FW: RHB FIC Credit Market Update - 14/4/14

14 April 2014

Credit Market Update

MYR Activities Returned to Normal Low; Splintered Coalition Expected to Dim Indonesia Reforms; Public Bank Printed Senior Notes at 4.20%

MALAYSIA

¨      MYR papers ended the week on softer tone; new IJM traded. Rallies in the credit market last week was short-lived as activities declined substantially in both the MGS and corporate bond space last Friday. Investors’ sentiment may be dampened by stronger US economic data as well as higher Malaysia’s Industrial Production (IP) figure as total volume almost halved from MYR553m to MYR272m. Further, some investors may be making way for the MYR1.5bn GII 12/28 reopening with tender to be closed today. Last Friday, short- to mid-end papers (such as IJM and Khazanah-related names) dominated the credit secondary market with mixed performance seen. Meanwhile, new IJM papers were trading at par (4/19 at 4.60% with MYR18m traded and 4/20 at 4.73% with MYR6m traded), except for its 4/21 paper which traded 1bp tighter last Friday to 4.80% (issuance level: 4.85%) on the back of MYR40m. Rantau 9/15 and Danga 4/15 were traded at 3.50% (unchanged) and 3.53% (-4bps) respectively. On the primary front, Public Bank (AAA) has successfully printed MYR600m 5y senior notes at 4.20%.

¨      Natural gas price to increase from 1-May. Gas Malaysia has obtained government approval to adjust the natural gas tariff upwards by an average of 20%. This follows the electricity tariff rise announced in Dec-13 and is in line with the government’s goal to reduce subsidies and narrow its budget deficit. We expect the direct impact on the consumers to be minimal but may see potential pass-through from industrial players.

REGIONAL

¨      APAC quieter; Splintered coalition dim reforms in Indonesia. Asian credits ended on a quiet note on Friday, with China/HK IG space seeing a general yield widening with focus on new issues such as CINDBK Perp NC5 which was recently issued at 7.25% (well bid within initial price guidance of 7.75%) while the HY space was mostly dominated by profit takers. Indian names generally traded wider c.10bps though the newly issued SBIIN 4/19 and 4/24 saw yields closing down on Friday at 17bps to 3.767% and 15bps to 5.009% respectively. Singapore saw Financials leading with 5bps widening, with OCBCSP among the top movers. In Indonesia, the expectations of a weak coalition that will dim chances for reform continue to impact the credit market in Indonesia as Jokowi gained the support of the National Democrat Party over the weekend. USTs dipped by 2bps to 2.6247% amidst continued uncertainty regarding the Russia/ Ukraine crisis. US Econ data continued to paint a picture of growth as PPI rose by 0.5% (exceeding expectations) and the Michigan US Sentiment Indexed increased to 82.6 in Apr (from 80.0 in Mar). Data to be released this week include March retail sales to be released today, CPI data on Tuesday and Industrial Production on Wednesday. We expect retail sales and industrial production numbers to improve on better weather conditions of late. 

¨      Last week saw 13 new APAC issues amounting to USD7.4bn (YTD: USD42.3bn) and we expect upcoming issuances in lieu of better market sentiments (post FOMC minutes) before the upcoming Easter holidays. Sinopec’s successful USD5bn (3y,5y,10y) bond offering (the largest in the decade) continues to highlight the importance of familiar names and good credit to investors as the market emerges from the recent two bond defaults in China. Investments which are strong on a standalone basis (without governmental support) are expected to continue to drive demand.  

TRADE IDEA

¨      MYR Trade: We spot value in Noble 10/15 at 4.45% (MGS+c.136bps), last traded 19-Mar, which is trading cheap compared to our proprietary AA2 curve with a 10bps pick up. Noble 10/15 looks attractive if compared with other similar rated (but with 8-9 months extended duration) papers such as ENCORP 5/16 at 3.91% (MGS+c.55bps) and Litrak 4/16 at 4.12% (MGS+c.76bps). Noble’s recent JV with COFCO (Hong Kong) Ltd via its divestment of 51% of Noble Agri Limited was opined by RAM to be neutral on its rating of its MYR3bn sukuk issuance. We view this as a credit positive development as its agriculture unit had volatile earnings and disposal would ease the debt burden on Noble. At end-2013, Noble’s leverage was on the high side prior the transaction, with total debt at USD6.14bn (2012: USD5.65bn), total debt/ total assets at 20.75% in 2013 (2012: 22.67%) and interest coverage at 2.46x (2012: 2.48x). This divestment is expected to earn Noble a USD1.5bn cash consideration, and expected to stabilise its earnings as the agricultural unit made a loss in 2013 and is sensitive and vulnerable to external factors.

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