RHB FIC Credit Market Update - 11/8/15

11 August 2015

Credit Market Update

           

Commodity Bloodbath Taking Tolls on Credits; Maintain Tactical on Olam 7/19

APAC USD CREDIT MARKETS                                                    

¨      CDS moved slightly on equity rebound in China. Credit protection costs widened 1bp to 114.2, reflected by the iTraxx AxJ IG despite the rebound in Chinese equities market. Separately, the UST rose 1-6bps, with the 10y adding 6bps to close below c.2.24%, with the markets rising expectation of a Sep rate hike despite conflicting views from FOMC members on the timing.

¨      IG corporates yields inched up 2bps to 3.18%. Underperformers in this space were ANHAU 16s, TNBMK 25, BABA 34, HUWHY 27 along with Chinese O&G names such as CNOOC, SINOPE, CNPCCH and SINOPC. We observed that ORGAU 18-21s yields widened sharply after it was downgraded by Moody’s from Baa2 to Baa3 with a stable outlook, the downgrade was to reflect its completion of the divestment of Contact Energy, which has weakened its revenue diversity, while its leverage profile remain unchanged. Contrastingly, HY corporates tightened 1bp to close below 8.5%. Outperformers were led by Chinese real estate HY names such as FTHDGR 17-20s, SHIMAO 21, GRNLHK 16, CSCHCN 19 and CAPG 19s.

¨      China’s July M2 money supply rose 13% y-o-y vs 11.8% in June, as lending to financial institutions last month likely rose to halt the rout of the Chinese equities markets.

SGD CREDIT MARKETS

¨      Commodity headwinds deepened taking tolls on SGD credits. There has been selling in commodity names of late from lower prices and concerns on commodities traders’ opaque valuation treatments. Selling has been observed in the better part of last week in SWIBSP, EZRASP, GGRSP due to last week’s Brent oil prices which dipped below USD50/bbl, though it has rebounded slightly this week to around USD50.2/bbl. Nevertheless, this is still below averages in June (USD63.7/bbl) by c.21% and July (USD56/bbl) by c.11% as well while palm oil prices have seen the same fate, hovering at MYR2,010/MT, below averages in June (MYR2,267/MT) by c.11% and July (MYR2,187MT) by c.8%. There has also been more offers for NOLSP and OLAMSP, even as fellow SGX-listed commodities-trader Noble yesterday unveiled PWC’s report on their review of Noble’s accounting practices.

MALAYSIA CREDIT MARKETS

¨      Credit yields moved higher following hike in govvies yields last week. Corporate flows improved by 32% to MYR404m, compared to last week daily average of MYR306m. On widening trend, we note DanaInfra 4/21 on MYR115m trades inching 11bps higher to 4.158% (5yMGS + 35bps). In other sectors, PLUS 1/21 was trading 6bps wider at 4.205%; although we also saw YTL 10/24 closing the day tighter at 4.731% (-2bps).

¨      Lackluster sovereign flows as investors holding their position. Govvies market started the week on muted activity of MYR527m as investors probably chose to hold their position at current level after the hike in sovereign yields last week. Yields for the 3y-10y MGS benchmark ended on downward bias, settling in between 3.30%-4.15% (-4bps to +1bps). The 5yMGS reopening auction set to close today with the WI was trading within the range of 3.80%-3.85%.

¨      Meanwhile, Malaysia’s Industrial Production Index increased by 4.3% y-o-y in Jun-15, slightly slower than 4.5% in May-15.

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TRADE IDEA: SGD

Bond(s)	OLAMSP 17/7/19 (NR) (Price: 104.1; Yield: 4.634%; SIGB20 +264.3bps) (Amt o/s: SGD350m)
Comparable(s)	OLAMSP 22/7/19 (NR) (Price: 99.7; Yield: 4.333%; SIGB20 +240.2bps) (Amt o/s: SGD400m) WILMAR 25/1/19 (NR) (Price: 101.2; Yield: 3.741%; SIGB20 +172bps) (Amt o/s: SGD100m)
Relative Value	We maintain tactical on OLAMSP 17/7/19 for an attractive 24bps and c.90bps yield pickup against OLAMSP 22/7/19 and WILMAR 1/19. Although OLAMSP 17/7/19 has widened c.20bps in yield since our call on 8-July (hit by softer commodities such as corn and wheat which declined 8%-9% to USD384/bu and USD521/bu respectively), it proved to be slightly more resilient than WILMAR 1/19 given that spread has tightened 5bps against the latter. We also see support from OLAMSP's commitment to restructure its lower margin businesses as well as debts (to recap its S$97m bond-buyback in 1Q15), strong shareholder (i.e. Temasek's 58.4% stake), and to some extent the delay of a USD1.3bn acquisition of Archer Daniels Midland's global cocoa business, which could bolster credit profile at least for now. Though we advise caution ahead of its results scheduled to be released this Friday.
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 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.

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CREDIT UPDATE

Company/ Issuer	Sector	Country	Update	RHBFIC View
Noble Group Limited (“Noble”) (M/S/F: Baa3/Sta; BBB-/Neg; BBB-/Sta)	Commodities/Plantation	HK	Noble released its 2Q15 results with revenue of USD3.7bn (y-o-y: -49%-; q-o-q: -17%) and EBITDA of USD220m (y-o-y: -2.5%; q-o-q: -25%), while its net profit fell 4.5% y-o-y from USD66m to USD63m. Additionally its gearing level remain elevated with a total debt of USD5.7bn which translates into a net gearing and net debt/EBITDA of 0.8x and 4.6x respectively, as its cash-to-short- term debt remains below 0.41x. Meanwhile, Noble interest coverage ratio hovers in the region of 3.7x. On the other hand, PwC’s independent 3rd party review notes that Noble’s valuation approach for contracts conform to both industry & accounting rules.	Maintain underweight. We view that negative investor sentiment will remain in the short-to-medium term and this is compounded by the weak global commodities outlook, which continue to persist amid the slow-down in the Chinese economy.