FW: RHB FIC Credit Market Update - 25/7/14

25 July 2014

Credit Market Update

Range-bound Towards Incoming Data-Heavy Week 

REGIONAL                      

¨      Credits traded softer; consolidation expected towards data-heavy week. JACI composite spread was broadly unchanged at 237.7bps, with IG space moving sideways at 171.6bps and HY closing c.2bps tighter at 458.7bps. We saw better selling yesterday with trades seen on CHIOLI 18 and SWIRE 23 in the China/HK IG USD space. Meanwhile, new DBSSP 19 senior and OCBCSP 24 sub-debt similarly traded a couple of bps wider in the Singapore USD space. On a macro perspective, we noted weak performance on US Treasuries yields (+2bps to +4bps) amid stronger-than-expected Eurozone data (PMI index, services survey), easing geopolitical tensions and mixed US data (weaker new home sales, lower initial jobless claims). Looking forward, we opine that credit markets may move into consolidation ahead of important data releases in US next week, including GDP (30-July); Fed meeting (30-31-Jul) and nonfarm payrolls (1-Aug). We expect US 2Q14 GDP to show a rebound in growth following a harsh weather-induced 1Q14 GDP, amid continuous QE tapering and broadly mixed home sales and job data.

¨      Active primaries seen from China as Huatong avoid default; Tata Steel printed USD1,500m. CRCC (A3/A-/NR) printed USD800m of PerpsNC5 at 3.95%, China Exim (Aa3/AA-/NR) 5y at T+95bps and 10y at T+125bps while Tata Steel (Ba3/BB/BB+) seen priced a USD500m of 5.5y at 4.85% and USD1,000m of 10y at 5.95% to fund prepayment and refinancing of its offshore debts.

¨      Activity driven by better supply. SGD swap rate yesterday marginally inched up 0.6-1.5bps across the curve as USTs saw a slight decline in demand overnight. On secondary SGD issues, there was continued interest in names like WINGTA 22 and GGRSP 17. On the primary front, Dyna-Mac Holdings Ltd. (NR) priced a SGD 3y deal at 4.75%.

MALAYSIA

¨      Range-bound on MYR credit top trades. We saw strong activities of MYR635m on secondary market yesterday. Most active traded bonds were generally range bound although we also saw Plus 1/28 gained MYR1.64 since 2-July closing at 4.85% (-17bps) with MYR20m reportedly done. Among the top traded were MYR40m GIC 6/22 last done at 4.62% (-5bps since 16-Jul); TBEI 3/32 widen by 1bp to 5.70% on MYR40m transactions; while Mudajaya 1/17 and 1/19 on combined MYR40m activities both tighten by 4bps to 4.62% and 4.78% respectively, amid the recent positive developments in regard to the acquisition of the power projects in Philippines and Indonesia which will increase its recurring incomes base. 

TRADE IDEA: USD

Bond	PCCW Capital No.4 Ltd. (PCCW or PCCW Limited; NR) PCCW 22 (Price: 107.64; YTM: 4.56%; Z+229bps)
Comparable(s)	PCCW-HKT Capital No.5 Ltd (PCCW-HKT; Baa/2Sta; BBB/Neg; NR) PCCW HKT 23 (Price: 97.65; YTM: 4.08%; Z+165bps)
Relative Value	We prefer PCCW 22 over PCCW-HKT 23 for: 1) potential pick up of 55bps and 72bps in yield and Z-spread; and 2) shorter duration of slightly under 11 months. PCCW 22 is unconditionally and irrevocably guaranteed by PCCW Limited. Despite the high cash price, we think PCCW 22 offers exposure to a dominant telco business in Hong Kong via PCCW’s 63%-owned subsidiary, Hong Kong Telecommunications (HKT) Limited. HKT has maintained a strong dividend upstreaming record to its parent companies (payout ratio of at least 80%) since the start of 2012. We also note the stabilized outlook on HKT’s ratings following HKT Limited's announcement on 22 July that it had successfully completed its rights issue and raised c.HKD7.9bn (c.USD1.0bn).
Fundamentals	PCCW is Hong Kong’s only quadruple-play service provider via its integrated internet protocol TV business and telecommunications services (HKT). We think PCCW’s credit is strong as a result of: 1) 63%-owned HKT’s dominant competitive advantage as the only domestic quad-play operator with an estimated 35% market share of the mobile market; 2) strong EBITDA margins in HKT of 34.6% and PCCW of 29.6% in FY13; 3) consistent and robust cash flow generation at HKT, which enabled a dividend payout of 118% out of net profits in FY13; and 4) high available liquidity via cash reserves of HKD5.51bn. Notwithstanding, our call is moderated by: 1) PCCW’s aggressive M&A appetite for growth; 2) elevated leverage as reflected by debt/EBITDA of c.3.67x as of 31-Dec 13; and 3) high dividend payout ratio by PCCW of 76% of net profits.

TRADE IDEA: COMPARABLES

Issue	PCCW Capital No 4 Ltd	PCCW-HKT Capital No 5 Ltd
Obligor	PCCW Limited	Hong Kong Telecommunciations (HKT) Ltd
Guarantor	PCCW Limited	HKT and HKT Group Holdings Ltd
Size	300m	500m
Rating	Baa2/Sta; BBB/Neg; NR	Baa2/Sta; BBB/Neg; NR
Coupon	5.75%	3.750%
Maturity	17-Apr-22	08-Mar-23
Call date	N/A	N/A
Term (years)	8	9
Price	107.642	97.654
Yield	4.56%	4.08%
Z-Spread	229.413	164.575