FW: RHB FIC Credit Market Update - 25/3/14

Credit Market Update

Quiet MYR; APAC Ended Flat in the Absence of Fresh Catalyst

MALAYSIA

¨      Corporate activity dipped 72%; Focus on belly trades: This week’s corporate activity started off on a quiet note, with volumes dropping 72% to MYR75m on Monday, with focus seen in the belly of the curve. The remaining MGS auction slated for March, MGS 9/21, is expected to take place this week. Interest was heavy in the AA space (at 89%), while the GG-space was notably quiet with no trades happening. Yields on Monday reversed Friday’s broadly upward trajectory, with yields observed to be on a downward path. Top transacted issue BGSM 12/18 narrowed by 10bps to 4.75% on MYR35m activity since it was last traded on 24-Jan, while SabahDev 7/14 saw yields close at 3.78% (-3bps) on MYR15m volume since 27-Jan. The other papers, HCS 2/17 and Imtiaz 3/19, saw between MYR5-6m activities each and stayed broadly unchanged at 4.2% and 4.61% respectively.

¨      Moody’s: Palm oil producers remain strong on industry fundamentals. Moody’s expects CPO price to average USD700-750/tonne this year (c.MYR2,240-MYR2,400/tonne based on conversion rate of MYR3.20 to USD), which is rather prudent in our view. Moody’s also highlighted that palm oil producers are supported by long-term supply, resilient demand and still-low production costs. Our view: Moody’s view is generally in line with our overweight stance on plantation with outlook likely to remain stable this year. Nevertheless, we expect a higher average CPO price of MYR2,700/MT (2013: c.MYR2,370/MT) on the backdrop of: i) response to a potential El Nino towards 2H14; ii) CPO price exceeding MYR2,900 this month; iii) narrow CPO price discount to soybean oil and iv) downcycle in stockpile and production leading to supply tightness.

REGIONAL

¨      Slight uptick in overall credit spreads; HY outperformed marginally. Yesterday’s credit flows followed the usual quiet Monday pattern as credit spreads ended relatively unchanged. Overall, the JACI composite spread rose slightly by 0.6bps to 267.4bps mainly due to IG spreads inching up 0.9bps to 190.2bps. HY spreads moved opposite, inching down 0.3bps to finish at 521.4bps. In the China/HK IG space, selling in oil & gas and SOE names was seen after China’s weaker PMI release of 48.1 vs 48.5 in February. Meanwhile, in SEA, SG Banks/FIs tightened on PB demand, particularly in UOB 24s. On the HY front, bonds generally closed c.0.25pts lower on the selling among institutional investors. In the SGD space, accounts were seen reducing risk in Russia’s VTB complexes.

¨      DM-currency primaries in the pipeline; China Construction Bank, Vallianz and First Gulf Bank to issue. On the USD front, China Construction Bank (Asia) Corporation Limited (A2/-/-;stable) is offering 3y Senior notes (Reg S) under a USD3.0bn sized programme and at an initial guidance of T3+175bps. Meanwhile, in the SGD space, Vallianz Holdings Limited (NR) is issuing 2y notes under a SGD500m multicurrency debt programme. Also in the pipeline, First Gulf Bank (A2/-/A+; all stable) is planning a 5y AUD debt offering, expected to be priced swap+155bps.

TRADE IDEA

¨      Telcos (USD): Underweight BHARTI 5.125% 3/23. We think it is prudent to reduce on BHARTI 3/23 (BBB-/Baa3/BBB-; all stable) (Z+273bps; mid-Price: 98.26; mid-YTM: 5.37%) given that credit spreads have come down substantially over the past 6 months (ref. to Chart below). With increased rate hike expectations, post-FOMC, we now see the carry on the position as less attractive and foresee vulnerability to selling pressure from a technical standpoint.