RHB FIC Credit Market Update 130515

13 May 2015

Credit Market Update

Strong Appetite for Chinese Supply; Huawei Debuts USD1.0bn 10y; TF Varlik 5/20 MYR Appears Attractive

REGIONAL

¨      Chinese supply floods the market; Huawei secures USD1.0bn in debut offering. Credit protection costs spiked over yesterday’s pickup in new bond sales, sending the iTraxx AxJ IG up 2.9bps to 108bps, while appetite for new Chinese bonds remained evidently strong. Spearheading the primary rush was Huawei (NR) with its first USD1.0bn 10y tap at T+195bps (IPT: T+220bps) on USD8.5bn orders (8.5x oversubscribed), the subscription base comprising 77% Asian investors and 58% fund managers. This was accompanied by China General Nuclear Power Corp (A3/A-/A+) pricing USD600m 10y notes at T+177.5bps (IPT: T+200bps), oversubscribed 6.3x) and Agile Property Holdings Ltd (Ba3/BB-/NR) supplying USD500m 5NC3 papers at T+9.125% (IPT: 9.375%), oversubscribed 3x.  Secondary trading was subdued and yields were generally flat in the major IG sectors of banking and O&G, although Chinese HY real estate credits were firmer as their yields narrowed 1-2bps on average. Brent crude prices moving up 3% to USD66.86/bbl had little impact on O&G papers with markets focusing on new deals. Meanwhile, recapping on the pipeline, China Metallurgical Group Corp (Baa3/BBB-/NR) and Shanghai Electric Group Co Ltd (A2/A/A) completed investor meetings yesterday while China Minsheng Bank (NR/BBB/BB+) will complete its own set today. On economic data, US NFIB small business optimism turned out slightly above expectations at 96.9 (prior: 95.2), while over in China, the markets await retail sales, industrial production and new loan and aggregate financing numbers.

¨      SGD primaries turn active after short-lull. The short-to-mid swaps were mostly unchanged yesterday, with the 3y and 5y widening around 0.6-1bps to close at 1.79% and 2.24% respectively. We saw some pickings into the O&G space on names like VALSZP, MIOAU and govt-owned KOROIL even as Brent oil prices retraced up to USD67/bbl currently. In the primaries, Sembcorp Industries (NR) is printing a SGD Pnc5 at initial guidance of around 5% while Frasers Centrepoint Ltd (Baa1/BBB+/-) is issuing a SGD7y at 3.65%.

MALAYSIA

¨      Focus on new 3y-GII; Small issuances from Turkish banks. Govvies yield inched higher yesterday as yields hike in the UST and Euro region. Notably, the 7y-MGS climbed 14bps to close at 3.92%, exceeded the 10y-MGS yield on Monday which settled at 3.878%. Elsewhere, market is looking forward for the new issue of MYR4bn 3y-GII 5/18 with auction closing tomorrow (14-May). On the corporate side, total volume breached MYR640m, led by AAA names such as Telekom 24s moved -2bps to +1bps trading in between 4.409%-4.414% with combined MYR80m reportedly done. On the primary front, we note some small prints from AA3-rated Turkish banks – TF Varlik 5/20 at 5.75% (MYR210m) and KT Kira 5/20 at 5.72% (MYR200m).

TRADE IDEA: MYR

Bond(s)

TF Varlik 5/20 (Price: 100; Yield: 5.75%; 5y MGS+c.216bps) (RAM: AA3) (Amt O/S: MYR200m)

Comparable(s)

KT Kira 3/20 (Trade date: 5-May; Price: ; Yield: 5.649%; 5y MGS+c.206bps) (RAM: AA3) (Amt O/S: MYR300m)

Relative Value

In relative value perspective, we view that the new issue of TF Varlik 5/20 appears attractive at 5.75%, which traded c.10bps above KT Kira 3/20 for 2 months longer tenure.  We think there is room for the paper to compress further as more familiarity is built up for foreign bank and scarcity value, while noting that some investors may face restrictions on trading Middle East names as well as geopolitical situation in Turkey.

Fundamentals

Fundamentally, we view that TF Varlik’s credit strength relies on the high probability of extraordinary support from majority shareholder, National Commercial Bank (66.3%) (A+/Sta), the largest bank in Saudi Arabia and majority owned by the Saudi Arabian government. Capitalization remains sufficient with T1 and CAR at 11.5% and 12.7% respectively.  However, we note deterioration in asset quality with NPL ratio moderated to 3.1% as at Mar-15 (from 2.6% in Dec-14).

*financial figures as at Mar-15.