RHB FIC Credit Market Update - 7/7/15

7 July 2015

Credit Market Update

                                       

USD and SGD Credits Remain Hardy amid Greek Headwinds; Retain Preference in FIRTSP 5/18

REGIONAL                                                                                      

¨      Asian credits remain hardy amid Greek headwinds; Chinese measures keep markets afloat for a day. Asia’s credit market reaction to Greece’s referendum outcome was generally moderate, with the iTraxx AxJ IG inching up just 2.4bps to 112.7bps as sovereign CDS spreads (China, South Korea, Indonesia and Malaysia) widened 2bps on average. We noted IG bank and corporate bond yields closing 4-5bps and 5-6bps firmer, respectively, against extended gains in USTs, which saw their curve bull-flatten 4-10bps on safe-haven flows ahead of today’s Euorzone summit. Notable movements we observed were in NOBLSP 6.625% 20 which narrowed 290bps to close at 99.905 ahead of its redemption date on 5-Aug. Surprisingly, IG O&G yields lowering 5bps despite Brent crude plunging 6.3% to USD56.54/bbl amid oversupply issues on surging OPEC production. Meanwhile in China, stock market measures appeared to have been successful in stemming weakness for a day, leaving the Shanghai Index up 2.4%, although HY credits did not fare as well, with yields widening 12.7bps in general. Berau 2015s were traded 62/64 ahead of its maturity tomorrow while the issuer is obtaining seeking moratorium with Singaporean authorities. Elsewhere, primary activity remained at a standstill given current macro-headwinds; new to the pipeline, China’s HNA Tourism Holding Group Co Ltd (NR) has engaged banks for investor meetings today. On key economic data, the US services sector performed below consensus but better than prior month as June non-manufacturing PMI registered at 56.0 (consensus: 56.4; prior: 55.7). Key events to monitor include the Eurozone summit today and FOMC minutes on Thursday morning.

¨      Markets treading warily. The 3y and 5y swap benchmarks ended lower yesterday by around 4-4.25bps to close at 1.68% and 2.18% respectively. Market was expectedly quieter resulting from the Greek referendum (as well as some spillover sentiments from the trajectory of the China equity market), though we still saw some buying interest into PSASP and CAPLSP as well as banking names like UOBSP and BPCEGP. The SG 2Q2015 GDP print is due today (consensus: 2.5%; 1Q: 2.6%).  

MALAYSIA

¨      Local bond markets tripped post Greece “No” vote. Ongoing uncertainty in Greece following a “No” vote at Greek referendum had sparked another weak performance day on the sovereign front. The MGS curve steepened with the 5y, 7y and 10y benchmarks moved 3bps-6bps higher to 3.61%-4.02%. Meanwhile, MYR depreciated to 3.8092 against the greenback (the weakest level since pegging period between 1998 and 2005). The key focus for this week would be the reopening of 30-year benchmark MGS 9/43 at estimated size of MYR1.5bn-2bn. Amid the bearish sentiments, activities were subdued at MYR337m in the corporate bonds. Few names exchanged hands – notably, we saw MYR16m debut trade of Krung Thai B3T2 25c20 crossed at 4.949% (15bps below par). Other top traded bonds were on widening trend – RHBIB LT2 21c16 ended the day at 4.115% (+4bps); while Prasarana 9/22 inched 3bps higher to 4.198%. On the primary market, civil servant receivables ABS, Cendana Sejati (AA1) priced 7y at 5.65% (MYR50m).

TRADE IDEA: SGD

Bond(s)	FIRTSP 5/18 (yield: 3.68%; SOR+197bps) (NR) (outstanding: SGD100m)
Comparable(s)	SUNSP 2/20 (yield: 2.94%; SOR+77bps) (Baa2) (outstanding: SGD310m)
Relative Value	We reiterate a preference for FIRTSP 5/18, a healthcare REIT with strong exposure in Indonesia (c.95% of revenue), due to its stable expected cash flows and cheaper valuations. In addition, its lease agreements are structured in SGD, providing a hedge against the more volatile IDR. If compared to SUNSP 2/20, and allowing for a 2y difference in duration, we opine that FIRTSP 5/18 should provide a pick-up of around 20-30bps.
Fundamentals	We believe that FIRST REIT has strong fundamentals and outlook due to:  1)     Robust credit fundamentals. If compared to its SG REIT peers, it has a healthier credit profile, with leverage at 32.7% (peers: 34%), Total Debt/ EBITDA at 4.55x (peers: 9.3x) and EBITDA Interest Coverage at 5.4x (peers: 4.6x). 2)     Stable cash flows. It has stable cashflows as it has full occupancy rates and long lease rental agreements (averaging 11.2 years) with the hospital operator, Siloam Hospitals. As most of its operations are in Indonesia, the REIT is insulated from forex fluctuations as the Indonesian rental agreements are structured in SGD. 3)     Strong franchise supported by established sponsor. Siloam Hospitals is owned by PT Lippo Karawaci Tbk, an established property developer in Indonesia, who is also the largest shareholder in FIRST REIT at 27.7%. Though we acknowledge the presence of concentration risk, we believe that the underlying stable demand for healthcare and the established business of PT Lippo Karawaci should moderate any concerns in this area.

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	RHBFIC View
PTPTN (GG)	Education- student loan provider	MY	163,000 of civil servants with loans from PTPTN will be subjected to mandatory salary deduction effective September 2015.	Neutral to mild positive. Deduction at source will improve repayment but there was no mention on the amount to be collected from this move. Our quick check with PTPTN website shows limited info on the fund’s financials. Nonetheless, we take comfort from the GG-status of the sukuk to brush off credit risks. PTPTN 3/21 seen last traded at 4.056% (MGS+26bps).