FW: RHB FIC Credit Market Update - 1/10/14

1 October 2014

Credit Market Update

APAC Spreads Spike on Risk Aversion; Take Profit on CNOOC 22

REGIONAL                      

¨      APAC USD credits traded weaker; spreads jumped. We saw better selling on USD credits yesterday across Asia as investors appeared to trim investments ahead of Hong Kong holidays (Wed-Thurs) and China’s Golden Week. Yields tilted higher particularly at the short- to mid-end, although new RHBCMK senior 19 held up well at around reoffer levels.  JACI spreads closed wider, with HY space leading at 476.5bps (+16bps) and the IG spread standing at 180.5bps (+7bps). Meanwhile, UST yields were flattish during the overnight session, although the 30y yield inched 3bps higher. Looking ahead, we expect US data releases tonight to remain weak (ADP employment change and manufacturing numbers), which may provide support to USTs. 

¨      In the pipeline, Korean Reinsurance (S&P: A-/pos) is eyeing USD-denominated bonds with investor meetings set for next week.

¨      Expect quieter market today ahead of China Holiday. SGD swap rates broadly stayed unchanged with the 3y/5y spread maintaining at c.61bps, in tandem with US Treasury movement yesterday. We observed better buying into short-to-mid papers such as NCLSP, WINGTA and newly issued FRESHK ‘19. Ahead of China’s National Holiday today, we expect a quieter SGD bond space. Investors will be eyeing the release of Singapore’s Sept PMI tonight for signs of waning manufacturing sentiment as Aug numbers saw a contraction to 49.7, the first contraction after seven consecutive months of expansion. Chip Eng Seng Corp (NR) and Tiphone Mobile Indonesia (NR) are currently meeting with investors for planned SGD issuances.

MALAYSIA

¨      PASB and TF Varlik dominated PDS space; MGS closing flat. Both MGS and PDS space were active yesterday with total volumes of MYR3.7bn and MYR556m respectively. Investors were keen on mid-duration papers fueled by water asset operator (PASB) and Turkish-bank (TF Varlik). PASB 6/19 ended flat at 3.986% (MGS+31bps) while PASB 2/19 tighten 3.8bps to close at 3.962% (MGS+29bps) on combined MYR240m transactions. We saw selling bias on AA3-rated TF Varlik 6/19 as yield inched 13.1bps higher to 5.717% with MYR96m reportedly done. Meanwhile, MGS prices were generally flattish. At the end of day, 5y and 10y MGS closing flat at 3.675% and 3.908% whereas 3y, 7y and 30y MGS narrowed marginally to 3.449% (-1.3bps), 3.801% (-0.4bps) and 4.721% (-0.1bps). Throughout Sept, secondary trade for local govies amounted to MYR36.4bn, below YTD monthly average of MYR42bn. MGS curve steepened slightly as 3y/10y spread increased to 46bps (+5bps m-o-m). On corporate space, trading volumes for the month were dynamic at MYR10.9bn (vs YTD monthly average: MYR9.6bn) amid moderate primaries issuance (Sept: MYR5bn vs YTD monthly average of c. MYR6bn).     

TRADE IDEA: USD

Bond(s)	CNOOC 3.875 5/22 (price: 100.6; yield: 3.78%; z-sprd +142bps (Aa3/AA-/NR)
Comparable(s)	CNOOC 4.25 4/24 (price: 101.8; yield: 4.02%; z-sprd +145bps (Aa3/AA-/NR); CNOOC 7.4 5/28 (price: 132.1; yield: 4.26%; z-sprd +148bps (Aa3/AA-/NR); SINOPE 5/22 (price: 100.6; yield: 3.81%; z-sprd +144bps (Aa3/AA-/NR)
Relative Value	We see the opportunity to take profit on CNOOC 22, which has tightened 18bps in z-spread (total return: 2.70%) since our initiation on 6-May. At present, the paper appears fairly priced vs the issuer’s curve and peers, lacking further tactical pick-up potential.
Fundamentals	We remain comfortable with CNOOC’s credit profile, based on the following: 1.     Government-owned. We believe there is a high likelihood of extraordinary government support over the medium term, with its rating capped at China’s sovereign rating of (Aa3/AA-/A+); and 2.     Moderated by weakening credit metrics. On a standalone basis, we expect limited upside  to its credit profile given large capex plans, high reinvestment risks and implementation risks in overseas projects. CNOOC reported weaker EBITDA to interest coverage of 39x in FY13 (FY12: 71x), cash ratio of 0.71x (FY12: 1.62x) and debt to EBITDA ratio of 0.99x (FY12: 0.49x).

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
Woori Bank (Woori)	Banking	KR	Fitch upgraded Woori’s legacy subordinated unsecured notes (B2 LT2s) to BBB+/Sta from BBB-/Sta following its improved perception of sovereign support likelihood as Korean authorities’ recently revised policy on subordinated capital securities. Specifically, authorities have allowed the removal of one of the two point of non-viability (PONV) trigger clauses in existing subdebt: the event that a management improvement order (MIO) is issued to the bank by the regulator.	Positive. The improved systemic support assumptions are based on expectations that pre-emptive support will be provided in order to avoid insolvency. Removing the issuance of the MIO as a trigger event reduces subjectivity/uncertainty with regards to the PONV. Effectively, this means the PONV trigger for Korean bank-issued subdebt with single-PONV structures will only be reached upon insolvency or default, similar to the point at which senior debt is considered to be in default, and not earlier than this.
Vallianz Hldgs Ltd	OSV	SG	Acquired 100% of OER Holdings, a provider of manpower services to the offshore industry, for SGD35.4m via equity consideration.	Neutral. OER may contribute up to 26.8% to Vallianz bottomline (based on FY2013’ NP of SGD5.9m). The purchase could be positive in the long run, as it current financials stand lag behind peers –i.e  LTM Debt/EBITDA is at 19.9x (OSV peers: 9.8x) while its EBITDA/Interest is at 2.3x (OSV peers: 5.3x).
IOP Capital Management Sdn Bhd (IOI Prop)	Properties	MY	Raised MYR750m under its MYR1.5bn Sukuk Programme (NR). 3y- MYR190m, 4.98% 4y- MYR190m, 4.98% 5y- MYR370m, 4.98%	Neutral. The proceeds will be utilized to refinance existing bridge loan facility with Maybank.