FW: RHB FIC Credit Market Update - 16/7/14

16 July 2014

Credit Market Update

Credit to Stay Cautious Amid Yellen’s Testimony

REGIONAL                      

¨      Cautious activities expected amid Portugal bank concerns and Yellen’s testimony. JACI spreads were marginally wider, with IG and HY spreads inching 1bp up each to 173.0bps and 458.0bps respectively. We saw better selling as Asian IG yields traded generally wider, such as CAPITA 18, Kasikornbank (KBANK) 18 senior and ICBCAS 17 senior. Meanwhile, UST yields saw marginal flattening as short- to mid-end yields rose 1bp. The market seems to perceive Yellen’s comments to signal an earlier rate hike should there be better than expected improvements in labour market, despite reiterating her preference for high degree of monetary policy accommodation. Despite the market’s reactions, we remain of the view that Fed is still dovish-tilted. Going forward, we expect Asian credits to trade cautiously today, digesting Yellen’s testimony amid slumped Germany ZEW economic sentiment (actual: 27.1; consensus: 28.0) and escalating concerns on Portugal’s largest bank. Issuers remained wary to tap the market with little action seen on primary activities.

¨      SGD credits closed firmer; Olam printed SGD400m of 5y at 4.25%. SGD swap rates shed 1-3bps across the curve yesterday amid dovish tones from the Fed. In the SGD credit space, we saw interest in better quality names like SSREIT, SUNSP and HDB. There also continued to be buyers looking for GENSSP and UOBSP perps. On the primary front, Olam International Limited (NR) priced a 5y SGD400m issue at 4.25% or SOR5Y+259.2bps.

MALAYSIA

¨      Lackluster PDS secondary trades. MYR credit flows were quiet on Monday with trading volumes of MYR299m as most investors were on extended holidays in view of Nuzul Quran (yesterday) and FIFA World Cup final (early Monday). Yield for top trades heading south, taking cue from MGS rally – which is unwarranted due to ultra-low foreign participation in corporates, in our view. Among the top volumes were Kesturi 12/26 ending 15bps lower to 5.14% (since 9-July) and Kesturi 12/32 tighten to 5.58% (-19bps since 19-June) on MYR55m and MYR40m activities respectively.

TRADE IDEA: MYR

Bond	Nur Power 4.67% 6/24 (AAA) (price: 101.76; yield: 4.45%; MGS+c.49bps)
Comparable(s)	Manjung 4.43% 11/25 (AAA) (price:96.44; yield: 4.84%; MGS+c.88bps)
Relative Value	We believe the bond is pricey relative to BNM’s AAA yield curve (10y yield: 4.82%) and hence, would prefer to lock-in profit on this paper.  Since our first call on 31-Mar, the paper has gained 22bps as yield declined from 5.08% to 4.45% (traded on 23-Jun). Further, its credit spread has narrowed c.48bps over the same period.
Fundamentals	Fundamentally, we are still favourable of Nur Power for: 1.     Credit enhancer from Danajamin’s guarantee; 2.     Gradual tariff increase that favours TNB. This may lead to a favourable revision of NUR Power’s tariff rates and projected demand is expected to increase on the back of expansion into Phase 4 (Phase 3 has been fully subscribed) of the technology park as announced by the acting Kulim Hi-Tech Park (KHTP) president in Nov 2013; 3.     Improved capital structure following debt-restructuring exercise in Jun-12, with gearing ratio of 0.95x as at end Dec-12. Gearing ratio is expected to remain or improve given limited headroom for further indebtedness. Nevertheless, on a standalone basis, Nur Power is exposed to downside economic cycle given its concentration risk to industrial customers in the high-technology industries (which represents 79% of electricity sales in FY12).