FW: RHB FIC Credit Market Update - 24/12/14

24 December 2014

Credit Market Update

Yields Pressured Following Stronger US 3Q GDP Print; Hold USD BOC 11/24 B3T2

REGIONAL

¨      Yields headed north amid sapped liquidity. Liquidity thinned ahead of Christmas holidays with a large number of USD credits staying flattish. On USD papers that were traded in Asia, we saw generally higher yields with investors adjusting their positions ahead of the seasonal holidays. In the HK/CN space, papers like CNOOC 23, YUEXIU 23 and CHOHIN 20 subdebt inched wider. Elsewhere, we saw BBLTB 18, TEMASE 23 and PSASP 21 widening marginally. JACI IG and HY spreads inched a tad tighter to 192bps (-1bp) and 539bps (-2bps) respectively amid a spike in UST yields (+8bps to +11bps) following stronger US 3Q GDP (actual: 5.0%, consensus: 4.3%). iTraxx AxJ narrowed 1bp to 104bps.

¨      Light general trading; Nov CPI prints marginally lower than expectations. We saw mild flattening in the SOR curve yesterday, with the 3y widening by +0.25bps (to 1.43%) and 5y tightening by -0.8bps (to 1.90%). Flows traded thinly yesterday, though there was some residual demand interest in REITs (CAPITA) and property (KPLDSP) names. SG’s Nov CPI came in slightly lower than expected at -0.3% (consensus: -0.2%, Oct: 0.1%).

MALAYSIA

¨      Surge in bank trades; IBK top traded. Secondary credit activity rose to a hefty MYR847m (YTD avg: MYR438m) as investors rushed to reorganize their positions ahead of the holidays. On the other hand, MGS volume remained below-average at MYR832m (YTD avg: MYR2.17bn). In the credit space, trading interest was mostly in short-dated and AAA-rated papers. Notable active names of the day were mostly bank names including IBK 2/15 MTNs, settled flat at 3.579% on MYR190m transacted since its prior trade; ALLIANCEB 4/21, settled 1.3bps tighter at 4.169% on MYR65m traded; and KEXIM 7/15, which traded 4.2bps wider to 3.783% on MYR43m trades. Meanwhile, GAMUDA 4/15 drew significant interest at MYR82m traded, widening 8.7bps to 3.767%. In the sovereign space, 7y traded most actively with MYR264m transacted closing 10bps tighter at 4.06%, followed by 3y with MYR170m closing 7bps tighter at 3.58%. MGS curve flattened with 7y and 10y tightening 10bps and 9bps respectively while 3y tightened 7bps and 5y widened 2bps.

TRADE IDEA: USD

Bond(s)

Bank of China Ltd (BOC, A1/A/A) BOC 5.00% 11/24 B3T2 (price: 102.19; mid-yield: 4.72%; Z+241bps)

Comparable(s)

BOC 5.55% 2/20 B2 LT2 (price: 108.70; mid-yield: 3.67%; Z+184bps)

Relative Value

We reiterate our preference on BOC 11/24 B3T2 (initially recommended on 13-Nov 14), which remains attractive from an absolute yield standpoint within the USD T2 space. In addition, the bond still offers a decent PONV premium over BOC 2/20 B2 LT2, which we estimate to be c.33bps (in Z-spread) after tenor adjustments (5bps/year). The new-style’s issuance size is also larger at USD3.0bn versus its B2 counterpart’s size of USD2.5bn.

Fundamentals

BCHINA’s solid credit profile is supported by the following key aspects:

1)     Fourth-largest state-owned bank in China, with an estimated 10% share of system loans and assets in addition to a strong franchise in Hong Kong;

2)     Respectable profitability metrics, with NIM and ROA of 2.26% and 1.16% respectively;

3)     Sound asset quality, evidenced by its slightly below-average NPL ratio of 1.07% (industry: 1.08%) and significant loan coverage ratio of 229.35%;

4)     Stable funding and liquidity, reflected by a 76.53% loans-to-deposits ratio and historically stable levels;

5)     Majority-owned by the Chinese government. Very strong implied systemic support assumptions given BCHINA’s 67.68% ownership by Central Huijin Investment Ltd and its significant influence over China’s financial system.

*all data as of 30-Sep 14

CREDIT BRIEF

Company/ Issuer

Sector

Country

Update

RHBFIC View

Hyflux Ltd (Hyflux)

Engineering

SG

Hyflux, together with National Power and Water Co, has been awarded a USD250m water project by the government-owned Oman Power & Water Procurement.  Hyflux’s portion includes the engineering, procurement and construction (EPC) worth USD210m.

Mildly positive. This is Hyflux’s first contract in 12 months. We opine that a firmer pipeline is needed before its credit profile is to show improvement. Hyflux is currently geared towards the higher side, with its LTM Debt/ EBITDA at 15.3x while its LTM EBITDA Interest Coverage is at 4.65x.