RHB FIC Credit Market Update - 30/4/15

30 April 2015

Credit Market Update

Bharat Petroleum Priced USD500m at 5Y+208bps; Weaker 1Q15 GDP to Keep APAC Credits Flowing

                                                                                               

REGIONAL                                                                                      

¨      Weaker 1Q GDP in US to keep APAC credits flowing; Bharat Petroleum raises USD500m at 5Y+208. Credit protection costs inched up 0.26bps, with the iTraxx AxJ closing at 106bps. Credit markets again opened to steeper USTs as the 2y and 10y rates rose up 4.5bps and 8.3bps respectively. Overnight, the US GDP Annualized QoQ print registered below expectations at 0.2% (consensus: 1.0%) and weaker than 2.2% in 4Q14; core PCE QoQ lowered to 0.9% (consensus: 1.0%; prior: 1.1%) while pending home sales MoM weakened but met expectations at 1.1% (consensus: 1.0%; prior: 3.1%). Additionally, the Fed kept benchmark rates status quo at 0.25%, acknowledging slowdown in 1Q15 but expecting pickup in the subsequent quarter. Secondary trading remained quiet as the market was still preoccupied with new supply, led by Bharat Petroleum Corp (BPCL, Baa3/NR/BBB-) launching USD500m 10y notes priced at T+208bps (IPT: T+225bps) and oversubscribed 4.2x, marking India’s third dollar bond sale this week after Reliance Communications and Bank of India. Nonetheless, we noted secondary yields widening in the bank space, in particular CCB 17-24s (+2-6bps), ICBC complex (+1-7bps) and AXSBIN 15-20s (+1-4bps). Elsewhere, BHARTI 23-24s softened as yields rose 9-10bps following its 4QFY15 results announcement. In the pipeline, China Construction Bank (A1/A/A) will meet investors from 1-May onwards for its upcoming USD T2 deal. Upcoming data for the remainder of the week includes US initial jobless claims and China PMI prints.

¨      O&G interest as oil prices hit YTD high. We continued to see widening in the short-to-mid SOR curve, with the 3y and 5y widening by around 2.3-2.75bps to close at 1.53% and 1.89% respectively. We saw interest tilted towards the O&G space (NCLSP, EZISP) as Brent oil prices hit a YTD high of USD65/bbl. There was also demand in recently-printed papers such as UENVSP and in existing RLSSP ahead of the retap. In the primary market, Raffles Education (NR) successfully retap the market with RLSSP 5.9% 5/18 at final price of 100 and SoilBuild Business Space REIT (BBB-/-/-) are meeting investors for a SGD issuance.

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MALAYSIA

¨      MARC rates NNKSB at AA-; RAM expects CPO prices to be under pressured. Investors stayed active in the credit market with MYR764m transacted yesterday. Yields continued to move lower, notably in the banking bonds. HSBC Amanah 3/20 has narrowed by 9bps since issuance in 27-Mar to close at 4.146%. Also note tightening by couple of bps in some highly traded GG bonds - PTPTN 8/26, DanaInfra 4/40 and Prasarana 8/26. Govvies benchmarks moved sideways on relatively quiet activity of MYR1.5bn. Meanwhile, MARC assigned AA- rating to Grand Sepadu’s proposed MYR210m Sukuk, the concession owner of New North Klang Straits Bypass Expressway (NNKSB) which links from North Port to NKVE. RAM expects CPO prices to stay at the lower end of its forecast of MYR2,200-2,400/MT in 2Q15 (1Q15 averaged at MYR2,204/MT) and anticipate lower CPO prices in 2H15.

TRADE IDEA: USD

Bond(s)	Bank of India (BOIIN) BOIIN 3.125% 5/20 Senior (Baa3/NR/BBB-) (price: 99.46 yield: 3.24%; T+185bps) (O/S amount: USD750m)
Comparable(s)	BOIIN 6.25% 2/21 Senior (Baa3/NR/BBB-) (price: 114.72; yield: 3.42%; Z+178bps) (O/S amount: USD500m ) ICICI Bank Ltd, ICICI 5.75% 11/20 Senior (Baa3/BBB-/BBB-) price: 113.71; yield: 3.04%; Z+144bps) (O/S amount: USD1.0bn) Syndicated Bank of India, SNDBIN 3.875% 12/19 Senior (Baa3/BBB-/NR) (price: 102.43; yield: 3.30%; Z+184bps) (O/S amount: USD400m) IDBI Bank Ltd, IDBI 4.125% 4/20 Senior (Baa3/BB+/BBB-) (price: 101.82; yield: 3.72%; Z+220bps) (O/S amount: USD350m)
Relative Value	We think the new BOIIN 3.125% 5/20 Senior is fairly valued against Indian bank peers. While offering 25bps pickup in yield (after tenor adjustment) against recently downgraded ICICI 11/20, we view the differential as justifiable as ICICI’s superior credit metrics, scale and reach and diversified loan base compensate for BOIIN’s very high likelihood of government support. We also note SNDBIN 12/19 offering 10bps more over BOIIN 5/20 considering SNDBIN’s better credit metrics. Finally, while IDBI 4/20 trades much wider than BOIIN 5/20 after adjustments by 48bps, we note that the former is on review for downgrade by Moody’s on deteriorating credit fundamentals and has a high exposure to corporate borrowers. For investors wishing to gain exposure to BOIIN, we prefer BOIIN 5/20 over BOIIN 6.25% 2/21 as the former trades 10bps wider in adjusted yield while being larger in size.
Fundamentals	We view BOIIN’s credit profile to be sound based on the following: 1)     Very high likelihood of systemic support, as BOIIN is 64.4%-owned by the Government of India, which has demonstrated support in the form of capital injections; 2)     Strong domestic franchise, being India’s third-largest public-sector bank in terms of assets and deposits and having a well-established nationwide presence; and 3)     Stable liquidity and funding, with a loan/deposit ratio of 80.35% and deposits making up over 90% of funding. Notwithstanding, BOIIN’s credit profile remains challenged by declining profitability (NIM: 2.29%), pressured asset quality (NPL ratio: 3.48%) and weak capitalization metrics (T1 ratio: 7.42%). All financial data as 31-Mar 14