FW: RHB FIC Credit Market Update - 18/7/14

18 July 2014

Credit Market Update

Rising Geopolitical Tensions Led Safe Haven Flows 

REGIONAL                      

¨      Rising geopolitical tensions led safe haven flows. We saw rush to safe-haven assets during US session as geopolitical tensions in Russia-Ukraine rose after MAS plane of MH17 was shot at the eastern Ukraine, overshadowed the mixed data releases in in US. Treasuries seen tightened by c.4bps to 8bps. Despite firmer trading yesterday in credits where new issuances (eg OCBCSP 24 subdebt and GRNLGR 19) tightened, we expect investors to remain on the sidelines today. Further, data releases yesterday were mixed as US housing starts and building permits came in below expectations, contributing to UST gains amid improved jobless claims (actual: 302k; consensus: 310k). Given the heightened geopolitical crisis overnight, risk aversion is likely to take hold over the near term.

¨      Firm SGD flows as new issues entered the fray. Yesterday’s SGD swap rates closed 2-5bps tighter across the curve, in line with the UST curve flattening. Meanwhile, secondary credits saw buying in perps like GENSSP Pc17 and CHEUNG Pc16. On the primary front, Housing and Development Board (NR) priced a SGD800m 10y note at 3.10% while Bank of Communications Co. Ltd, Hong Kong Branch ((P)A2/Sta; NR; A/Sta), priced a SGD100m 3y EMTN at 2.10%.

MALAYSIA

¨      Infrastructure bonds fueled quiet Thursday; new supply to the fore. We saw yesterday’s activities were slow with below average trading volumes of MYR354m amid the new issuance of MYR1.5bn Aquasar Capital today. Among the notable names were infrastructure bonds such as DanaInfra on combined transactions of MYR70m closing between 4.19%-5.23% for maturity 10/20-4/39; and Prasarana expiring between 11/16-8/28 saw done at 3.74%-4.72% with cumulative volumes of MYR50m.

TRADE IDEA: MYR

Bond	Malakoff Power 12/19 (yield: 4.99%; MGS+c.130bps) (AA3)
Comparable(s)	Malakoff Power 12/16 (yield: 4.44%; MGS+c.107bps) (AA3) Malakoff Power 12/18 (yield: 4.85%; MGS+c.126bps ) (AA3)
Relative Value	We like Malakoff Power 12/19 as it seems slightly dislocated compared to other Malakoff Power and the most recent trades on Malakoff units such as Tanjung Bin Power and Tanjung Bin Energy, with a potential yield pick-up of between 5-15bps.
Fundamentals	Malakoff, though seen to be highly-leveraged, continue to be strategically important as: 1)   Malakoff Berhad is the largest IPP in Malaysia, with four operating power plant subsidiaries generating 25% of Peninsula Malaysia’s electricity needs 2)   Tanjung Bin Power (TBP) back at full capacity. TBP faced operational issues in 2013 (impacting up to MYR320m in revenue in FY2013), but these issues have been resolved and plant is operating at full capacity as at Mar-2014 3)   IPO is still on the cards to tackle its high-gearing. Malakoff’s Total Debt/ EBITDA for 2013 hit 10.7x (Power sector peers: 6.3x) and EBITDA/ Interest for 2012 at 2x (Power sector peers: 4.3x). Nevertheless, these leverage levels will be mitigated in the event that the Malakoff IPO is successfully executed Power sector peers: Tenaga Nasional Berhad, Sarawak Energy Berhad, SP Power Assets, CLP Power Hong Kong, Hong Kong Electric Co, Perusahaan Listrik Negara, Korea Electric Power Corp, NTPC Ltd, China Resources Power Holding