RHB FIC Credit Market Update - 26/8/15

26 August 2015

Credit Market Update

           

PBOC Cuts to Ease Liquidity Pressure; Hold HUWHY 4.625% 1/22

APAC USD CREDIT MARKETS                                                    

¨         Asian credit markets suppressed amid faltering global equities. The iTraxx AxJ IG widened by c.5bps to 135 despite persistent volatility in Chinese equities market. The UST widened across the curve with the 10y rising 7bps to close at 2.07% on the back the People’s Bank of China’s (PBOC) easing monetary policy (interest rate cut by 25bps to 4.60% and reduction of the reserve requirement ratio (RRR) by 50bps to 18%) and mixed economic data from the US.

¨         IG and HY credits weakened as yields crept up marginally by 6bps to 3.25% and 8bps to 10.3%, respectively. Chinese IG and HY real estate names led declines as seen in Yuexiu Property 18-23, Wanda 18-24, China Overseas 18-43, Swire Pacific 18-23, Greenland 16-17, Evergrande 18-20, and Shimao Property 20-21.

¨         Germany’s 2Q GDP was in line with market expectations at 1.6% YoY (prior: 1.6% YoY) while mixed economic data from the US were observed, whereby new home sales in July was below expectations at 507k (consensus: 510k; prior 482k) despite the rise in consumer confidence in August at 101.5 (consensus: 93.4; prior: 90.9).  

SGD CREDIT MARKETS

¨         Uncertainty rules the roost. The short-to-mid SOR curve tightened by between 5-6.5bps, with the 2y and 5y closing at 1.77% and 2.31% respectively. Markets continued to see-saw from headline news yesterday, with the day ending on a slightly better note with news of the PBoC’s interest rate and required reserve ratio by 25bps and 50bps respectively. Overall flows were light, though safe-haven papers continue to be well bid, with the likes of HDBSP papers 17’-19’ tightening by around 4-7bps, while HY (GALVSP, GUOLSP) and China issues (BNKEA, YLLGSP) were better offered. With the overall market turbulence and uncertainty, we opine that investors may still stay at the sidelines today, not yet ready for bottom-fishing.

¨         In terms of the CNY depreciation, Chinese property developers as a whole have been big fundraisers in the offshore capital markets, though their foreign currency debt levels (which include USD, HKD and SGD) differ across board, with Vanke (17% foreign currency debt of total debt), Yanlord Land Group (45%) and Central China Real Estate (70%). Both YLLGSP and CENCHI 17’s prices have fallen off by about 1.5-2% since the devaluation to around 99.5 and 97 respectively. 

MYR CREDIT MARKETS

¨         Credit yields widened; IJM’s profit doubled from sale of Indian toll. Flat topline for Telekom (credit Brief). Few names exchanged hands yesterday – Maybank IT1CS 9/68c18 topped the trading chart on MYR150m trades (or 39% of total volume), rose 18bps to 4.829%. Elsewhere, we continue to see widening trend in good quality bonds such as DanaInfra 7/24 (+26bps to 4.53%) and CMBS 5/22 (+2bps to 4.60%).   

¨         Government bonds ended mixed as delayed in Fed hike could provide temporary relief, but PBOC cut provides another source for volatility. We saw the 7y-MGS recovered to 4.38% (-8bps); while the 3y-10y benchmarks MGS settled in between 3.65%-4.38% (-8bps to +2bps). The government, meanwhile, announced the MYR3bn reopening of 10y-MGS (tender closing: 27-Aug), with the WI is now trading around 4.44%-4.45%. The local currency is under pressure following another round of China’s monetary easing, as the Ringgit is trading in the range of 4.228-4.299/USD this morning. IRS curve steepened with 3y and 5y decreased to 4.13% (-1bps) and 4.22% (-3bps); while 10y rose to 4.69% (+4bps).  

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TRADE IDEA: USD

Bond(s)	CK Hutchison (acquirer of Hutchison Whampoa Ltd in Jun-15) (HUWHY) 4.625% 1/22 (A3/A-/A-, all stable) (Price: 107.85; YTM: 3.249%; Z+151bps) (Amt o/s: USD1.48bn)
Comparable(s)	HUWHY 7.625% 4/19 (A3/A-/A-, all stable) (Price: 117.94; YTM: 2.411%; Z+120.4bps) (Amt o/s: USD1.5m) HUWHY 5.75% 9/19 (A3/A-/A-, all stable) (Price: 112.76; YTM: 2.413%; Z+108.4bps) (Amt o/s: USD1.0m) HUWHY 3.25% 11/22 (A3/A-/A-, all stable) (Price: 100.00; YTM: 3.249%; Z+144bps) (Amt o/s: USD500m) Li & Fung LIFUNG 5.25% 5/20 (Baa1/BBB+/NR, all stable) (Price: 110.07; YTM: 2.943%; Z+148bps) (Amt o/s: USD750m)
Relative Value	We reiterate our preference for HUWHY 1/22 for its slightly shorter duration and larger size to similar-yielding HUWHY 11/22, absolute yield pick-up of c.84bps to HUWHY 4/19 and 9/19, and likely gain on roll-down effect. Historically, HUWHY 1/22 yield has be at par or lower than LIFUNG 5/20, a global consumer product sourcing and trading company, but has since risen to offer a spread of c.30bps over the latter – which we opine is unjustified. After adjusting for 2y longer duration but 1-notch higher rating (assuming 10bps per year and notch), HUWHY 1/22 would still see fair value pickup of 20bps against LIFUNG 5/20. Moreover, we see room for the bond to benefit from greater scale post-merger with CHEUNG and more stable performance after spin-off of real estate businesses. Yield on HUWHY1/22 has tightened c.15bps from 3.40% since our recommendation on 15-Jul.
Fundamentals	We are comfortable with the pro-forma credit standing of CK Hutchison (the entity resulting from the merger of HUWHY and Cheung Kong’s non-real estate businesses) given: 1)     Strong business profile with well-diversified operations which includes telco (circa 50% of EBITDA), retail (15%), infrastructure (27%), and energy (12%) across the Mainland, Europe, elsewhere in Asia – while spinning off real estate businesses into Cheung Kong Property Holdings; 2)     Continued EBITDA growth and margins of +8.5% YoY to HKD46.2bn and +1.7ppt to 23.4% (vs HUWHY’s FY14 EBITDA of HKD51.8bn and 19%) respectively; 3)     Healthy liquidity with estimated positive free cash flow of HKD10.0bn in 1H15 and cash balance of HKD173.9bn sufficient to cover ST debts of HKD43.8bn and 51.7% of total debts outstanding; 4)     Credible management track record (controlled by tychoon Li Ka-shing) and commitment to maintain credit ratings at current levels despite active M&A activities.  However, we are cautious of risks arising from: 1)     Strain on leverage with debt/EBITDA rising to 7.3x (vs HUWHY’s 4.93x at Dec-14), with added pressure from pending acquisition of O2 UK for GBP9.25bn cash plus deferred upside interest of up to GBP1.0bn (with plans to concurrently sell 33% stake or GBP3.1bn to cornerstone investors); 2)     Uncertainties of financial performance pending first full year operating results, while current numbers are based on pro-forma management accounts. All financial data as at Jun-2015, unless stated otherwise.

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CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
IJM Corporation Bhd (IJM) (AA3/AA-)	Construction	MY	1QFY3/16 NP doubled to MYR371m, due to the gain on sale of Jaipur Mahua Tollway of MYR169m. Total borrowings increased to MYR6.4bn, gearing stable at 0.7x. Debt-to-EBITDA healthy at 4.4x (FY3/15: 4.2x).	Maintain marketweight. IJM’s debt profile is still at manageable level with debt-to-EBITDA of 4.4x. Earnings to be supported by its huge construction orderbook of estimated MYR7.2bn (6x of FY3/15 revenue), offsetting to weak sentiment in the property market.
CK Hutchison (A3/A-/A-, all stable) (Entity containing the merged non-real estate businesses of Cheung Kong, CHEUNG, and Hutchison Whampoa, HUWHY)	Diversified	HK	Reported 1H15 pro-forma EBITDA growth of +8.5% YoY to HKD46.2bn (but -3% for comparable EBITDA). Operational highlights: ·          Retail +1% to HKD6.7bn, +345 net additional stores to 11,780 in 24 markets; ·          Infra +36% to HKD16.0bn post-reorganistion of CK infrastructure and acquisition of Eversholt; ·          Husky Energy -33% to HKD5.5bn due to lower oil prices despite average production rising +5% to 346,400 BOE per day; ·          Telco (3 Group) +20% to HKD7.8bn with 30m customers in Europe and pending regulatory approval for acquisition of O2 UK to make the largest mobile operator in UK.	Maintain marketweight. We opine that the benefits of greater scale and stability post-merger with CHEUNG and spin-off of real estate businesses are offset by rising leverage following acquisition of Eversholt rail and pending O2 UK. Neutral on credit profile given high leverage of debt/EBITDA  of 7.3x buffered by liquidity with positive free cash flow of HKD10.0bn in 1H15 and cash reserves of HKD173.9bn sufficient to cover ST debts of HKD43.8bn and 51.7% of total debts. Yields were seen spiking around 10bps on HUWHY 19-24 yesterday.
Telekom Malaysia Berhad (TM) (A3/Pos; A-/Sta; A-/Sta)	Telecommunications	Malaysia	2Q15 revenue increased marginally by 0.7% to RM2.84 billion from a year ago. Operating profit and net profit, however, declined by 9.8% and 1.0% respectively due to forex losses from borrowings and consolidation of operational loss of P1. Gearing remains stable as debt-to-asset ratio is relatively unchanged at 30% in 2Q15 (2Q14: 29%).	Maintain marketweight. TM remain susceptible to forex risk as TM has high exposure to foreign denominated borrowings with 22% in USD and remaining 3% in Canadian Dollar and Yen. Despite the hedged position (only 12% of TM’s forex borrowings are unhedged), we expect TM’s leverage to deteriorate marginally should the MYR weaken further against the USD, whereby annualised 2015 debt/EBITDA may increase to 1.94x from 1.78x and EBITDA interest coverage may decrease to 11.73x from 2014’s 12.45x.