FW: RHB FIC Credit Market Update - 28/8/14

28 August 2014

Credit Market Update

Firm Interest Across APAC Markets; Reiterate Call on PCCW 22

REGIONAL                      

¨      Firm interest across APAC credit markets. The JACI Composite and IG marginally broadened by 0.8bps (to 242.8bps) and 0.5bps (to 174.1bps) respectively while the HY widened by a larger 1.8bps (to 471.5bps). Buying was mostly firm across APAC markets, with interest in China seen in lower beta names like CNOOC and SINOPE while HK saw interest on centred on the usual names like HUWHY and HK property papers. In the Singapore USD market, a similar trend emerged with focus on TEMASE and OCBCSP. The Treasury curve flattened with the 2y rising 2bps (to 0.51%) while the 10y tightened by 3.9bps (to 2.36%). Investors are seeking higher-yielding Treasuries as European yields are depressed due to Draghi’s Jackson Hole speech which investors have speculated to mean additional stimulus measures and continued geopolitical tensions.

¨      In the USD APAC pipeline, China Taiping Insurance Holdings (NR/BBB+/A-) is meeting investors to sell USD subordinated papers.

¨      Stable tone for SGD credits on quiet primaries and few catalysts. Yesterday’s SGD swap curve was relatively unchanged, seeing marginal tightening of 0-1.4bps past the 3y mark, in line with little changes overnight in USTs as the market redirected attention onto the 2y floating note and 5y UST auctions. Over in the credit space, there was recurring interest in EZRASP 16 and UOBSP Pc18. In addition we saw two-way flows in CAPITA 24s, CAPLSP 19s and BIGSP 17s.

MALAYSIA

¨      Power names led MYR secondary activities. Corporate spaces were active on power sector which consist 41% of total trades. We saw SEB 7/24 yield continue trending lower to 4.79% (-4.1bps since 26-Aug) on MYR70m reportedly done. Mixed trading on mid-tenure TTPC where 1/18 and 1/19 widen by 1.5bps to 4.154% and 2.3bps to 4.264% respectively, while 1/20 narrowed 8.7bps to 4.344% - each on MYR10m. Other notable trades include Public Senior Bond 4/19 saw MYR75m changed hands to end the day at 4.101% (-3.8bps). Overall, secondary market turned to be relatively more active with MYR463m transacted (vs YTD average of c. MYR380m), skewed slightly towards mid-duration.

TRADE IDEA: USD

Bond	PCCW Capital No.4 Ltd. (PCCW or PCCW Limited; NR) PCCW 22 (Price: 107.85; YTM: 4.52%; Z+235bps)
Comparable(s)	PCCW-HKT Capital No.5 Ltd (PCCW-HKT; Baa/2Sta; BBB/Neg; NR) PCCW HKT 23 (Price: 98.85; YTM: 3.91%; Z+160bps) Bharti Airtel Ltd (BHARTI; Baa3/BBB-/BBB-; all stable) BHARTI 5.13% 23 (Price: 106.04; YTM: 4.27%; Z+199bps)
Relative Value	We reiterate our preference for PCCW 22 over PCCW-HKT 23 and other APAC peers in the USD space (including BHARTI 23): 1)     Yields and Z-spreads continue to look attractive versus comparable USD issuers in the telecommunications sector; 2)     PCCW 22’s yield spread over PCCW-HKT 23 still appears wide despite the latter having the better structure (corporate guarantee by Hong Kong Telecommunications (HKT) Limited and HKT Group Holdings Ltd); and 3)     Shorter duration of slightly under 11 months versus PCCW-HKT 23. PCCW 22 is unconditionally and irrevocably guaranteed by PCCW Limited. Despite the high cash price, we continue to believe PCCW 22 offers good exposure to a dominant telco business in Hong Kong via PCCW’s 63%-owned subsidiary, HKT. HKT has maintained a strong dividend upstreaming record to its parent companies (payout ratio of at least 80%) since the start of 2012.
Fundamentals	We think PCCW’s credit is improving post completion of HKT’s successful rights issue (for c.HKD7.9bn) on 22-Jul 14. HKT’s recently announced 1H14 results also revealed ongoing stable business performance while the following credit factors remain intact and support our view: 1)     63%-owned HKT’s robust competitive position as the only domestic quad-play operator with an estimated 35% market share of the mobile market; 2)     Strong EBITDA margins in HKT and PCCW of 35% and 30% respectively for 1H14; 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 and projected decrease in gearing via PCCW’s group cash and equivalents of c.HKD9.0bn (USD1.16bn) as of end-1H14 which will pare down debts to arrive at a net debt/EBITDA of 3.3x by 3Q14. Notwithstanding, our call is moderated by: 1) PCCW’s aggressive M&A appetite for growth and 2) high dividend payout ratio by PCCW of 76% of net profits.