: RHB FIC Credit Market Update - 22/10/15

22 October 2015

Credit Market Update

           

Markets Haunted by Paradox as Weaker Japanese Exports and Oil Pullback Weigh on Fed Hike Signaling; FCTSP and CREISP REITs Positive Results

APAC USD CREDIT MARKETS                                                    

¨      Credit markets slow ahead of FOMC next week. Credit risk via the iTraxx AxJ IG inched up 1.7bps to c.140.7bps yesterday following weaker Asian equities markets performances. Overnight, interest in UST soar as investors reacted to disappointing Japanese Sept exports at 0.6% YoY (consensus: 3.8%; prior: 3.1%) that reignited concerns of a slowing global growth, which may signal that a Fed rate hike may be delayed further. This apart from falling Brent oil prices (-1.8%) to c.USD47.8/bbl pushed yields of 5y-30y UST lower by 3-5bps.

¨      On secondary trading, average IG yields tightened 2bps to 3.0%* led by Asian financial such as OCBC B3T2 24, UOB Senior 20, ICBC Senior 20 and select O&G papers like PTT 21, Sinopc 23 and Cnooc 20 that saw yields narrowed 3-4bps.  Meanwhile in the HY space, the average HY credit yields climbed 3bps to 9.19% as Vedanta 16-23 traded 20-80bps wider after it was downgrade to B+ from BB- by S&P on expected weaker financial performance over the next 12-18 months. The group has been hampered by lower commodities prices that will keep its FFO to debt below 0.10x in the coming years. S&P also adds that its financial ratios remain weak for its BB- rating regardless of whether the group can successfully complete the merger between its intermediate holding company Vedanta Ltd and its subsidiary Cairn India Ltd.

¨      ECB meeting today on possible QE expansion. ECB interest rate decision is expected to remain at 0.05% but markets will focus on its QE scheme. Over in the US, investors will eye jobless claims data (week ending Oct-17) which is expected at 265k (prior: 255k). Attention will also be on September existing home sales data which is expected to grow at 1.5% MoM (prior: -4.8%).

*based on RHBFIC internally-generated index.

SGD CREDIT MARKETS

¨      FCTSP and CREISP announce positive results (Credit Update); Short-dated real estate papers saw interest. The short-to-mid benchmark curve rose by 6-8bps, with the 2y and 5y closing at 1.72% and 2.28% respectively. Hong Kong was out due to holidays yesterday, with interest flowing into short-dated real estate names such as GUOLSP, HPLSP and CENCHI which traded 5-10bps tighter (based on Bloomberg). Meanwhile, Frasers Centrepoint Trust (BBB+/Baa1) and Cambridge Industrial Trust (BBB-) both announced positive end-Sept quarterlies, with net income rising YoY 4.9% (to SGD23.4m) and 4.5% (to SGD14.7m) respectively. Further details in our credit update section below. Looking ahead, investors will be eyeing the release of the Sept CPI (consensus: -0.6%; Aug: -0.8%) tomorrow.

MYR CREDIT MARKETS

¨      Credit moved mixed; CIMB Thai’s non-performing loan weakened further to 4.3% (Credit Update). Credit market was active yesterday with MYR477m transacted. Activity was mainly concentrated in the AAA and AA1 space on mixed tone. Notably, Malaysia Airports bond, MACB 8/20 tightened 6bps to 4.415%, in tandem with MAHB Perps transacted the day before. AA1-rated power-bond, TTPC fell 1bps to 4.63%-4.78% across tranches maturing 1/22-7/23.

¨      Local govvies slipped further as the 5y-10y MGS inched 1bps-3bps higher to 3.77%-4.13%; although the 3y settled flat at 3.63%. The 7y MGS climbed 3bps higher to 4.04% yesterday as When Issue was also last traded at higher level of 4.055%, before the reopening auction slated to close today. Meanwhile, Ringgit continued on its weakening path to close at 4.28/USD yesterday along with other regional currencies following weak-than-expected export data from Japan reinforced bearish outlook for global growth. Investors to focus on foreign reserves number for mid-Oct data today, which could give a clue on foreign flow after the huge MGS maturity of MYR8.2bn on 15-Oct.

CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
Frasers Centrepoint Trust (BBB+/Sta; Baa1/Pos)	REIT	SG	4QFY9/15 saw gross revenue decrease by 1.7% YoY to SGD47.5m while net income rose 4.9% to SGD23.4m.	Overweight on credit. The Singapore suburban retail REIT continues to show better credit fundamentals if compared to its peers, with leverage (Debt/ Assets) lower at 28.2% (SG REIT peers: 33.2%) coupled with higher fixed rate borrowings at 75%. Operationally, it also has strong portfolio occupancy levels of 96% with decent rental reversion rates (9MFY2015: 6.3%; FY2014: 6.5%). In addition, we like its exposure to the suburban Singapore retail space, which we deem is expected to be more resilient in lieu of the slower tourism outlook in Singapore.
Cambridge Industrial Trust (BBB-/Sta)	REIT	SG	3QFY15 saw gross revenue increase 13.8% YoY to SGD28.5m while net income went up by 4.5% to SGD14.7m.	Overweight on credit. Though gearing is towards the higher side at 37.2% (SG REIT peers: 33.2%) while EBITDA Interest Coverage is at 4x, this REIT is buffeted by strong fixed rate borrowings of 96.5% and a longer weighted average debt expiry of 3.3y.  In addition, its operating metrics are healthy, with portfolio occupancy at 95.4% and weighted average lease profile of 3.9y. Though the industrial space in Singapore has seen strong headwinds this year (registering monthly negative YoY growth since Feb-2015, with Aug-2015 coming in at -7%), we opine that Cambridge Industrial Trust’s better financial and operating metrics should enable it to weather through the slowdown.
CIMB Thai (RAM: AA2)	Banking	TH	CIMB Thai’s 3Q15 YTD NP -6% yoy to THB846.5m due to higher provisioning. NPL increase to 4.3% (FY14: 3.3%), near 5 years high. Decrease in loan loss coverage to 89.2% (FY14: 95.2%). NIM tightened 20bps to 3.16%, compared to 3.36% in previous year corresponding period. Moderate capitalization with Tier-1 and Total Capital Ratio of 9.1% and 13.1% respectively.	Maintain underweight on CIMB Group. We remain concern on CIMB Group weakening asset quality, particularly from its Thailand and Indonesia operation. CIMB Group’s capitalization are relatively low with CET1, T1 and RWCAR of 9.6%, 10.5% and 13.4% as at 2Q15 (compared to Malaysia average: 12.1%, 12.7% and 14.8% in Aug)
Malaysia Banking System	Banking	MY	Financial Holding Companies are required to meet Basel 3 capital requirement effective Jan-19, under the new guideline finalized by BNM last week, according to news report. The capital requirement for the holding company will be similar as the banks – 8% total capital ratio, 2.5% capital conservation buffer and counter-cyclical buffer.	The new regulation will affect banking group with holding company structure such as CIMB, RHB, HLFG and Ambank Group. We view that banks may incur higher issuance cost for capital instrument under the new regulation, due to the higher non-performance risk given the cross-entity non-viability trigger requirement, in order to consolidate at the Group level (i.e. PONV events include both holding and subsidiary non-viability) – as compare to trigger at the subsidiary level only for the existing capital instruments.