RHB FIC Credit Market Update - 29/10/15

29 October 2015

Credit Market Update

           

Fed Revives Hike Speculation in December; Telcos Earnings Fell in 3Q; MARC Affirmed MMC at AA-is on NCB Acquisition

APAC USD CREDIT MARKETS                                                    

¨      APAC credit markets sideways on lack of catalysts; USTs tumbled as Fed turned hawkish. The iTraxx AxJ IG tightened by c.4bps to 129.5bps driven by sparse strengthening of corporate CDS such as Bank of China, Hyundai Motor, Petronas and Swire Pacific. Meanwhile, USTs tumbled with 2y yields rising 8bps to a one-month high of 0.7% while 10y added 6bps to 2.1% following Fed’s hawkish stance despite keeping rates unchanged whereby policy makers believe that the economy is expanding at a moderate place with the possibility of a Dec rate hike still on the cards. Accordingly, the probability of a rate hike in Dec as indicated by Fed funds traders went up to 48% from 33% the day before.

¨      Spreads of IG credits narrowed 2bps to 151bps* with gains seen among power and real estate companies such as Korea Electric 18, PLNIJ 21, Franshion 21 and China Vanke 19.  HY credits lose momentum as it stayed flat at 8.96%*. Gains in Agile Property 19-20 and Yingde Gases 18 were offset by widening of Evergrande 18-20, JSW Steel 19 and SOHO China 17.

¨      Key data today include US’ initial jobless claims, actual 3Q GDP, core PCE and pending home sales. Markets will look to gauge US’ economic direction as a string a weak economic data releases are forecasted by consensus with expected initial jobless claims print of 265k compared to prior week’s 259k, actual 3Q GDP of 1.6% QoQ lower than last quarter’s 3.9%, reduced core PCE of 1.4% from prior release of 1.9%. On a more optimistic note, investors are expecting continued rebound in the property market with pending home sales expected to grow by 1% MoM in Sep following Aug’s drop of 1.4%.

*based on RHBFIC internally-generated index.

SGD CREDIT MARKETS

¨      HDB prints SGD1.2bn 5y at 2.10%; Commodity sees demand on slight oil recovery. There was little movement in the short-to-mid benchmark curve, with the 2y marginally rising by 1bp (to 1.73%) and 5y unchanged at 2.26% as investors awaited the release of the Oct FOMC statement, which turned out to be more slanted towards the hawkish side. Property names continued to garner interest on issues like KREIT, AREIT and OUESP while some accumulation was observed in commodity/transport names such as OLAMSP, KRISSP, NOLSP after Brent oil prices rose 2.24% to USD49/bbl.

¨      Ascott Residence Trust, ARTSP, released its 3Q15 results, with revenue increasing by 21% (to SGD113.2m) and net income by 189% to SGD46.9m due to acquisitions in Japan, Australia and US in the last twelve months as well as the absence of one-off losses suffered in 3Q14.

¨      In the primaries, Singapore’s Housing Development Board (Aaa/NR/NR) printed a mega SGD1.2bn 5y issue at 2.1% (SIGB+c.35bps) after it was rated Aaa by Moody’s in mid-Oct. This is HDB’s first print this year (SGD1.6bn in 2015 maturities, with a remaining SGD600m due in Nov), and we can expect further prints with SGD3.265bn maturing in 2016. It previously printed a SGD600m 12y at 3.22% (SIGB+c.88bps) in Dec-2014.

MYR CREDIT MARKETS

¨      Strong credit flows amid steady govvies; MARC reaffirmed MMC rating at AA-/Stable after accessing impact of NCB acquisition (Credit Update). Secondary market stayed active above MYR500m trading volumes yesterday. Investors were concentrated in the government-guaranteed bonds. Notably, PASB 9/20 retreated 1bps to 4.125%, after tightened by 12bps since early of Oct. Elsewhere, combined MYR100m WCE 29-36 exchanged hands in between 5.088%-5.211% on its debut trade. On the construction sector, WCT 10/22 widened 31bps to 5.119% following the negative outlook by MARC on the 7-Oct.

¨      MGS moved sideways before FOMC meeting; Possibility of US rate hike this year pushes Ringgit lower. MGS moved sideways yesterday with the 3y-10y settled in between 3.58%-4.08% (-1bps to +1bps) as investors are waiting for more directions from FOMC meeting overnight. All eyes focus on the tender of the MYR1.5bn 20y-GII 10/35 today with the When Issue was last traded at 4.75%. Ringgit depreciates for the 4^th continuous day to c. 4.30/USD this morning as the USD gain strength after the Fed reiterated the possibility of raise interest rate this year.

CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
Maxis Berhad (NR) / BGSM Management (RAM: AA3/Sta)	Telco	MY	Maxis’ 3Q15 results indicated a 2% and 8% YoY drop in EBITDA and net profit respectively while EBITDA margin declined to 49% from 52% predominantly due to higher international direct dialing (IDD) interconnect charges as a result of MYR’s depreciation.  Gearing position deteriorated with debt/equity of 2.4x compared to 1.9x in FY14, debt/EBITDA increasing to 2.4x from 2.13x and lower cash short term debt coverage of 1.2x vis-à-vis FY14’s 1.7x. 3Q15 capex crept up 38% QoQ to MYR359m, representing capex/revenue of 16.6% with expectations of another MYR400-500m to be spent in 4Q15.	Maintain marketweight on Maxis and BGSM given its dominant position in the Malaysian telco landscape (no.2 in terms of market share by mobile subscribers at c.30%). However, we are placing this credit under review as we note the company’s deteriorating leverage, high susceptibility MYR weakness given 30% loan exposure in USD and aggressive capex plans with FY15 target expenditure of MYR1.2-1.3bn. The above combined with the highly competitive Malaysian telco operating landscape will put further pressure on the company’s leverage moving forward on expectations of more earnings compression. Yield of BGSM 12/22 last traded at 4.829% on 23 July 2015.
PT XL Axiata Tbk (XL Axiata) (Ba1/NR/BBB; Sta)	Telco	ID	XL Axiata, the 3rd largest telco operator in Indonesia by revenue, recorded a 4% YoY drop in EBITDA in its 9-month 2015 results, dragged by decline in SMS and roaming revenue by 16% and 21% respectively. XL has also successfully restructured and refinanced their unhedged USD position and in the process, has improved its gearing ratios such debt/equity of 2x from c.2.4x in 2Q15 and debt/EBITDA of 3.2x from 3.62x. The company’s capex expenditure is 53% below initial FY15 budgeted IDR6.5tr at only IDR3.0tr given recent operational challenges.	Maintain marketweight on the credit. We view the success of the restructuring of its unhedged USD debt (c. 60% of its USD total debt on 1H15) positively as it removes FX risks and has resulted in improved leverage evidenced by the better debt/equity and debt/EBITDA ratios. Although the exercise has impacted its cash levels unfavourably with a 33% drop from 1H15, its cash short term debt coverage remains adequate at 1.1x but declined sharply from 1H15’s 1.7x and is further mitigated by its good access to funding via banks and the debt capital markets.
Alibaba Group (BABA) (A1/A+/A+; Sta)	e-Commerce	CN	BABA’s earnings momentum sustained in 2Q FY3/16 as revenues grew +32% YoY to CNY22.2bn, EBITDA +31% to CNY11.1bn, and net income +36.8% to CNY9.3bn. Gross merchandising value (GMV) grew 28% YoY to CNY713bn, of which 62% came from mobile transactions (from 36% a year ago).	Maintain overweight. Earnings last quarter defied concerns over China’s economic slowdown and remained in double digit growth, though GMV growth slowed to lowest in over 3 years as competition intensifies with JD.com and Tencent. Nonetheless, BABA remains in net cash of CNY81.4bn (lower by 11.7% from CNY92.2bn June-2015) and had hefty free cash flows of CNY13.6bn during the quarter. Leverage is moderate but improving with Debt/EBITDA dropping to 1.86x (from 1.92x) and EBITDA interest cover rising to 10.5x (from 9.5x). BABA 19-24 yields widened 6-13bps since Monday to 2.858%-3.958%.
MMC Corporation Bhd (MMC) (MARC: AA-is, Sta)	Conglomerate (Ports, Utilities, Construction)	MY	MARC maintained AA-is/Stable ratings on MMC after assessing the impact debt-funded acquisition of NCB Holdings, concluding: ·          Gearing to rise to 0.94x (from 0.74x), total borrowings to increase to MYR9.0bn (from MYR7.1bn); ·          Acquisition is cash accretive with NCB’s annual operating cash flows of MYR200m vs MYR100m servicing cost of existing NCB debts and MMC’s new borrowings; ·          Potential deleveraging to 0.83x and net gearing of 0.70x ‘over the near term’ from rationalisation at NCB (unlocking MYR300m), confirmed land disposals in Senai Airport City of MYR300m, and scheduled debt repayments; ·          Planned IPO of consolidated ports business ‘over the medium term’ will significantly reduce group borrowings.	Maintain marketweight. MMC’s credit profile is supported by its strong business profile but moderated by debt-funded expansion. Gearing could hover above 1.0x over the next 18-24 months given debt-funded acquisition of NCB and hefty CAPEX/expansion plans at existing ports. Nonetheless, we recognize the potential value that could be unlocked from listing the Group’s consolidated and streamlined ports businesses. Management has indicated that a 25% sell down of its combined ports operations in 2018 could raise MYR3.6bn-MYR4.6bn (assuming PER range of 18x-23x and PATMI of MYR800m) which will repay the acquisition cost and potentially halve the Group’s gearing ratios to 0.5x-0.65x.