrel respectively) pose concern on the government revenue and current account. At the end of the day, the 3y, 5y, 7y and 10y-MGS were crossing at 3.14% (unchanged), 3.46% (-1bps), 3.84% (+3bps) and 3.94% (-1bps) respectively.

¨      Special Port Vehicle Bhd’s (SPVB) MYR1.31bn asset-backed serial bonds facility was affirmed at AAA with a negative outlook by MARC. The Negative Outlook has been placed on SPVB for more than 5 years, is to reflect the vulnerability of future payments from the government/Port Klang Authority (PKA) and its willingness to provide support/payment to SPVB for to meet its debt obligations. However, we note that the track record of payments from PKA to SPVB has been forthcoming and ahead of its repayment schedule, therefore, we opine that such a long standing negative outlook is ineffective as it does not serve to reflect expectations of incremental risk.

TRADE IDEA: MYR

Bond(s)	Century Sunshine Group Holdings Ltd CENSUN 7.2% 4/18c17 (NR) (YTM 6.5%-6.95%) (Amt O/S: SGD125m)
Comparable(s)	Gallant Ventures (NR) 7.00% 4/18 (YTM: 6.358%) (Amt O/S: SGD230m) HNA Group International (NR) 7.00% 3/17 (YTM: 6.638%) (Amt O/S: SGD128m) CW Group 7.00% 6/18 (YTM: 6.75%) (Amt O/S: SGD75m)
Relative Value	For an SGD-denominated issue, CENSUN appear to provide an attractive tactical positioning for yield and short duration tenor (less than 3 years), with yield on the re-tap at c6.95% (at 100.60 re-tap price). We view that a mid-6% yield is more appropriate for CENSUN bonds (the bonds were trading at around 6.5% prior to the re-tap announcement) with negligible upsizing from SGD75m to SGD125m will not lead to any supply risk concerns.
Fundamentals	CENSUN’s credit profile is supported by the following: 1)     International Finance Corp (IFC) as the key shareholder – a member of the World Bank holds 11.47% stake in the company with history of financial support 2)     Leading vertical producer of magnesium products and fertilisers with major exposure in China – fertilisers formed 61.6% of the firm’s revenue, followed by 33.6% by magnesium products. 3)     Robust cash holdings with low gearing – CENSUN’s revenue CAGR at 18.6% from 2012-2014, while net profit CAGR at 30.2% over the same period, recorded HKD287.9m last year. CENSUN’s net debt/equity stood at a healthy level of 0.9%, while interest cover at 13x as of Dec-2014. 4)     Favourable terms with CoC put at 101, callable in April 2017 and Dec 2017 at 103.60.

CREDIT UPDATE

Company/ Issuer	Sector	Country	Update	RHBFIC View
DBS Group Holdings Ltd (“DBS”) (Aa2/NR/AA-)	Banking	SG	1H15 NP +8% yoy to SGD2.4bn; NIM for Q2 improved by 6bps to 1.75% (1Q15: 1.69%) on higher SIBOR and greater loan utilization (LDR increase to 93% from 88% in 1Q); Healthy asset quality with NPL of 0.88% and NPL coverage of 147%; Strong capitalization - CET1: 13.4%, T1: 13.4% and Total capital: 15.3%.	We maintain marketweight on DBS on the back of its healthy asset quality, and strong capitalization.