RHB FIC Credit Market Update - 25/3/15

25 March 2015

Credit Market Update

Weak US Inflation to Keep Asian Credits Rolling; KEXIM 3/18 MYR Offers Scarcity Value

REGIONAL                                                                                      

¨      Support for credits to continue following weak US inflation. iTraxx saw muted movements yesterday (-0.3bp to 111.8bps) following a sharp rise in the previous session (+8.9bps). We noted better buying in the secondary space, led by HK/CN real estate names such as GRNLHK 16-17, FRANSH 17 and CHIOLI 22-24 while Indian and Singaporean FI names similarly were better bid, such as ICICI 19-20 seniors, OCBCSP 24 subdebt and UOBSP 20 senior. Meanwhile, S&P highlighted that HK Airport Authority’s credit risk may rise given expected higher leverage to finance the construction of the airport’s third runway. In the overnight session, USTs extended gains (-1bp to -5bps) as subdued US Feb inflation data (actual: 0.2% MoM, consensus: 0.2% MoM) overshadowed positive PMI (actual: 55.3, consensus: 54.6) and solid new home sales data (actual: 539k, consensus: 464k). On the primary front, India Exim (Baa3/BBB-/BBB-) printed the country’s maiden USD green bond of USD500m 5y bonds at T+147.5bps (initial guidance of T+165bps area) while Astra Sedaya Finance (Baa3/NR/BBB-) is eyeing USD250m 3y at T+225bps area. Looking ahead, today’s session may continue to see support for credits on strong overnight lead (i.e. lower UST yields) and expectations of weaker durable goods orders tonight.

¨      Flows oriented towards higher-grade papers. We saw a parallel drop in the short-to-mid swap rates, with the 3y and 5y tightening by -8.2bps each to 1.78% and 2.1% respectively. In the secondary market, we observed buying interest into high-grade papers, with TEMASE, SPSP and HDBSP trading a couple of bps tighter. Investors will be eyeing the SG Feb Industrial production numbers which are expected to deteriorate to -2.2% (prior: 0.9%), which comes on the heel of the Mar HSBC China Manufacturing PMI which unexpectedly fell to 49.2 (consensus: 50.7), signaling expected continue contraction in Asia’s largest economy. In the primary market, HNA Group International (NR), an aircraft leasing company, priced the SGD128m 2y at 7.0% (SOR+544), where 90% of total allocation went to PB investors, while 98% was absorbed by SG-based accounts.

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MALAYSIA

¨      Long-dated bonds in focus; new issues by AmBank and Prasarana; Danga offers MYR2bn of 5y at IPT 4.05%-4.12%. Secondary activity eased again following a busy past week, as volume slid 5.3% to MYR413m (YTD daily average: c.MYR300m). Top-traded yesterday was IMTIAZ 11/21 with MYR80m exchanged and closing at 4.60% (-3bps). We also noted flows shifting to longer-dated GREs like PTPTN 3/24, DanaInfra 10/28 and Prasarana 3/24 which saw their yields compressing 1.2-7bps on combined transacted volume of MYR130m. Conversely, Telekom 4/23 which garnered MYR50m in trades saw its yield widen 4.7bps to 4.417%. Meanwhile, rates on govvies were supportive of credit, ending 1-2bps tighter across the curve with the 3y and 10y benchmarks closing at 3.32% and 3.88% respectively. On the primary front, AmBank (M) Berhad (RAM: AA2) issued MYR800m 3y and MYR600m 4y senior notes at 4.25% and 4.30% respectively, while Prasarana Malaysia Berhad (NR) issued MYR2.0bn 5-15y sukuk in 3 tranches, pricing within 4.02-4.64%. After hitting the market with MYR1.5bn of 15y (at 4.88%) in January, Danga Capital set to issue the MYR2bn of 5y at 4.05%-4.12%, which we believe is to prefund its maturity in April.

TRADE IDEA: MYR

Bond(s)	KEXIM 3/18 (AAA) (Last traded on 10-Mar) (Price: 100.66; Last yield: 4.26%; 5y-MGS+66bps) (Amount o/s: MYR500m)
Comparable(s)	Cagamas 3/18 (AAA) (Last traded on 20-Mar) (Price: 100.01; Last yield: 3.95%; 5y-MGS+35bps) (Amount o/s: MYR440m) Cagamas 10/20 (AAA) (Last traded on 10-Mar) (Price: 108.32; Last yield: 4.21%; 5y-MGS+61bps) (Amount o/s: MYR105m)
Relative Value	We maintain preference for KEXIM 3/18, which has remained flattish since our initiation on 3-Dec-2014 (at 4.26% yield). In comparison to Malaysian GRE, Cagamas 3/18 (YTM: 3.95%), KEXIM 3/18 trades attractively wider by 31bps while also being perceived to have high likelihood of systemic support from its respective government.
Fundamentals	In our opinion, we are comfortable with The Export-Import Bank of Korea (KEXIM) based on the following: 1)     Strategic role as South Korea’s official export credit agency in support of the country’s export sector by financing the country’s exports and overseas investment; 2)     Extreme likelihood of systemic support, given the government’s 100%-stake in KEXIM and its legal obligation under Article 37 of the KEXIM act to maintain the bank’s solvency; 3)     Still healthy credit profile, with strong financing demand remaining strong as gross loans increased 15.8% despite an increase in non-performing loan ratio to 1.13% as at Jun-13 (end-12 0.97%) due to shipping and shipbuilding companies’ non-performance.