RHB FIC Credit Market Update - 8/9/15

8 September 2015

Credit Market Update

           

Market Took a Breather from US Labor Day; CCRE Slashed to Negative by S&P; Reiterate on CREISP 5/20

APAC USD CREDIT MARKETS                                                    

¨      Quiet in Asian credits as US closed for Labor Day.  The iTraxx AxJ IG rose up 4bps to a new high of c.144bps from c.140bps.  Weak sentiments continue to plague the Chinese equity markets reflected by the Shanghai index and CSI 300 tumbling 2.5% and 3.4% respectively as China’s foreign reserve fell to USD3.56trn in Aug (consensus: USD3.58trn; prior: USD3.651trn). The US markets were closed for Labor Day holiday.

¨      Little change with in IG spreads; some widening was seen in credits such as PETMK 19, PTT 22, Sun Hung Kai 22 and HKLSP 22. HY yields rose 5bps to 10.09% as commodities and Chinese properties names weakened. We observed negative pressure on credits such as MIE Holding 19, China Hongqiao 17, Indo Energy 23, Yancoal 17, Greenland HK 17, Evergrande 18 and departmental store operators Parkson 18.

¨      Central China Real Estate (CCRE) outlook was slashed to negative by S&P. Its ratings was affirmed at BB-, the outlook change was mainly to reflect concerns over its leverage profile, which is expected to deteriorate the coming year and from pricing pressure in lower-tier cities.

¨      Key data releases was the July German IP which came in weaker than expected at 0.7% (consensus: 1.1%; prior: -1.4%). Investors will be watchful on the China Trade data which will be released later today (consensus: USD48b; prior USD43.0b).

SGD CREDIT MARKETS

¨      Selling in IG names as SOR rises by 10-12bps. The benchmark swap curve continued to widen, with the 2y and 5y SOR rising by between c.10-12bps to close at 2.05% and 2.67% respectively. Monday trading continued to be lighter on account of US being out due to US Labour Day, though selling was seen in IG names such as HDBSP, MRTSP, TEMASE to cut losses from the leap in the benchmark swap curve. Investors were also taking the opportunity to offload HY O&G names like EZISP and VALSZP as Brent oil prices languished at c.USD47.6/bbl. Meanwhile Ezra Holdings (NR) has redeemed its SGD225m EZRASP 9/15 (due 7-Sept), after its previous SGX announcement that it will be redeeming its SGD150m Perp call 18-Sept. Looking ahead, its lumpy maturities are over for now, with the next maturities in Mar-2016 (SGD95m) and Apr-2018 (SGD150m). Ezra’s liquidity position recently strengthened with the 50% divestment of EMAS AMC, of which it received a USD150m cash consideration as part of the transaction (further details in our Credit Market Update dated 7-Sept). 

MYR CREDIT MARKETS

¨      Secondary market was muted with merely MYR87m exchanged hands yesterday. We saw DanaInfra 11/34 slipped 2bps lower to 4.9% on MYR20m trades. Elsewhere, PBB IT1 36c16 widened 9bps to 4.402%.

¨      Govvies yields rose amid renewed selling in Ringgit. Sovereign benchmarks generally ended on negative territory after the positive momentum last week. Notably, the 7y and 10y-MGS clinched 4bps higher to 4.14% and 4.24% amid bearish local currency which has breached 4.35/USD this morning. In tandem, the 3y-10y IRS have also increased 1bps-4bps to 4.15%-4.64% yesterday.

TRADE IDEA: SGD

Bond(s)	Cambridge Industrial Trust; CREISP 5/20 (yield: 3.72%; SOR+105bps)(-/BBB-/-)(O/S amount: SGD130m)
Comparable(s)	Mapletree Industrial Trust; MINTSP 3/19 (yield: 2.71%; SOR+42bps)(-/-/BBB+)(O/S amount: SGD125m)
Relative Value	We reiterate a preference for CREISP 5/20, last mentioned on 20-July, which provides richer valuations while being one of the fundamentally stronger names in the weaker industrial REIT space. We believe that the REIT’s stronger operating and financial profile (as elaborated below) will buffer it against further inclement headwinds from the industrial space.
Fundamentals	We like Cambridge Industrial Trust credit profiles due to: 1.   Earnings visibility from longer operating lease and high occupancy rate of 95.5%. CREISP has an average operating lease profile of 4 years with occupancy rates of 95.5%, higher than the industrial REIT space of around 3.6-3.8y and 90% respectively. 2.   Decent debt servicing profile.  Debt/ EBITDA is pretty high at c.14x, but is supported by 80% of unencumbered assets while EBITDA Interest Cover of 3.2x is on the tighter side, but remain acceptable. 3.    Stable credit rating. The REIT’s rating was affirmed as BBB-/Sta by S&P in May-2015, which should alleviate any rating risk as was recently suffered by another industrial REIT. Sabana Sukuk’s outlook was revised down to BBB-/Neg from BBB-/Sta by S&P in June-2015 due to a weaker operating profile while Viva Industrial Trust was downgraded by S&P in July-2015 to BB/Sta (from BB+/Neg). Nonetheless, key risks to our call are:   1.   Further debt-funded expansion would cause a deterioration in its already tighter leverage profile 2.   High concentration of single-tenanted properties at 53.6% 3.   Protracted decline in the manufacturing sector. The industrial space in Singapore has been weaker, with July’s IP coming in -6.1%, the sixth consecutive month of decline in the industrial production numbers. SG PMI has also come in at 49.7 and 49.3 for July and Aug, below the minimum threshold of 50.0 for expectations of growth.

CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
China Banking Sector	Banking	CN	Moody’s in its report titled “Chinese Banks: 1H 2015 Results Show Rising Pressure on Operations” on 4 September 2015 expects rising operating pressure over the next 1 – 2 years for Chinese banks citing China’s slowing economic growth and banks’ compressing margins as the State embarks on an easing monetary policy. Furthermore, concerns were also raised in relation to asset quality as NPL ratios increased by 25bps in 1H15 to 1.50% and also the less stringent recognition of NPLs whereby an increasing amount of loans overdue for at least 90 days are not classified as NPL.	Maintain marketweight for Chinese banks under our coverage. We concur with the view that Chinese banks will see challenges in its operations. Nevertheless, we continue to believe that the credit profile of these banks will remain stable given strong capitalization (1H15’s CET1: 11.1% and CAR: 13.7% vs 1H14’s CET1: 11.0% and CAR: 14.0%), State shareholdings and banks’ systemic importance should keep ratings intact, in our view.