RHB FIC Credit Market Update - 3/7/15

3 July 2015

Credit Market Update

                                       

Trading Flows Pick-Up as Greek Concerns Ebb; Value in USD SUNHUN 2/22

REGIONAL                                                                                      

¨      Market gaze momentarily shifts away Greek quandary. Asian market sentiment improved yesterday as worries over Greece abated and a number of regional equity markets posted gains, with the exception of the Shanghai which saw its composite index declining a further 3%. This was also reflected in the iTraxx AxJ IG lowering 4bps to 109.5. In the US, rates narrowed 2-7bps across the curve after June nonfarm payrolls fell under expectations at 223K (consensus: 233K; prior: 280K) setting firmer tone for Asian credit today. Back on yesterday’s session, IG bank yields added 1.5bps as overnight benchmark USTs move 4-6bps wider, while IG and HY corporates fared better shedding 1-2bps and 10-11bps respectively. Notably, Malaysian IG corporate yields ended 4bps wider on average, with the exception of TNBMK 25, despite the affirmation by Fitch on Malaysia’s sovereign rating. Meanwhile, there were a number of rating actions from Moody’s, including Country Garden raised to Ba1 from Ba2 on improved funding and financial management; Hyundai Steel outlook raised to positive from stable in response to its completed merger with Hyundai Hysco on 1-Jul; and Towngas China Company Limited upgraded to Baa1 from Baa2 on continued strengthening in its operating profile and expected feedthrough benefits on credit metrics in the next 2-3 years. On key economic data, we noted softer China HSBC Composite and Services PMI of 50.6 (prior: 51.2) and 51.8 (prior: 53.5).

¨      Flows expected to pick-up after uncertain week. We saw a widening in the short-to-mid SOR, with the 3y and 5y rising by between 2.3-3.2bps to close at 1.74% and 2.24% respectively. We saw interest in old-style T2 papers like DBSSP and UOBSP while some selling was seen in mid-dated NUSSP papers. Singapore June PMI rose to 50.4 (consensus: 50.2; May: 50.2), though it is still too early to say if the slump in the industrial sector is bottoming out, where we expect headwinds to the industrial REIT space to continue for the next 6-12 months or so. US NFP came in stronger above the psychological threshold of 200k, though still below consensus (actual: 223k; consensus: 230k). We expect trades to pick-up today, closing off a week that started out with much uncertainty.  

MALAYSIA

¨      Mixed flows in credit market; Govvies extended gain; SapuraKencana set to issue an unrated Sukuk. PDS market ended mixed on thinner trading volume of MYR427m. Anih 11/26 and 11/27 led the chart on combined MYR60m trades, settling 1bps-3bps higher at 4.768%-4.849%. Elsewhere, YTLPI saw MYR15m crossed at 4.599% (-12bps). Govvies market, meanwhile, extended the positive momentum as 5y, 7y and 10y MGS benchmarks fell 1bps-6bps to 3.55%-3.97%. It was reported that SapuraKencana is ready to issue its unrated Sukuk under the MYR7bn Multi-currency programme.

TRADE IDEA: USD

Bond(s)	Sun Hung Kai Properties, SUNHUN 2/22 (M/S/F: A1/A+/A) (Price: 106.405; Yield: 3.408%; Z+135bps) (Amt o/s: USD900m)
Comparable(s)	Hongkong Land, HKLSP 6/22 (M/S/F: A2/A/NR) (Price: 106.345; Yield: 3.458%; Z+135bps)(Amt o/s: USD500m) Swire Property, SWIPRO 6/22 (M/S/F: A2/A-/A) (Price: 105.936; Yield: 3.408%; Z+130bps)(Amt o/s: USD500m)
Relative Value	We see value in SUNHUN 2/22 which is trading at similar level as SWIPRO 6/22 and merely 5bps premium in comparison to HKLSP 6/22 justified by SUNHUN’s one-notch rating premium.
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 2Q15 (Dec-14), almost flat to 4.7x in FYE14. Debt-to-EBITDA is below 4x, 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.

CREDIT IDEA

Company/ Issuer	Sector	Country	Update	RHBFIC View
Prasarana (GG)	Infra	MY	LRT 2 Ampang line should be ready for operation by March 2016. Phase One and Two are now 92.6% and 70% completed, respectively. The issuer is confident in meeting the targeted revenue service date.	Mild positive. Prasarana’s commitment is mostly welcome after the main contractor for Ampang Line, George Kent reported a potential delay by 12 months due to hiccups in civil works as reported by Business Times on Wednesday. Prasarana 9/24 seen traded yesterday at 4.309% (MGS+34bps).
Consumer sector	Consumer	MY	Retail sales forecast for 2015 slashed to 4.0% (from 4.9%) on rising costs of living, weaker MYR and GST impact (Retail Group Malaysia)	Neutral. We do not see much impact to bond issuers within MYR space. Bernas (rice supplier) recent three-notches downgrade (to A3/Neg) was more driven by weaker financials (from dividend upstreaming to holdco), while F&N Cap (AA1) stays resilient - F&N 9/18 and 10/18 last seen MTM at c.66-68bps above MGS, 4.099% and 4.113% respectively.
REIT regulations	REIT	SG	MAS released new REIT regulations which includes a single-tier leverage limit of 45% (down from 60% previously for rated names, and up from 35% for unrated), increase in development limit of a REIT to 25% of total assets and increased transparency of fee structure as well as board governance.	Neutral event. The official announcement was largely in line with the MAS Consultation paper released in 9-Oct-2014. REITs under coverage have largely stayed conservative in terms of the leverage profile, with an average leverage level of 32% and none above the 45% limit.