FW: RHB FIC Credit Market Update - 14/7/14

14 July 2014

Credit Market Update

Credit on the Backseat as ECB and Fed Testimony Taking Charge

REGIONAL                      

¨      Credit activities thinned ahead of Yellen’s testimony. Investors would prefer to stay on the sideline during this data-heavy week, with testimony from ECB’s president Mario Draghi today and US Fed Chairperson Yellen later. JACI Composite spread closed wider (+3.3bps to 237.3bps), with IG spread increasing 3.7bps (171.8bps) and HY spread adding 1.8bps (456.3bps) last Friday. Meanwhile, in the secondary space, China/HK and Singapore IG USD markets saw better buying on papers such as BOC Aviation (BOCAVI) 17, CHINAM 22c17 and UOB 17 senior, pushing yields lower. Over in US, Treasuries saw demand at the long end (-1bp to -3bps) thanks to European bank worries prompting safe haven demand. Looking forward, we expect a broadly mixed US economic data this week, with stronger retail sales and housing numbers (16 Jul) amid softer manufacturing numbers and Yellen’s testimony (likely to be dovish).

¨      Primary activities similarly dried up with some high yield names looking to tap bond market. Chinese property developer, Future Land (Ba3/BB-/NR) is eyeing USD benchmark 5NC3 at initial guidance of 11% area.

¨      Fairly active Friday ahead of today’s GDP forecast. Last Friday, the SGD swap curve ended relatively unchanged, in line with overnight UST movements. In the SGD credit space, there was profit-taking in perps like CHEUNG Pc16 and UOBSP Pc18. In the same day, we continued to see interest in short-dated papers, Swibsp 16s/17s, Pillsp 17s and Galvsp 17s. On the primary front, Perisai Capital (L) Inc.(NR) priced its 6.875% SGD102mn re-opening, guaranteed by Perisai Petroleum Teknologi Bhd (NR), at 100.10 plus accrued interest. Meanwhile, Singapore released this morning its 2Q14 GDP of 2.1% YoY, which was weaker than consensus estimates of c.3.1%. While the data is of importance, we think the impact on market sentiment will be moderate seeing as how preceding economic data, particularly manufacturing and exports, have been tepid.

MALAYSIA

¨      Strong MYR secondary activities after MPC decision. Local credits posted an above average activities of MYR492m last Friday after BNM decided to raise the OPR by 25bps to 3.25%.Trading were led by the debut trade of Notable Vision 7/19 closing at 4.91% (1bp above coupon rate) on MYR95m transactions. Top gainer was Public Bank B3 T2 9/23c18 tighten by 23bps since 3-Apr to 4.51% with MYR31m traded. Looking ahead is the trade balance data set to be released next week, where we expect moderation on the back of slowing export due to mixed global recoveries.

TRADE IDEA: MYR

Bond	DRB-HICOM 3/17 (AA-) (price: 100.14; yield: 4.72%; MGS+c.121bps).
Comparable(s)	DRB-HICOM 3/19 (AA-) (price: 99.51; yield: 5.15%; MGS+c.145bps).
Relative Value	We initiate a call on DRB-HICOM 3/17 with potential pick up value of 23bps relative to BNM’s AA3 yield curve (BNM 3y yield: 4.49%). In terms of spread to MGS, it offers c.13bps of pickup value relative to BNM’s indicative 3y spread.
Fundamentals	1)   Market position of DRB-HICOM in automotive sector remains strong, with 39% of total industry volume. 2)   Debt repayments at DRB-HICOM at holding company level are likely to be supported by steady dividend income from its operating subsidiaries, expected to be average of MYR585m from FY14 to FY18. We noted the company’s challenging environment but are of the opinion that DRB-HICOM is able to repay debt through FY2017, provided it contains significant purchases via debt.