FW: RHB FIC Credit Market Update - 15/10/14

15 October 2014

Credit Market Update

Extended UST Rally Supportive of APAC Credits; TF Varlik 6/19 Offers Attractive Pickup from AA3 Curve

REGIONAL                   

¨      Support for credits likely to continue. Investors remained risk off as USTs extended rallies across the curve, in particular the 5y (-9bps) and 10y (-8bps). In the USD Asia credit space, we saw better buying across the region as yields narrowed. Trades generally focused on the belly of the curve, including KBank 19 senior and CNOOC 19 which compressed a couple of bps. Looking ahead, important data coming out of the US tonight which may indicate softer economic growth include empire manufacturing (consensus: 20.25, prior: 27.54), retail sales (consensus: -0.1%, prior: 0.6%), PPI (consensus: 0.1%, prior: 0.0%) and the Beige Book release. 

¨      On the primary front, Korean Reinsurance (NR/BBB/NR) priced USD200m 30nc5 at 99.58 for 4.60% yield (T+314.7), inside initial price guidance of 4.875%. Meanwhile, China's Power Construction Corp (A3/NR/NR) sold USD500m Pnc5 at par to yield 4.05%, inside initial guidance of 4.375%. In the pipeline, China Travel Services (Baa3/BBB/NR) is eyeing a USD-denominated bond offering among the spate of new Chinese issuances.

¨      SOR inched tighter on weaker growth in 3Q14. SGD swap rates narrowed between 1.5-3.5bps to 1.1% (3y) and 1.64% (5y) respectively despite the relatively strong rally seen in Treasuries (UST 3y: -8bps; UST 5y: -9bps) as the lacklustre SG Q3 GDP released (actual: 2.4%; consensus: 2.7%) may have provided traction for further tightening. On credits, there was better buying across mid-duration papers such as OUESP, GUOLSP and SIASP with a tad stronger interest seen in the property names.

¨       

MALAYSIA

¨      Moderate demand for 15y-MGS reopening; active govies and PDS market. Tender for MYR2.5bn 15y-MGS reopening was modest at BTC of 1.73x on average yield of 4.13%. We continue to see a flattening trend in the MGS curve. Long-dated 10y and 15y-MGS closing lower at 3.797% (-1.8bps, MYR30m) and 4.125% (-3.1bps, MYR653m) while yield for 2y, 5y, and 7y-MGS increased to 3.467% (+1.7bps, MYR32m), 3.665% (+0.7bps, MYR467m) and 3.792% (+0.3bps, MYR90m). Total govies transactions were lively at MYR8.24bn where 10y-GII remained highly transacted with MYR2.26bn exchanged hands settling 1.5bps lower at 4.102%. Similarly, investors were active in corporates on total volumes of MYR1bn fueled by liquid GRE and AAA bonds. DanaInfra 7/29 topped volume with yield tightening to 4.70% (-1.9bps, MGS+57bps, MYR225m), followed by AAA-rated Plus 1/24 (-0.6bps, 4.504%, MGS+71bps, MYR160m) and Ara Bintang 3/21 (-3.3bps, 4.398%, MGS+61bps, MYR130m).     

TRADE IDEA: MYR

Bond(s)	TF Varlik 6.00% 6/19 (AA3) (price: 101.23; yield: 5.69%)
Comparable(s)	HLA 4.50% 25c20 subdebt (AA3) (price: 98.225; yield: 4.88%) AISL 5.05% 24c19 subdebt (AA3) (price: 100.69; yield: 4.875%)
Relative Value	We see value in Turkish name TF Varlik 6/19 given its high pick-up relative to the AA3 space despite its healthy fundamentals. At 5.69%, the paper is trading at a whopping c.100bp discount to our indicative AA3 yield curve. We think there is room for the paper to compress as more familiarity is built up for the new issuer, while noting that some investors may face restrictions on trading Middle East names.
Fundamentals	In our opinion, TF Varlik is fundamentally sound based on the following: 1)     High probability of extraordinary support from majority shareholder, National Commercial Bank (66.3%) (A+/Sta), the largest bank in Saudi Arabia and majority owned by the Saudi Arabian government. 2)     Sound credit profile, with NPL ratio improving to 2.48% (FY12: 2.75%) and still healthy net interest margin of 5.07% (FY12: 6.35%).   TF Varlik’s fundamentals are, however, moderated by Turkey’s challenging economic and political backdrops.

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
Power Construction Corporation of China (PowerChina)	Power/ Energy	CN	Printed USD500m Senior PerpsNC5 at 4.05%. The perp has a generous 500bps step-up in 2019, which lead to very high probability of call by the issuer.	PowerChina (A3/-/-) (wholly-owned by the Government via SASAC) has modest FY2013 fundamentals with EBITDA Interest Coverage at 3.9x (APAC power peers: 4.3x) and Debt/ EBITDA at 6.47x (peers: 6.3x). Post the inaugural USD issuance, its credit profile would deteriorate to 3.7x-3.8x and 6.7x-6.8x respectively. Compared to a similarly rated peer, China Railway Construction Corp (EBITDA Interest cover: 8.1x; Debt/EBITDA: 6.1x), Power China exhibits weaker fundamentals. Nevertheless, we opine that Power China’s SINOHY Pnc5, which we will treat as a 5y due to high call probability, looks attractive with a pick-up of around 20-25bps if compared against CHRAIL 2/23 (yield c.3.90%).
Jimah East Power Sdn Bhd	Power	MY	Assigned AA-id/Stable by MARC for the MYR8.4bn Sukuk Murabaha Programme.	Neutral. This issuance is meant to fund the Project 3B – of the ultra, supercritical coal-fired power plant (2 x 1,000MW) in Negri Sembilan – via 70:30 JV of a unit of 1MDB and Japanese consortium, Mitsui Co. Ltd, respectively. The plant is expected to be complete by mid-May 2019.
Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE)	O&G	MY	Assigned AA-id/Stable by MARC for the MYR1bn Sukuk Murabaha Programme.	Neutral. Mainly slated for its yard upgrade, MHB’s gearing and debt-to-EBITDA expected to rise to 0.52x (Jun-14: 0.14x) and 6.9x (Jun-14: 1.81x) respectively upon full disbursement. MMHE has the competitive advantage in the domestic market given the 41.6% indirect ownership of Petronas in MMHE through MISC.
Plantation	Plantation	MY, ID	CPO export tax exempted until December in Malaysia; Indonesia likely to follow suit for November.	Neutral. We expect gradual recovery in CPO prices, with near-term range at c.MYR2,000-2,200/MT, supported by improving exports to India, increased domestic demand from biodiesel needs and slight decline in production. Credit of frequent borrowers such as SIME, FRL, GAR and TSH to stay intact in our view.
Tower Bersama (TBIGIJ)	Telco	ID	Moody’s affirmed TBIGIJ at Ba2/Negative following acquisition of 49% stake in Mitratel – the telco tower arm of Telkom (Baa1/Stable) on share exchange transaction.	Mild positive. We view the purchase as earnings accretive, debt/EBITDA set to improve to c.4.5x in 2015 (from 1H14’s 6.0x). TBIGIJ to consolidate its status as the largest independent tower company in Indonesia with 14,087 towers, or 33% more than Protelindo (Ba2/stable).