FW: RHB FIC Credit Market Update - 13/8/14

13 August 2014

Credit Market Update

Firmer APAC Credits Ahead of China IP and Retail Data; Take Profit on CNOOC 5/22

REGIONAL                      

¨      APAC credits ended tighter. The JACI Composite tightened to 251.8bps (-1.8bps) led by similar movements in the IG and HY, which also narrowed to 184.7bps (-1.8bps) and 482.8bps (-1.8bps). In China/ HK, credits traded firmer on Oil names (like CNOOC & SINOPE) while HK saw buying on HUWHY and CHINLP. Down south, we saw balanced flows with selling in long-dated TEMASE papers and buying into the Singaporean Bank/FI space. The Treasury curve steepened yesterday with the 10y rising to 2.45% (+2bps) while the 2y tightened to 0.43% (-1bp). With no near-term resolution in-sight expected for the Ukraine crisis, we expect investors to focus on incoming data today from China (July Industrial Production and Retail Sales) and the US (June Retail Sales).

¨      We saw a consolidation mode as the SGD swaps curve ended broadly unchanged (-1bp to +1bp) while the 3y/5y spread stood at 62.3bps (previous: 62.6bps). In the credit space, we saw better buying amongst PBs in short-dated high yield names such as MDASP 16, SWIBSP 16, AMTENG 19 and BIGSP 17, while AMs took interest in better quality papers like VANKE 17, WHEELK 21 and STANLN 21.

MALAYSIA

¨      Mid-dated papers actively traded. Secondary market activity continued to see strong momentum as trading volume rose 68% to MYR1.1bn from Monday, with investor preference skewed to mid-duration bonds (70% of total activity). AAA-rated and GRE names topped trades as Celcom Network 8/17 saw MYR160m transacted and marginally tightened to 4.101% (-1bps); followed by a series of CMBS 8/17-12/20 trades for a cumulative volume of MYR170m closing between 3.964%-4.468%. The Prasarana curve also flattened, as Prasarana 3/19 (flat at 3.969%), 8/23 (-0.1bps to 4.33%), and 11/28 (-3bps to 4.659%) were traded for a combined total of MYR130m. Trades aside, we await Malaysia’s 2Q GDP data scheduled for release on Friday where we expect a slight improvement to 6.3% (vs 6.2% in 1Q14).

TRADE IDEA: USD

Bond	CNOOC 3.875 5/22 (price: 101.45; yield: 3.65%; z-sprd +132bps) (Aa3/AA-/NR)
Comparable(s)	CNOOC 4.25 4/24 (price: 102.83; yield: 3.90%, z-sprd +136bps (Aa3/AA-/NR) CNOOC 7.40 5/28 (price: 133.78; yield: 4.14%, z-sprd +137bps (Aa3/AA-/NR) SINOPE 3.90 5/22 (price: 101.68; yield: 3.65%, z-sprd +136bps (Aa3/A+/NR)
Relative Value	We have observed CNOOC 5/22 tightening over the past 2 months and now positioned at a premium to the CNOOC curve. Accordingly, we suggest locking in profit on this paper. Since our call on 6-May, CNOOC 5/22 has tightened c.37bps in yield and c.28bps in z-spread.
Fundamentals	Some of CNOOC’s key credit quality factors are its: 1)     High likelihood of systemic support: CNOOC is wholly-owned by China’s State Council and ultimately the Chinese Government. 2)     Strong market position: CNOOC is the largest offshore oil company in China, focusing on upstream operations. 3)     Weak standalone credit profile: We noted weakness in CNOOC’s standalone credit profile as total debt/total assets rose to 21% in FY13 (FY12: 13%); while tighter liquidity was reflected on declining cash ratio of 0.7x in FY13 (FY12: 1.6x) and shrinking EBITDA/total interest of 29x (FY12: 39x) 4)     Upside potential may arise from a sovereign upgrade while downside risks may be triggered by a significant increase in leverage due to further large acquisitions or a steep increase in its reinvestment risk.