FW: RHB FIC Credit Market Update - 4/11/14

4 November 2014

Credit Market Update

Uptick in Longer Duration Interest; Value in Aquasar 7/21   

REGIONAL                   

¨      Interest shifts to longer tenures. Solid ISM manufacturing Oct print in US (actual: 59.0, consensus: 56.1) further spurred tightening ahead, sending UST short- to mid-end yields 2bps higher overnight. In the Asian USD credit space, we saw better buying along the mid- to long-end while the short end papers generally suffered upward yield pressure. In HK/CN, we saw investors’ focus on property papers like FRANSH 21, SINOCE 24 which tightened several bps. In MY and TH, long papers similarly gained such as SIMEMK 23, PETMK 26 and PTTTB 35 which narrowed a couple of bps. JACI IG spread closed 4bps tighter (181bps) while the HY spread narrowed 3bps (495bps), partially due to rising UST yields. Looking ahead, investors may look out for US trade balance tonight which may record a narrower deficit, potentially extending the upward yield pressure.

¨      On the primary front, COFCO (A3/A-/A-) plans USD-denominated bonds with pricing and amount to be determined through bookbuilding; while China-based Nexteer Automotive Group (Ba1/BB+/NR) is eyeing to price USD250m 7NC3 next week.

¨      SPSP gains after last week’s selloff; SG PMI in Oct may stay flat. The 3y and 5y SOR marginally tightened by 1-1.5bps (to 1.08% and 1.66% respectively) while the 3y/5y spread widened by 45bps even as Treasuries of similar durations broadened by c.2bps.  There was a general tad better buying, with interest centered on SG bank bonds (UOBSP, DBSSP) and into REITs (CCTSP, FCTSP), though there was profit-taking on Hyflux (HYFSP) papers. SPSP papers also saw gains post-last week’s selloff. Singapore’s Oct PMI to be release tonight, with consensus expecting the number to stay at par with Sept of 50.5.

¨       

MALAYSIA

¨      MGS rebounded from Friday’s losses; Weak PDS flows amid issuance of Cagamas’s new tranches. Local govies retracted from Friday’s losses as MGS curve moved downward yesterday. Trading momentum remain strong with total volumes surpassed MYR2.3bn (YTD daily average: MYR1.5bn). Among the top gainer were 2y, 5y, 10y and 15y-MGS settling at 3.446% (-9.2bps, MYR103m), 3.610% (-1.5bps, MYR135m), 3.814% (-3.3bps, MYR279m) and 4.415% (-1.3bps, MYR272m) respectively. Meanwhile, corporate bonds ended the on listless activities with only MYR250m transacted (vs YTD average MYR439m) amid the issuance of Cagamas (MYR1.06bn) yesterday. Yield generally moved sideways with notable names such as Prominic (HLB NIT1) 5/61c16 tighten 1.4bps to 4.786% with MYR30m done, Sime Darby 11/16 saw MYR25m exchanged hands closing at 3.782% (+0.3bps) while Malakoff 12/15 ending the day at 4.296% (+0.1bps, MYR20m).

TRADE IDEA: MYR

Bond(s)	Aquasar 7/21 (RAM: AAA) (MTM Price: 101.56; MTM Yield: 4.488%; 7y-MGS+c.73bps)
Comparable(s)	SEB 6/21 (RAM: AA1) (MTM Price: 103.67; MTM Yield: 4.509%; 5y-MGS+c.75bps)
Relative Value	We see value in Aquasar 7/21 which is now trading only c. 2bps lower than the AA1-rated SEB 6/21. In addition, we noted that Aquasar is 12-13 bps cheaper relative to our proprietary AAA curves and provide tightening opportunity.
Fundamentals	Aquasar is a special funding vehicle for State Government of Sarawak where the latter is supported by the following credit strength: 1)     Prudent financial management as demonstrate by its consistent budget surplus in the last 5 years. 2)     Strong balance sheet with net cash position. As at FY13, Sarawak has cash balance of MYR23.3bn compare to total debt of MYR8bn, equivalent of 2.9x of cash-to-debt coverage. 3)     Diversified resources base. Sarawak is rich with commodities resources such as petroleum, natural gas, timber and palm oil. However, the State is exposed to the fluctuations in commodities prices where O&G contributed about 41% to the State’s revenue in 2013.

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
Westpac Banking Corporation (Westpac, Aa2/AA-/AA-)	Banks/FIs	AU	FY14 net interest income increased 5.6% YoY to AUD13.54bn while net income rose 11.7% YoY, helped by lower credit costs. Net interest margin compressed 5bps to 2.09% from 2.14% last year. Total impaired asset ratio fell to 0.4% from 0.67% in the same period.	Maintain Marketweight. Westpac’s full-year financial performance was solid. However, we still note the elevated exposure to wholesale funding, reflected by loans/deposits ratio of 142% (FY13: 140%) versus the industry average of 134%.
DRB-Hicom Bhd (DRB Hicom) (AA-)	Conglomerate	MY	Proposed MYR1.8bn Perpetual Sukuk Programme (MARC: A). Proceed are mainly to fund Proton’s working capital and developmental expenditures.	Mild positive. Treating the Perpetual Sukuk as capital, the gearing ratio will reduce to 0.74x (Jun-14: 0.82x) on pro-forma basis.
Hong Leong Investment Bank (HLIB) (AA-)	Banking	MY	Proposed MYR1.0bn Multi-Currency B3T2 Programme (NR).	Mild positive. Total capital ratio for HLIB will increase from 20.3% in Jun-14 to 79.8% on pro-forma basis.
Cagamas (AAA)	Financial	MY	Printed MYR1.06bn under its existing MYR40bn MTN/IMTN programme. -1y IMTN: 3.75%, MYR70m -3y  MTN: 3.95%, MYR60m -3y IMTN: 3.95%, MYR930m	Neutral.