RHB FIC Credit Market Update - 20/4/15

20 April 2015

Credit Market Update

New USD bonds keep markets busy; China Cuts Reserve Ratio; Maintain Preference for HKLSP 6/22 USD

REGIONAL                                                                                      

¨      Surge in USD bond sales; China cuts RRR again.  Asian USD CDS premiums rose 2.2bps to closes at 109bps last Friday, led by wider spreads for Indonesia and Malaysia sovereigns, the latter recently issuing dual-tranche USD1.5bn sukuk. In the same day, secondary markets were generally stable albeit quieter amid robust new bond sales, rallies in both China and Hong Kong’s stock markets as well as Brent crude, which rose 0.9% to USD64/bbl. We noted yields in the CNOOC and SINOPE complexes close 5-6bps tighter on a better crude pricing backdrop. Elsewhere, RILIN 40’s yields were seen 3.7bps tighter on a better 4Q profit showing, with net income rising 11% and beating estimates. In the HY space, Kaisa Group has until today to secure USD52m coupon payments for its 2017 and 2018 notes. Going forward, we may continue to see subdued secondary activity as we expect further new supply to hit the market. Following last Friday’s session, we noted China’s home prices falling in fewer cities, with declines seen in 49 last month compared to 66 in Feb as transactions increased; and the PBOC cutting China’s reserve requirement ratio by 1% down to 18.5% last Sunday. These events appear supportive of real estate and bank credit.

¨      On the USD primary front, Indonesian real estate developer, Bumi Serpong Damai (Ba3/NR/BB-), is expected to sell its first set of USD 5NC3 bonds today with an initial price target in the 7% area. Doosan Heavy Industries (expected issue rating: Aa3/NR/NR) is also selling USD 5y notes, guaranteed by Export-Import Bank of Korea (Aa3/A+/AA-), with pricing guided at T+115bps. Meanwhile, Indosat Tbk PT (Ba1/BB+/BBB) is considering a global bond issuance this year or next year to refinance debts maturing in 2010. Additionally, both Hongkong Land Holdings Ltd (A3/A/A) and Reliance Communications (Ba3/NR/BB-) are meeting investors today for potential offerings.

¨      Quieter trading on Friday; Int’l Healthway Corp with 2y at initial 7%. The short-to-mid swap curve marginally widened, with the 3y and 5y broadening by between 0.5-1bps to 1.41% and 1.80% respectively. It was a rather quiet Friday in the SGD corporate space, partially due to Bloomberg technical issues, with some buying nevertheless still seen in OHLSP and UOLSP. In the primaries, International Healthway Corp (NR) is planning to issue a SGD2y at initial guidance of around 7%.

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MALAYSIA

¨      Credit yields remained supported; Putrajaya Holdings printed MYR200m. Corporate yields inched lower amid moderate trading activity of MYR539m in the credit space last Friday. We saw yields tighten in both banking (e.g. Maybank B3T2 5/24c19, RHB T1 3/39c19) and power space (e.g. SEB, TTPC, TBEI). Notably, TBEI 9/18 and 3/19 narrowed 9-10bps to 4.446% and 4.541% respectively, amid improvement in construction progress where construction delays had narrowed to 5.6% from 10.2% a year ago (according to RAM’s rating affirmation on 17-Apr); meanwhile, Malakoff’s upcoming IPO alleviates concerns on repayment of its Junior Facility. In govvies, trading activity was thin at MYR1.7bn as investors are probably sidelined ahead of the MPC meeting early next month, 7-May. We saw mild gains in the MGS benchmarks (-0.1bps to -1.1bps) amid strengthening in MYR to 3.624/USD last Friday. On the primary side, the reopening of MYR3.5bn SPK 7/22 (MYR1.5bn private placement; tender closing tomorrow, 21-Apr) could attract good demand which last traded at 3.997% (c.14bps above GII 7/22). Elsewhere, Putrajaya Holdings printed MYR200m Sukuk on 2 separate tranches, 7y @ 4.25% and 10y @ 4.4%.

TRADE IDEA: USD

Bond(s)	Hongkong Land, HKLSP 6/22 (yield: 3.06%; T+140bps) (A2/A-/-) (Amt out: USD500m)
Comparable(s)	Swire Property, SWIPRO 6/22 (yield: 2.98%; T+132bps) (A2/A-/A) (Amt out: USD500m)
Relative Value	We reiterate a preference for USD HKLSP 6/22. The yield has tightened by c.16bps since first mentioned in Credit Market Update (dated 13-Oct). We advocate a hold position in this paper as it should be largely unscathed from the slowdown in HK Jan retail sales due to its lower retail exposure.
Fundamentals	We like HKLSP 6/22 for the following reasons: 1)      Strong-exposure to office space vis-à-vis retail. HK’s retail sector has been badly hit by the slowing growth in China, with Jan-2015 retail sales down YoY by -14.6%. Nevertheless, its HK retail space forms only 15% of its total HK rental area, with HK office space comprising the remainder. 2)      Stable cash flow from rental income. 69% of operating profit is derived from commercial investment properties, mainly its Central office portfolio in HK with low vacancy rates at c.5% 3)      Slightly tighter credit fundamentals. The company has a slightly tighter financial profile if compared to similar regional property peers, with LTM EBITDA Interest Coverage at 9.2x (peers*: 9.0x) while LTM Total Debt/ EBITDA is at 5.1x (peers*:4.2x). *Regional peers: Shimao Property, Swire Properties, Sun Hung Kai, Capitaland, UEM Sunrise, Lippo Karawaci