RHB FIC Credit Market Update - 23/4/15

23 April 2015

Credit Market Update

Credits Marginally Widened; S&P Slashes Yancoal Rating to BB; MARC Revises IJM Outlook to Negative

                                                                                               

REGIONAL                                                                                      

¨      Credits marginally wider; S&P slashed Yancoal rating to BB. Asian USD CDS premiums ended marginally wider by 0.4bps to 108bps yesterday. Yields in both IG and HY papers widen on average by 2bps and 5bps respectively following China’s State-backed power equipment manufacturer, Boading Tianwei Group’s, missed interest payment on 21-Apr on a CNY1.5bn 5y note. Fitch has stated that it expects defaults by SOEs to be less uncommon but remain sporadic and isolated given its view of China’s prioritization of systemic risk management. Meanwhile, the market’s take on easing actions by the PBOC buoyed demand for the new SINOPE USD2.5bn 5y notes, which were reported closing 2bps tighter, while the new 10y and 30y notes remain at reoffer. S&P downgraded Yanzhou Coal Mining to BB from BB+, following Fitch’s move last week, underpinned by deteriorating cash and leverage metrics against a subdued coal price backdrop; yields on the YANCOAL bond complex widened 5-14bps across. On the primary front, HY China developer, Jingrui Holdings Ltd (B2/NR/B), is planning to sell USD 3y notes at an initial guidance of 13.5%. Going forward, the markets may take cues from today’s US April initial jobless claims (consensus: 287K; prior: 294K) and US PMI (consensus: 55.7; prior: 55.7) as well as Euro-Zone composite PMI (consensus: 54.4; prior: 54).

¨      Interest seen in yieldy papers. We saw the short-to-mid curve tighten by around 4-5bps, with the 3y and 5y closing at 1.48% and 1.85% respectively. Though market traded lighter yesterday, we still saw some buying interest in VALSZP and EZISP, as well as HYFSP and mixed interest in short-dated GGRSP. Investors will be awaiting the SG Mar CPI to be released in the afternoon (consensus: -0.5%; Feb: -0.3%). In the primaries, United Envirotech Ltd (NR) is pricing a 3y at initial guidance of 5.0%.

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MALAYSIA

¨      MARC placed IJM on negative outlook (refer credit brief); Gain in MYR bonds amid active flows. IJM’s rating outlook was revised to AA3/negative by MARC premised on challenging prospects in its plantation and property divisions. The MGS/GII market closed on a positive tone amid heavy trading activity of MYR4.7bn, particularly in mid-to-long govvies, as MYR strengthened to 3.6112/USD following March inflation print in line with consensus of 0.9% yoy (Feb-15: +0.1% yoy). Meanwhile, corporate flows breached MYR528m as credit markets extended gains across sectors, notably in banking, tollroad and GRE bonds - such as Maybank, Anih and PASB. On the primary market, BIMB issued MYR300m B3T2 4/25c15 @ 5.75% (RAM: A1); while Maybank printed JPY31.3bn Samurai Bonds – 3y@0.397% and 5y@0.509%.

TRADE IDEA: MYR

Bond(s)	Jimah Energy Ventures (JEV) 5/20 (AA3) (Trade date: 10-Mar; Price: 119.87; Yield: 4.90%; 5y-MGS+128bps) (Amt o/s: MYR90m)
Comparable(s)	Besraya 7/20 (AA3) (Trade date: 13-Apr; Price: 101.21; Yield: 4.46%; 5y-MGS+84bps) (Amt o/s: MYR60m) Malakoff Power 12/18 (AA3) (Trade date: 20-Apr; Price: 101.03; Yield: 4.59%; 5y-MGS+97bps) (Amt o/s: MYR330m)
Relative Value	We maintain our preference for JEV 5/20 over Besraya 7/20 as the former currently trades wider at c.44bps, up from c.35bps since our initial call on 18-Mar. With both papers rated at AA3, we see room for spreads between them to compress, based on our indicative fair value of 4.85% for JEV 5/20 and 4.92% for Besraya 7/20.
Fundamentals	We are comfortable with JEV based on the following considerations: 1)     Stable business profile, as seen with favourable terms of its Power Purchase Agreement with Tenaga Nasional Berhad; 2)     Strong cashflow-generation ability, with healthy finance service coverage ratio of 1.66x as at Nov-14 and cash balance of MYR114.15m. 3)     Unscheduled outages which reduced available capacity payments and daily utilization payments (Aug-13 to Dec-13: MYR59.54m, May-14 to Sep-14: MYR41.13m) to be compensated by the operations and maintenance service provider, a consortium made up of Jimah O&M and Jimah Teknik.