FW: RHB FIC Credit Market Update - 7/9/15

: RHB FIC Credit Market Update - 7/9/15

7 September 2015

Credit Market Update

           

Mixed Interpretation on NFP to Keep Credits at Bay; Reiterate on PWONIJ 7.125% 7/19

APAC USD CREDIT MARKETS                                                    

¨      Credits stay weak amid equities and commodities rout. iTraxx AxJ IG rose 3bps to close at 140bps on Friday. UST strengthened across the curve as 10y yield declined approximately 4bps to 2.12% as investors turned to safe havens for respite amid continued decline in global equities and commodities markets despite a stronger case for a Fed rate hike soon on the back of “full employment” in the US (more on economic data below).

¨      IG spreads widened marginally by 1bps to 169.2bps*. Decliners were observed in O&G space such as Sinopec 23, PTT PCL 22 and Pertamina 21 as Brent prices declined by 2.1% to USD49.6/bbl. Conglomerates also saw some declines, notably Hutchison Whampoa 22 and Swire 22.

¨      HY yields widened sparsely by c. 2bps to 10.05%*. Chinese property players continue its decline as seen in Agile 19-20, SOHO 17-22 and Evergrande 18-20 whereby average yields widened approximately 3bps with biggest decliner widening as much as 20bps.

¨      Plantation credits took a dive as Moody’s downgraded Golden Agri’s rating from Ba2 to Ba3 on negative outlook while Sime Darby and IOI Corp’s ratings were affirmed at A3 and Baa2 respectively but outlook was revised to negative from stable. Moody’s cited weaker CPO and commodities prices as the main driver for the negative outlook (more on Golden Agri, Sime Darby and IOI in the Credit Update section).

¨      Rating upgrade for China Orient Asset Management while Guangzhou R&F Properties’ outlook revised to negative by Fitch. China Orient was upgraded to A from A- on stable outlook by Fitch on the back of the company’s strategic importance to the Chinese sovereign (100% owned by China’s MOF) and improved capitalization from retained earnings. Meanwhile, Guangzhou R&F’s outlook was revised to negative by Fitch due to deteriorating cash flows and leverage.

¨      US reached full employment as jobless rate came in stronger-than-expected at 5.1% in Aug-15 (vs consensus: 5.2%; prior: 5.3%), and lower-than-expected Aug-15 NFP at 173k (vs consensus: 217k; prior 215k). Meanwhile, across the Atlantic Ocean, Germany recorded disappointing manufacturing data whereby Jul-15 factory orders declined 1.4% MoM (vs consensus: -0.6%; prior: 2.0%).

¨      Key data to watch out for today is China’s foreign reserves as market is expecting reserves in Aug-15 to decline to USD3.58tr from USD3.65tr in prior month. Any larger-than-expected decline could potentially impact APAC credit markets negatively.

SGD CREDIT MARKETS

¨      Low activity due to China holiday and US NFP. We saw parallel tightening by c.4bps in the short-to-mid SOR curve, with 2y and 5y closing at 1.9% and 2.6% respectively. Volumes were thinning towards the end of the week due to China being out on Thurs/ Fri due to Victory Day and investors staying at the sidelines ahead of the Fri’s US NFP, which came in weaker than expected at 173k (consensus: 217k). We saw interest into property names such as FCLSP, HKLSP, while ARTSP jumped following its disposal of six rental housing properties in Japan for SGD52.6m. Meanwhile, Ezra’18 improve c.4% to c.87.5 since its announcement of the partial divestment of its subsidiary EMAS AMC to Chiyoda (which includes Chiyoda paying cash consideration of USD150m to Ezra and a USD30m cash injection for a 50% ownership in the newly established EMAS Chiyoda). We expect further gain on Ezra after announcing contract win with BHP Biliton, though the amount was not mentioned.

MYR CREDIT MARKETS

¨      Short-term paper fueled last Friday’s corporate flows where c.81% of MYR376m total trading volume was concentrated in bonds maturing in 1-3 years. Top traded were Cagamas 16s which settled at 3.998%-4.029% (-70bps to +35bps) on combined MYR210m trades. On the power sector, we saw yields for YTLPI 8/18 and SEB 6/16 rise marginally by 0.1bps-0.3bps to 4.349% and 4.094% respectively.

¨      Govvies ended the week positively with the 3y-10y benchmark MGS yields shifting 1bps-10bps lower to 3.31%-4.20% last Friday. These translated to a drop of 11bps-21bps w-o-w for 5y-10y as investors were seen bargain hunting following the previous sell down. Ringgit is on a weakening trend, trading at 4.26-4.31/USD this morning as we saw less intervention from the central bank based on the improved foreign reserves print of USD94.7bn as at end-Aug, or USD200m more than level seen in mid-Aug. Meanwhile, IRS 3y and 5y declined 1bps-2bps to 4.13% and 4.24% respectively last Friday. Elsewhere, investors are awaiting for the new 3.5y-MGS auction expecting to be announced this week.  

TRADE IDEA: USD

Bond(s)	Pakuwon Jati (PWONIJ 7.125% 7/19) (Ba3/Sta; B+/Pos; BB-/Stable) (Price: 98.79; YTM: 7.49%; Z+622bps; Outstanding: USD200m)
Comparable(s)	Lippo Karawachi (LPKRIJ 7.00% 5/19) (Ba3/BB-/BB-; Stable) (Price: 99.58; YTM: 7.12; Z+588bps; Outstanding: USD250m)
Relative Value	We reiterate our idea on PWONIJ 7/19 which continues to offer a good pick-up of 37bps over LPKRIJ 5/19. The spread of the 2 bonds has tightened from 114bps since we first recommendation on the 10-Jul driven by positive rating actions. PWONIJ, over the last 2-3 months, was upgraded one notch by Moody’s and Fitch to Ba3 and BB- respectively, while we expect an upgrade from S&P subsequent to the positive outlook - underpinned by its strong financial profiles. The latest 1H15 results has shown strong earnings growth from the Indonesian property developer where revenue increased by 29% to IDR2.4tn. Having said that, we believe that the spread between the 2 above-mentioned bonds will continue to converge.
Fundamentals	Pakuwon’s credit metrics are supported by the following factors: 1.     Stable recurring income from investment property, which forms c.46% of its revenue; 2.     Discipline and conservative capital management. Its USD200m bonds are fully hedged, hence mitigating the weaknesses seen in IDR, debt/EBITDA at 1.5x (vs its self-regulated policy of 2.5x) and moderate gearing of 0.57x. 3.     Solid EBITDA margins and profitability of more than 50% (for the past 4 years) In addition, we view that several developments are positive for the property sector: 1.     The government is reportedly in the process of finalizing the ruling to allow foreigners to buy Indonesia properties, although this proposal may come with some restrictions such as ownership to be limited to luxury apartments and will only allowed to those with temporary stay permit card. 2.     The recent relaxation on Loan-to-Value which increases the ceiling 10% for first, second and subsequent homes (to 80%, 70% and 60% respectively) should act as a driver for property developers.   Nonetheless, the key risks to our call are: 1.     Operational risks; i.e lower occupancy rates, slower takeup on property development division; 2.     Significant deterioration on financial profiles resulted from aggressive expansion; 3.     Slower-than-expected reforms in Indonesia could dragged property market.

CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
IOI Corp (Baa2/BBB/NR,Neg)	Plantation	MY	IOI’s outlook was cut by Moodys to negative from stable, while affirming its Baa2 rating. Similarly with S&P the week earlier, Moody’'s revised the outlook on IOI on concerns of the sharp decline in CPO prices, which is expected to be weak in the coming year due to the ample supply of CPO and other edible oils, while the use of CPO for biodiesel production has been limited due to the low crude oil prices.	We may consider revising IOI to underweight. We opine that the weak CPO prices (YTD average: MYR2,200/mt) will take a toll on IOI’s earnings profile and cashflows, On the other hand, IOI leverage profile has weakened slightly as its debt/EBITDA rose to 4.43x in FY15 from 3.82x in FY14, while its D/E ratio remains manageable at 0.49x during the same period. Meanwhile, its interest coverage ratio declined to 5.3x from 6.8x, further backed by a cash ratio remains above 1.0x in FY15. IOI 6/22 was seen quoting at bid/ask 4.427%/4.290%.
Sime Darby (A3/A-/A,Neg)	Plantation	MY	Sime Darby’s outlook was slashed by Moodys to negative from stable, while affirming its A3 rating. Moody’s revised the outlook on Sime on concerns of the sharp decline in CPO prices as its business has been affected across the board of the weaker commodities and by the slowdown in China, further affected by the weaker MYR.	We may consider revising Sime Darby to underweight. Sime Darby’s credit metrics has weakened considerably in FY15 as its debt levels rose 60% yoy to MYR18.2bn following the acquisition of NBPOL. The weaker balance sheet is reflected by D/E ratio rising to 0.58x (FY14: 0.38x), debt/EBITDA to 4.5x (FY14: 2.2x), while it’s net D/E rose to 0.45x. On the other hand, FFO/Debt and interest coverage ratio dipped to 0.18x (FY14: 0.41x) and 8.5x (FY14: 12.3x) respectively. The subdued CPO prices (average YTD: MYR2,200/MT) and slowdown in the Chinese economy may see further weakness in its financial leverage profile. Sime 1/23 was seen quoting at bid/ask 3.987%/3.863%.
Golden Agri Resources (Ba3/NR/NR,Neg)	Plantation	SG	GAR’s rating was cut by Moody’s to Ba3 from Ba2, while retaining its negative outlook. Moody’s downgraded the ratings of GAR on concerns of the sharp decline in CPO prices while its debt level remains elevated, further compounded by weak liquidity profile.	Maintain underweight. We maintain our negative view on GAR as its annualized debt to EBITDA remains high at 6.2x, with an interest coverage ratio of 4.2x, while its annualized FFO to debt ratio remains weak at 0.1x. The weak commodities outlook could potentially weaken the credit further. GAR 6/22 was seen quoting at bid/ask 2.684%/2.388%.