RHB FIC Credit Market Update - 25/8/15

25 August 2015

Credit Market Update

           

Wider Spreads as Treasuries Rallied; New OCBC AT1 is Fully Valued

APAC USD CREDIT MARKETS                                                    

¨      CDS suffered another bruising session as global equities selloff. The iTraxx AxJ IG surged by 10.5bps to 139.5 as the global equities and commodities rout continues. The drop in global equities market (S&P 500: -3.94%, Dow Jones: -3.57%, CSI 300: -8.75%), fears of a China economic slowdown and persistent oil price decline (Brent: -2.8% to c. USD43/bbl) drove investors towards safe haven assets as UST tighten across the curve with the 10y going as low as 1.9% before closing at 2.0%.

¨      IG credits relatively unchanged amid risk-off sentiment. Some interest were seen in high grade credits such as CNOOC 16-23, Hutchison Whampoa 16-19, MTR 17 and Swire Pacific 16-23 while O&G and real estate companies continue to decline as seen in PETMK 19-45, Sinopec 17-45, Noble 18-20 and China Overseas 24-43.

¨      Lackluster global markets weakened HY credits as yields rose 20bps on average to 10.2%. Declines were led by real estate names such as Agile Property 17-20, Vedanta Resources 16-23, Country Garden 19-23, Shimao Property 22 and SUNAC 17-19.

¨      Key data to be released later today include Germany’s GDP (consensus: 1.6% YoY; prior: 1.6% YoY), US Consumer Confidence (consensus: 93.4: prior: 90.9), US New Home Sales (consensus: 510k; prior: 482k) and S&P Case-Shiller Index (consensus: 181.28; prior: 179.03). 

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SGD CREDIT MARKETS

¨      It’s becoming a global rout. We saw a huge leap in the SOR benchmark which climbed between 8-11bps, with the 2y and 5y closing at 1.83% and 2.36% respectively. In what many market participants are terming ‘Black Monday’’, the dual sell-off in the Chinese and US equity markets has spilled over to other asset classes as investors flocked to safe-haven assets. The secondary SGD market saw lighter flows as investors digested the incoming events, with overall net offers in HY space with activity seen in property (CENCHI, GUOLSP) and commodities space (OLAMSP, SWIBSP) as Brent oil closed c.USD43/bbl, the lowest since Feb-2009. Selling was also seen in PAHSP even as it was announced that regulators in Singapore and Hong Kong are investigating Pacific Andes Resources Development, a frozen seafood company. 

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MYR CREDIT MARKETS

¨      AAA bonds fueled secondary flows; Eversendai’s earning doubled, but gearing still high (Credit Brief). Credit market started the week with only MYR274m worth of nominal transaction, concentrated on the AAA-names. Yields generally on widening trend – notably, CMBS 5/22 rose by 28bps since May-15; although we also saw MACB 12/22 settled flat at 4.56%.

¨      Govvies yields widened on thin liquidity. Top mover was the 7y MGS which increased 11bps to 4.46% on thin volume of MYR50m or c2.8% of total trade of MYR1.8bn reported yesterday. At the end of the day, the 3y-10y MGS benchmarks closing in between 3.63%-4.46% (+5bps to +11bps).

¨      At the same time, the 3y and 10y IRS moved 17bps-18bps higher to 3.95% and 4.55% respectively. Meanwhile, Ringgit continued the depreciating trend, settling at 4.2630/USD yesterday amid concerns on lower oil prices and falling foreign currency reserves. 

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TRADE IDEA: SGD

Bond(s)	OCBCSP AT1 3.8% Pc20 (A3/NR/BBB)(Price: 99.7, YTC: 3.86%; SOR5y+150bps)(Amount O/S: SGD500m)
Comparable(s)	UOBSP AT1 4.75% Pc19 (A3/BB+/BBB)(Price: 103.40, YTC: 3.86%; SOR4y+163bps)(Amount O/S: SGD500m) UOBSP AT1 4.9% Pc18 (A3/BB+/NR/BBB)(Price: 102.75, YTC: 3.88%; SOR3y+184bps)(Amount O/S: SGD850m)
Relative Value	We view the newly-issued OCBCSP to be fully valued, which is priced at similar level to the existing UOBSP AT1 Pc19 and Pc18, despite having a call date of one year later.
Fundamentals	Recently, the Monetary Authority of Singapore (“MAS”) published a consultation paper in regard to resolution regime to financial institutions, which exclude senior from bail-in resolution.  No impact to subordinated debts where Basel 3-compliant securities already incorporated with loss-absorption feature. OCBC possesses a healthy credit profile supported by: 1)     Diversified banking group with significant exposures in Singapore, China, Malaysia, and other Asean/Asia Pacific; 2)     Strong domestic presence with estimated loan market shares of c.22%; 3)     Healthy asset quality with NPL of 0.7% and allowance coverage ratio of 153%; 4)     Strong capitalization with CET1, T1 and RWCAR of 11.2%, 14.1% and 16.1%. 5)     Solid leverage ratio of 7.4%, well above Basel 3 requirement of 3%. 6)     Healthy funding and liquidity with LDR of 84% and liquidity coverage ratio of 109%. *all data as of Jun-15.

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CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
Eversendai  Corporation Bhd (Eversendai) (RAM: A2/Stable)	Construction	MY	2Q15 YTD NP doubled to MYR35.5m from a year ago. Gearing (including operating leases) remained high at 0.93x while debt-to-EBITDA on annualized basis improved but still elevated at 7x (FY14: 7.8x). Orderbook as at Jun-15 stood at MYR1.8bn (c. 1.8 times of FY14 revenue).	Maintain underweight. Gearing is high at 0.93x, above peer average of 0.7x.