FW: RHB FIC Credit Market Update - 27/8/14

27 August 2014

Credit Market Update

Firmer APAC Credits as UST Curve Flattened; Switch from AREIT 5/19 to MINTSP 3/19

REGIONAL                      

¨      APAC credits traded firmer in both IG and HY. APAC credits traded firmer yesterday, with similar tightening across the JACI Composite, IG and HY, with all three indices tightening by 1.5bps (to 242bps), 1.4bps (to 173.6bps) and 1.6bps (to 469.8bps) respectively. In China, we observed mostly mixed flows, though investors were profit-taking in CNOOC papers. In HK, there was generally better buying led by papers such as HUWHY and the usual HK property names. In the SG USD market, investor’s attention was focused on OCBCSP and STSP which traded a couple of bps tighter. The 10y widened (by 1.4bps) while the 2y tightened marginally (by 0.8bps) amid better US econ data as the Consumer Confidence Index rose to 92.4 (expected: 89.0) while the US July durable goods orders rose by 22.6% (expected: 7.5%).

¨      In the USD APAC primaries, The Link Holdings Ltd via Link REIT (exp ratings: A2/A/-) printed a REG S USD 10y at T+130bps, 15bps inside initial guidance while China Orient Asset Management (exp ratings: Baa1/-/A-) priced REG S USD600m 5y and USD400m 10y at T+225bps and T+275bps respectively.

¨      Slower secondary SGD flows as new issues remained in focus. Yesterday’s SGD swap rates past the 5y mark closed c.1-3bps tighter in line with overnight UST curve flattening amid weaker housing data. Meanwhile, Singapore’s Industrial Production (IP) picked up to 3.3% YoY in July over the revised June figure of 0.8%. In the credit space, secondary flows were mild with interest seen in short-dated papers like GUOLSP 15, EZRASP 16 and UOBSP perps. The new PACRA 18 continued to garner strong market interest.

MALAYSIA

¨      MYR corporate continue to gain. Good secondary market performance continued as yields edged downward in general. Activities rebounded to MYR569m, double of MYR283m on Monday (YTD daily average: MYR380m). We saw transactions mainly focused in banking and infrastructure sector. ADCB 11/17 topped trades at MYR60m trades closed 5.4bps lower at 4.455%. Meanwhile, we also noted Anih 11/25 and Tenaga 12/21 tighten by 1.5bps and 19.9bps to 4.904% and 4.279% respectively, each seeing MYR30m traded.

TRADE IDEA: SGD

Bond	Mapletree Industrial Trust Treasury, MINTSP 3/19 (ytm: 2.69%, SOR+101bps) (BBB+/Sta)
Comparable(s)	Ascendas REIT, AREIT 5/19 (ytm: 2.49%, SOR+81bps) (A3/Sta)
Relative Value	Switching out from AREIT 5/19 into MINTSP 3/19 could offer a yield pick-up of 10-15bps, which should compensate the rating differential of one-notch lower.
Fundamentals	We believe that Mapletree Industrial Trust Treasury (MITT) is a good pick as it has: 1)     Robust fundamentals: MITT exhibits robust and stable fundamentals. Though its Total Debt/ EBITDA (LTM 5.7x) is marginally below Ascendas’ (6.0x), it has a healthier LTM Interest Coverage at 9.9x compared to Ascenda’s 5.9x 2)     Strong operating metrics: As of 4Q FY3/2014, its occupancy level stood at a comfortable 91.3%, with nearly 50% of its tenants comprising existing lessees of more than four years 3)     High portion of fixed debt. MITT is protected from a rising interest rate environment in the next 1.5-2 years as over 70% of its debt during that period is on a fixed term basis.

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
Industrial Bank of China Ltd (ICBC)	Banking	CN	ICBC is planning to issue as much as USD5.7bn (about CNY35.1bn) of AT1 securities to bolster its capital base. As of 31-Mar 14 (end-1Q14), ICBC’s AT1 capital registered at approximately CNY62m while Tier 1 capital and Tier 1 ratio stood at CNY1.35trn and 10.88% respectively. Assuming ICBC manages to fully issue its targeted amount, pro-forma T1 capital ratio based on end-1Q14 risk-weighted assets would increase to 11.16%.	Positive. As at end-1Q14, ICBC’s Tier 1 capital ratio of 10.88% is well above China’s regulatory minimum requirement of 8.0% (including a capital conservation buffer of 2.5%). Given that Tier 1 capital needs are substantially met, the expected AT1 issues should further strengthen the bank’s capitalization and capacity for sustained loan growth, which registered at a relatively conservative 12% YoY as at end-1Q14 versus the industry average growth rate of 14%.
Bank of China Ltd (BOC)	Banking	CN	BOC plans to issue as much as USD5.0bn (CNY30.7bn) in AT1 securities to bolster its capital base. BOC’s end-1H14 AT1 capital registered at approximately CNY1.15bn while Tier 1 capital and Tier 1 ratio stood at CNY954.6bn and 9.37% respectively. Assuming BOC manages to fully issue its targeted amount, pro-forma T1 capital ratio based on end-1H14 risk-weighted assets would increase to 9.67%.	Positive. As at end-1H14, BOC’s Tier 1 capital ratio of 9.37%, satisfies China’s regulatory minimum requirement of 8.0% (including a capital conservation buffer of 2.5%). The expected AT1 issues should further strengthen the bank’s capitalization and capacity for sustained loan growth, which registered at a conservative 13.2% YoY as at end-1H14 versus the industry average growth rate of 14%.
Hong Leong Bank	Banking	MY	PBT for FY14 increased by 9.2% yoy led by better net interest income and lower operating expenses. Loan and deposit growth was healthy at 7.2% and 5.4% yoy respectively. Loan-deposit ratio increased to 78.8% (FY13:77.2%). Asset quality improved with gross NPL of 1.2% (FY13: 1.4%) and robust provisioning of 128.9% (FY13: 131.3%). Capitalization remained strong with tier-1 and total capital stood at 11.9% and 14.6% respectively (FY13: 11.9%, 14.8%).	Neutral. Overall, HLB maintained its loss absorption capability supported by its robust capitalization (total capital: 14.6%) and good asset quality (NPL: 1.2%).
Mudajaya	Construction	MY	PBT for 2Q14 decreased by 65.8% yoy to MYR39m (2Q13: MYR113m) due to the tapering-off in equipment components delivery for the coal-fired plant in India. Total borrowings increased to MYR416m to fund its investment in various infrastructure projects, in line with the management plan to increase its recurring income base.  Net gearing ratio as at 2Q14 stood at 0.07x (FY13: net cash).	Neutral. The company decrease in profitability is mitigated by its low borrowing profile with net gearing of 0.07x. In addition, we opine that Mudajaya is one of the key beneficiaries of the upcoming KVMRT 2 project enable them to replenish its order books. As at Mar-14, the group has a construction order book of about MYR1bn.
IJM	Construction	MY	Revenue decreased by 2.1% yoy in 1Q15 to MYR1.373bn following the completion of some of the construction projects. However, PBT improved by 2.1% yoy to MYR271m on the back of higher margin being achieved at the existing projects. Meanwhile, total debt increased to MYR4.2bn, translates to net gearing of 0.39x (FY14: 0.40x).	Neutral. Debt repayment profiles remained healthy with stable net gearing of 0.39x (FY14: 0.40x) and comfortable net debt-to-EBITDA of 2.12x (FY14: 1.72x). IJM current orderbook stood at MYR2.2bn with an expectation to increase to MYR5bn by year end, awaiting award from West Coast Expressway and Kuantan port expansion.