RHB FIC Credit Market Update - 12/8/15

12 August 2015

Credit Market Update

           

Jittery after a CNY Devaluation; Hold SUNHUN 2/22

APAC USD CREDIT MARKETS                                                    

¨      Credit premium rose as CNY devalued. Investors in risk aversion mode as seen with the iTraxx AxJ IG spiking up nearly 4bps to close at 117.8. Overnight, the UST gained 5-9bps across the curve, with the 10y adding closing below c.2.15%, as investors sought safe haven assets following the surprise move by the PBoC to devalue the Yuan as global stock markets closed lower.

¨      Safe haven shift into quality IG; yields tightened by 4bps to 3.14% from 3.18%. Investors’ confidence waned which led to HK corporates outperforming as seen SUNHUN 20-23s, SWIRE 22, HKLSP 22, HUWHY 22, as well as TNBMK 25, SINOPE 45 and TEMASE 19-42. Noteworthy underperformers in this space were TIAMK 22, RILIN 27 and KORELE 34. Lack of catalyst saw HY corporates traded sideways at 8.4%, whereby Chinese real estate HY names tightened by 5bps on average with EVERRE 18-20s, AGILE 17-19, CENCHI 20-21s.

¨      In the primary space, HNA Cap (Baa3/BBB-/NR) received over USD380m orders mainly from private banks (66%) for its USD200m 3y bond at T+360 (IPT: +370bp), while BOCOM (A2/A-/A) plans for a USD1bn multi-currency bond issue and will be meeting investors this week.

¨      On economic data to monitor, includes US MBA mortgage application and China July IP (consensus: 6.6%; prior: 6.8%) and Retail sales (consensus: 10.6%; prior: 10.6%).

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SGD CREDIT MARKETS

¨      Selling seen in short-to-mid HDB papers as 2y SOR rose. The benchmark SOR curve continued to flatten, with the 2y rising by +4.75bps (to 1.59%) while the 5y tightened by 1.5bps (to 2.22%). Yesterday saw selling in short-to-mid HDBSP papers and HY O&G names like PACRA and OTMLSP even as Brent oil prices see-sawed to USD49.2/bbl yesterday while some buying was seen in CITSP papers. City Developments will be releasing their 2Q2015 results tomorrow.

MYR CREDIT MARKETS

¨      Bearish government yields weight on GG bonds. Few names exchanged hands on a quiet trading session with total volume of MYR281m yesterday. Government guaranteed bonds led the trading chart on widening trend – DanaInfra 4/22 climbed 14bps to 4.247%; while Govco widened 3bps to 4.206%. Elsewhere, we saw AAA-rated ADCB 11/17 fell 2bps to close at 4.329%.

¨      Sovereign yields escalated higher as offshore players probably withdrawing from the market amid the weak Ringgit. This coincide with a total of MYR5.15bn of foreign outflows in July, which also saw foreign ownership of MGS fell to 47.8% (Jun: 48.5%), with net outflows of MYR1.36bn vs inflows of MYR8.64bn in June. At the end of the day, the 3y-10y MGS benchmarks shifted 3bps-10bps upward to settle at 3.35%-4.18%. Meanwhile, the 5yMGS reopening auction registered decent demand with BTC of 1.74x at average yield of 3.899%. The 5y benchmark subsequently closed higher at 3.91% post-auction.

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TRADE IDEA: USD

Bond(s)	Sun Hung Kai Properties, SUNHUN 2/22 (A1/A+/A) (Price: 107.93; Yield: 3.142%; Z+127bps) (Amt o/s: USD900m)
Comparable(s)	Hongkong Land, HKLSP 6/22 (A2/A/NR) (Price: 107.89; Yield: 3.199%; Z+129bps)(Amt o/s: USD500m) Swire Property, SWIPRO 6/22 (A2/A-/A) (Price: 107.12; Yield: 3.207%; Z+129bps)(Amt o/s: USD500m)
Relative Value	We continue to see value in SUNHUN 2/22 which has tightened by 16bps since we first recommended in 5-Jun. At 3.142%, SUNHUN 2/22 is trading at merely 5bps-6bps premium in comparison to 1-notch lower rated HKLSP 6/22 and SWIPRO 6/22.
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.

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CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
Centurion Corp Ltd (NR)	Real Estate	SG	Centurion saw its 2Q15 revenue rise 33% to SGD26.4m  from strong growth in its accommodation business while net profit increased 28% to SGD9.8m.	Overweight. Centurion provides accommodation to foreign workers (67% of 1H2015 revenue) and students in UK and Australia (27%), and we continue to believe that Centurion is a stable credit due to its strong occupancy rates (historically 90% and above), tenancy agreements with established corporations (such as SMRT) and URA regulation that only allows specific dwellings to be rented out to foreign workers in Singapore. Though its leverage is on the higher side in 2Q15 (Debt/ Assets at 56%), this is mitigated by the fact that 95% of debt is LT in nature, comfortable EBITDA margin at 59% (3y average ~60%) and sufficient EBITDA Interest Coverage at 5.4x.
POSCO (Baa2,Neg/BBB+ ,Sta/BBB/Sta)	Steel	KR	To set up 3m tonnes/year- integrated steel plant in western Maharashtra state with India’s Shree Utam Steel and Power Ltd.	Assuming cost of USD1bn for every 1m tonne steel plant, the set-up will cost c.USD3bn and if shared equally, we estimate POSCO’s debt/EBITDA to rise marginally to 4.88x from 4.69x as of Dec-15. There is a huge growth potential in India given the Government’s push for infrastructure spending which will boost demand for steel and we see the plan as earnings accretive. POSCO 10/20 was seen last quoted at 2.785%/2.692%.