RHB FIC Credit Market Update - 24/4/15

24 April 2015

Credit Market Update

New USD Deals Priced Tighter To IPT; CNOOC Next in the Pipeline; Khazanah to Deliver MYR1bn Sukuk; IPO Upside for Malakoff 12/19

                                                                                               

REGIONAL                                                                                      

¨      More primary deals in APAC USD priced tighter to IPT; CNOOC next in the pipeline. Asian USD CDS premiums relaxed 1.25bps to 107bps yesterday on better risk sentiment in the region. Credit markets remained focused on new issues, noting Pelabuhan Indonesia II’s (Baa3/BB+/BBB-) new print of USD1.1bn 10y at 4.275% (IPT: 4.625%) and USD500m 30y at 5.5% (IPT: 5.625%), which were 3.6x and 2x oversubscribed respectively; Sydney Airport Finance Co Pty Ltd (Baa2/NR/NR) with USD500m 10y at T+152bps (IPT: T+165bps); Korea Resources Corp’s (Aa3/A+/NR) USD350m 5y at T+97.5bps (IPT: T+115bps), which drew USD1.7bn in orders despite a brewing political scandal in South Korea; and Jingrui Holdings Ltd (B2/NR/B) with USD150m 3y notes at 13.25% (IPT: 13.5%). In the secondary market, the recent SINOPE issues, 5y, 10y and 30y papers, gained firm support as yields closed 1-2bps tighter amid a favourable 3.4% pick-up in Brent crude to USD64.85/bbl. In the pipeline, HK-based developer, Landsea Green Properties Co Ltd (NR), is proposing to issue its second batch of USD seniors, the proceeds of which will be channeled to M&A and working capital, while South Korean department store operator, Shinsegae Co Ltd (NR), is planning investor meetings from 28-Apr for a USD paper to be guaranteed by Kookmin Bank (A1/A/A). We also note state-owned O&G giant CNOOC Ltd (Aa3/AA-/A+) mandating banks for USD notes; S&P affirmed CNOOC’s ratings on continued belief in extremely high likelihood of timely support from the Chinese government. Today, the markets open to a 1-3bps tighter UST curve following flat US April initial jobless claims of 295K (consensus: 287K; prior: 294K), a weaker US PMI print of 54.2 (consensus: 55.7; prior: 55.7) and lower new home sales of 481K (consensus: 515K; prior: 539K). In the Euro-Zone, composite PMI registered at an underwhelming 53.7 (consensus: 54.4; prior: 54).

¨      Demand tilted to O&G names; Keen interest in UENVSP primary. There was some marginal widening in the 3y and 5y, with the respective swap rates touching 1.50% (+1.5bps) and 1.86% (+1.3bps) respectively. We saw continued activity in the O&G sector in names such as KRISSP, EZRASP and VALZSP as well as short-dated UENVSP ahead of its new print. Meanwhile SG Mar CPI came in at a lower -0.3% (consensus: -0.5%; Feb: -0.3%) while investors will be awaiting the Mar IP to be released this afternoon (consensus: -5.8%; Feb: -3.6%). In the primaries, United Envirotech Ltd (NR) printed a SGD225m 3y at a final guidance of 4.7%, 30bps inside initial guidance. This print has been one of the better received papers this year, with BTC of around ~8x largely from the PB space (~70% of investors), possibly on attractive income accumulation.

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MALAYSIA

¨      Steep fall in profits at Thailand and Indonesia units may drag CIMB performance (refer Credit Brief); Khazanah proposed new MYR1bn Sukuk programme (AAA). Asset quality of CIMB Group could weaken in 1Q15 following higher NPL for its Thailand and Indonesia operation (CIMB Thai and CIMB Niaga). On the primary market, police facility provider - Aman Sukuk priced MYR510m bonds, separated over 5 tranches – 3y@3.9%, 5y@4.14%, 7y@4.29%, 10y@4.47%, 12y@4.57% and 15y@4.7%. With these issuances, total outstanding for Aman Sukuk increases to MYR6.72bn out of its MYR10bn programme. Elsewhere, RAM assigned AAA preliminary rating to MYR1bn Sukuk Programme by Ihsan Sukuk Bhd, a special purpose vehicle of Khazanah. We also saw a new MYR360m civil servant receivables related facility from Cendana Sejati (AA1). Meanwhile, yields remain supported in both the corporate and govvies market following Bank Negara Governor signaled OPR to stay in the near future, while keeping the cut as an option if necessary. DanaInfra led the trading chart on combined MYR300m trades, while we note tightening by a couple of bps in the banking bonds such as Maybank, CIMB and RHB.

TRADE IDEA: MYR

Bond(s)	Malakoff Power 12/19 (AA3) (Last trade date: 24-Feb; Price: 100.98; Yield: 4.817%; 5y-MGS+c.121bps) (Amount o/s: MYR670m)
Comparable(s)	Tanjung BP (“TBP”) 8/19 (AA2) (Last trade date: 30-Mar; Price: 99.96; Yield: 4.549%; 5y-MGS+c.94bps) (Amount o/s: MYR525m)
Relative Value	We reiterate our preference on Malakoff Power 12/19 over Tanjung BP 8/19, our stance made firmer by the former’s upcoming IPO and resulting deleveraging advantage.  Malakoff 12/19, which has gained 12bps since our initial call on 22-May, still trades at a decent 27bps in yield over its one-notch higher-rated subsidiary Tanjung BP 8/19. We expect Malakoff’s estimated MYR1.80bn IPO slated for completion by 15-May will be a good upside catalyst. In light of strengthening fundamentals, we see Malakoff Power offering a better yield proposition despite a one-notch lower rating and structural subordination of holding company.
Fundamentals	Fundamentally, Malakoff’s credit profile is supported by: 1)     Diversified portfolio of 5 independent power producer subsidiaries (Segari, GB3, Prai Power, Tanjung BP, TBEI) with generating capacity of 5,393 MW including the under-constructing TBEI; 2)     The impact from delay of TBEI by 6-12 months to be minimal to Malakoff’s repayment profiles in the next 5 years as TBEI is expected to contribute only c. 5% to the operating cash flow during the period. Malakoff, however, dismissed reports of delays and stated that it will deliver the 1,000MW coal plant by March 2016; 3)     IPO to support deleveraging as the proceeds will be allocated to redeeming MYR1.8bn of Junior Sukuk, which currently account for additional finance costs of MYR113.4m per annum (6.3% coupon rate). We expect Malakoff’s pro-forma debt/equity ratio to reduce to 2.8x from 4.4x as of 31-Dec 14 based on consolidated borrowings of MYR18.23bn and shareholders’ equity of MYR4.18bn. However, we acknowledge that the IPO need to be completed before the repayment of MYR1.3bn TBEI’s equity bridging loans in 2017; and 4)     Stable and recurring cash generating capability mitigates its moderately geared balance sheet with gearing ratio and debt/EBITDA of 4.4x and 7.3x respectively. We expect the listing exercise to reduce debt/EBITDA to 6.6x on a pro-forma basis.