RHB FIC Credit Market Update - 8/7/15

8 July 2015

Credit Market Update

                                       

Credit Costs Widen on Greece; OLAMSP 7/19 SGD for Aggressive Mandate

REGIONAL                                                                                      

¨      Credit risks heighten on Greece but yields firm ahead of Fed minutes. Market sentiment yesterday deteriorated on concerns over the Eurozone summit, as the iTraxx AxJ IG touched a 5-month high of 115.7bps, while regional equities softened a moderate 1-2%. We continue to expect risk appetite to be subdued after news of Eurozone leaders setting a Sunday deadline for Greece to accept bailout terms or face an exit from the EU. Overnight, USTs extended gains on the news and a USD24bn 3y auction, resulting in the curve bull-flattening 1-4bps. In credit markets, IG bank and corporate bond yields continued to stay firm, shedding 1-2bps on average. IG O&G credit yields remained resilient, reducing 2-3bps; Brent crude was marginally up 0.55% at USD56.85/bbl. In the HY space, credits appeared to have been impacted by equity market weakness as yields added 17bps. We noted Berau Coal 2015s traded 0.25pp lower as the Singapore High Court approved moratorium for the bonds.

¨      Flows towards IG names amid convergence of negative headlines. The short-to-mid curve continued its decline, with the 3y and 5y tightening by between 3.5-4.5bps to close at 1.64% and 2.14% respectively, in tandem with Treasuries. A weaker sentiment continued to thrive due to a confluence of  China’s equity market sell-off, renewed commodity price concerns (Brent hovering c.USD57/bbl), and continued uncertainty over Greece. We saw some flows towards IG names such as SPSP, PSASP and HK names like HKLSP and SUNHUN and some selling in SMMSP. In the primaries, Centurion Corp (NR) set to price SGD deal of 3y at initial guidance of 5.5%.  

MALAYSIA

¨      Mixed flows in credit space; foreign reserves at USD105.5bn. Secondary flows improved to MYR753m but yields ended mixed note as investors were active AAA-space – Aquasar 7/26 saw MYR50m crossed at 4.721% (+2.1bps); while Danajamin-guaranteed IESB 11/20 tightened 2.8bps to 4.647% on MYR40m trades. Meanwhile, activity were rather muted in the benchmark govvies as investors opt to stay sideline amid the risk-off sentiment on the global front as well as the renewed fall in oil prices. Foreign reserves was at USD105.5bn on 30-Jun (+USD0.3bn from 15 Jun) while we expect OPR to stay from MPC meeting tomorrow (9-Jul).

TRADE IDEA: SGD

Bond(s)	OLAMSP 17/7/19 (NR) (Yield: 4.41% ; SIGB20+247bps) (Amt o/s: SGD350m)
Comparable(s)	OLAMSP 22/7/19 (NR) (Yield: 4.20% ; SIGB20 +229bps) (Amt o/s: SGD400m) WILMAR 25/1/19 (NR) (Yield: 3.47%; SIGB20 +158bps) (Amt o/s: SGD100m)
Relative Value	We like OLAMSP 17/7/19 given its defensive nature as a non-cyclical consumer player in the Singapore market. The specific issuance offers absolute yield pickup over OLAMSP 22/7/19 of 21bps, and almost a percentage point over WILMAR 19 which we opine is attractive despite the latter's better credit metrics. We see the weakened global sentiment, especially in emerging markets, spurred by deadlocked Greece debt discussions as a catalyst for this yieldy defensive pick. Singapore's economy also shows reassuring signs for consumer segment.
Fundamentals	Aggressive investors may consider OLAM's based on the following reasons: 1)     Decent profitability level with EBITDA growth of c.5% YoY to SGD1.2bn and margin of 5.95%; 2)     Good access to capital despite moderate liquidity with cash balance of SGD1.3bn against ST debts of SGD2.7bn (SGD2.6bn) but supported by unutilized credit lines of SGD7.1bn, based on 1Q15 results. 3)     Assumed support by Temasek’s controlling stake of 58.4% in Olam However, the risks to our call would be: 4)     High leverage of 2.1x and growing net debt/EBITDA of 6.83x (Dec-14: 2.3x; 6.79x); 5)     Earnings volatility from commodities prices and slowing global growth. *All financials as at Mar-15.