: RHB FIC Credit Market Update - 10/9/15

10 September 2015

Credit Market Update

           

Investment-Grade Issuers Sneak in as Sentiments Improved; Prefer IOCL 8/23 Relative to BPCL

APAC USD CREDIT MARKETS                                                    

¨      Sentiments improved amid sustained recovery in Chinese equities. The iTraxx AxJ IG recouped approximately 4bps to c.134.5bps from c.138.5bps as investor confidence improved as reflected by the gains in the Chinese equities market with the Shanghai index and CSI 300 regaining 2.3% and 2% respectively, while the Hang Seng Index climbed c.4%. Overnight, 10y UST rose 1bp to 2.21% after the auction of the benchmark 10y notes drew higher yield of 2.245% and also pushed lower by a host of US corporate bond issuances.

¨      IG spreads and yields unchanged at 168.6bps and 3.24% respectively. Buying interest across the IG space was mix with underperformers seen in STSP 21, PTTT PCL 22 and Korea Electric 18 while gainers were OCBC B3T2 24 and Samsung 17.

¨      HY yields tightened 7bps to 10.00%; Agile Property 17-20s, Evergrande 18-20, Greenland HK 16-17, and Country Garden 19-23 as buying interest in the Chinese real estate space remains rosy. Commodities names which sustained negative pressure in the weeks before also rebounded like Vedanta Resources 16-23, China Hongqiao 17 and Indo Energy 23.

¨      Four deals priced with healthy Bid-to-Cover (BTC). Shanghai Pudong Development Bank (Baa1/BBB+/NR) received over USD3bn orders for its USD500m 3y bond (BTC: 6.0x) priced at T+150bp (IPT+175bps). Similarly, Korea Development bank (Aa3/A+/AA-) sold USD750m 10y bond at T+115 (BTC of 2.9x), mostly taken up by Insurance companies (56%) and fund managers (21%). Additionally, China EXIM (Aa3/AA-/A+) priced its USD500m 5y bond at T+130 (IPT+135bps) and USD500m 10y at T+160 (IPT+165bps), while China Securities Finance (A1/NR/NR) may price its USD200m 5y bond today with an IPT+185bps.

¨      Key data releases prints was the China’s PPI y-o-y was weaker than expected at -5.9% (consensus: -5.6%; prior: -5.4%) and CPI at 2.0% (consensus: 1.8%; prior: 1.6%). Today’s economic data release is US jobless claims print expected at 275k.

SGD CREDIT MARKETS

¨      SORs dip after this week’s widening; general election tomorrow. The 2y and 5y SOR rates dipped by between 3.5-4.5bps to 2.0% and 2.62% respectively after much widening since last Friday. Flows continued to trade thinner, though some selling was seen in HY names like MDASP, FLESP and ASPSP as market uncertainty does not seem to have ended yet after the turbulence in the US equities market last night. The Singapore market will be out tomorrow due to the SG elections. SGX advised caution yesterday evening when dealing with shares of International Healthway Corporation due to high connected interparty trading volumes, which may negatively impact sentiment on its IHCSP papers while City Development’s (CITSP) 32.1%-owned CDL Hospitality (CDREIT) announced a GBP62.5m hotel acquisition in the UK.  

MYR CREDIT MARKETS

¨      AAA bonds fueled corporate activity. Flows doubled to MYR439m in the corporate bonds as value seems to emerge amid cautious market. Topping the chart was Cagamas 3/16 which rose 34bps to 3.962% on MYR100m trades or 22% of total volume. Elsewhere, PLUS 1/26-1/28 ended the day at 4.787%-4.899% (-7bps to +26bps) on combined MYR55m trades.

¨      Local govvies’ rally continued. Benchmark yields resumed the positive momentum as the 3y-10y MGS slid 4bps-15bps lower to 3.39%-4.17%, although trading volume on the sovereign market was thin at MYR1.9bn. The IRS on the similar trend where the 3y-10y onshore swap rate settled lower at 4.14%-4.61% (-2bps to -4bps) while Ringgit also strengthened 0.2% to 4.3290/USD yesterday.

¨      On the primary front, RAM assigned preliminary rating of AAA-A3 to Purple Boulevard’s proposed Sukuk Ijarah programme of up to MYR450m for the securitization of Ampang Point Shopping Centre.

TRADE IDEA: USD

Bond(s)	Indian Oil Corp Ltd (IOCL) IOCL 8/23 (Baa3/NR/BBB-) (Price: 109.0; YTM: 4.379%; T+244bps; Z+239bps; outstanding: USD500m)
Comparable(s)	Bharat Petroleum Corp (BPCL) BPCL 10/22 (Baa3/NR/BBB-) (Price: 102.5; YTM: 4.212%; T+227bps; Z+230bps; outstanding: USD500m) BPCL 5/25 (Baa3/NR/BBB-) (Price: 96.8; YTM: 4.409%; T+219bps; Z+224bps; outstanding: USD500m)
Relative Value	We see value in IOCL 8/23 as it offers an attractive yield pick-up of c.17bps over its other bonds although the slightly longer duration to BPCL 10/22. We view that the bonds should be priced at similar T-spread and Z-spread to BPCL due to their almost-similar credit attributes, with over 30% domestic market share and 47% of petroleum products marketing.
Fundamentals	We like IOCL due to the following: 1)     Strategic position within the Indian O&G sector. IOCL as the largest downstream refiner in the industry has more 30% refining market share and nearly half of India’s petroleum products market share.    2)     Support from Government of India given its 58% stake in the company due to its strategic importance as it owns 10 out of India’s 22 refineries, despite the decision to reduce its stake by 10% recently. 3)     Beneficiary of lower oil prices, which help reduces working capital needs due to lower inventory levels, which in-turn its short term debt position (-37% in FY15) and should improve its overall profitability (FY15 EBITDA margin: 2.52%) going-forward. However, key risks to our call include: 1)     Moderate financial profile. IOCL’s D/E of 0.92x as of Mar FY15, while its debt-to-EBITDA is high at 5.7x. Modest debt coverage protection with interest coverage ratio at 3.5x (5.0x in FY14) and cash ratio of 0.08x. 2)     Inherent risk given its exposure to the O&G industry. Refining margins may be pressured, given the overcapacity issues and stronger supply of oil globally.

CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
Central China Real Estate (Ba3/Sta; BB-/Neg)	Property	CN	The Henan-based property player’s outlook was revised down to BB-/Neg (from BB-/Sta) by S&P. In addition, even though 1H2015 revenue grew 27% YoY to CNY3.89bn, net profit declined 23% to CNY CNY321m.	Mild underweight on credit. CCRE’s net profit fell despite the rise in revenue due to compression in the gross profit margin which fell to 28% (from 42% in 1H14). This was largely due to the company’s ‘inventory de-stocking strategy’ which has seen a rise in cost of sales recognized in tandem with the rise in GFA sold. The property player has seen its average selling price fall in 1H2015 to CNY5,419 psm (1H14: CNY6,040). Additionally, as highlighted in our Credit Market Update 27-Aug, CCRE’s foreign currency debt is high, close to 65% of total debt, which makes it sensitive to swings in the CNY. Lastly, CCRE’s credit profile deteriorated in 1H15, with Total Debt/ EBITDA at 6.45x (1H14: 6.2x) and EBITDA Interest Coverage at 3.6x (1H14: 8x). That said, the company does not face a short-term liquidity crunch, with ST cash of CNY5.93bn sufficient to cover ST debt of CNY3.53bn.
Axiata Group Bhd (“Axiata”) (Baa2/BBB+/NR; all stable) and Bharti Airtel Limited (“Bharti”) (Baa3/BBB-/BBB-; all stable)	Telco	Asia	Axiata and Bharti announced that the two parties are discussing possibilities of a merger between their Bangladesh operations, namely Robi Axiata and Airtel Bangladesh. The merged entity will create the 2nd largest mobile operator with c. 37m customers at c. 29% market share trailing only Telenor-owned Grameen Phone’s 42% (As at Jun-15, Robi Axiata is the 3rd largest with 22% market share while Airtel Bangladesh is 4th with 7%).	Maintain marketweight on Axiata and Bharti. We opine that the potential merger exercise to have minimal impact on both companies’ profitability and leverage as their Bangladesh operations are not major contributors to respective groups’ financials. As at 1H15, Robi Axiata contributes 12% and 7% of Axiata’s EBITDA and profit respectively while Airtel Bangladesh contributes to less than 2% of Bharti’s revenue. Additionally, leverage are not expected to change at the group level from the merger exercise as less than 3% of Axiata and Bharti’s debt were raised at their Bangladeshi operations level. AXIATA 4/20 was last priced at 2.941%/2.838%, Z+147.9bps/137.6bps while BHARTI 3/23 was last priced at 4.391%/4.297%, Z+248.9bps/239.5bps.