RHB FIC Credit Market Update - 11/5/15

11 May 2015

Credit Market Update

Stronger NFP and China Stimulus Set Positive Tone; MYR Bonds Flat Post MPC; Preference for FIRTSP 5/18 SGD

REGIONAL                                                                                      

¨      China stimulus and stronger NFP set positive tone for APAC credits. Credit protection costs via the iTraxx AxJ IG lowered 1.7bps to 107bps last Friday underscoring stable sentiment ahead of a much better NFP print of 213K (prior: 129K) and China’s interest rate cut on Sunday, which saw both 1y lending and deposit rates lower by 25bps to 5.1% and 2.25% respectively. The rate cut was the third since last November and reflects the PBOC’s flexibility and eagerness in easing monetary policy. Last Friday, secondary markets generally ended on a firmer tone, with yields tightening 2-3bps on average, as a break in primary activity allowed investors to shift their attention. In the IG space, we noted the recently-issued CNOOC 25s tightening 6.6bps in yield, while the new CHINAM 3y notes compressed as much as 13bps as appetite for Chinese bonds remains solid. Meanwhile, new to the pipeline is China Minsheng Banking (NR/BBB/BB+), which is planning meetings from today onwards on a possible USD tap. We expect credit performance this week to be stable as the markets open to the positive China stimulus news. Important US economic data to look forward to this week includes NFIB small business optimism, retail sales, PPI, initial jobless claims, industrial production and consumer confidence. Over in China, the data lineup consists of new loan and aggregate financing data today, followed by retail sales, industrial production, and foreign direct investment.

¨      Interest on IG as SORs ended tighter on Friday. The short-to-mid SOR flattened on Friday, with the 3y and 5y closing at 1.77% (-1.9bps) and 2.18% (-3.2bps) respectively. We saw demand interest centered towards IG names such as SPSP, HDBSP and CAPITA as the underlying SOR rates ended the week lower. This reversed an earlier inclination for higher yield bonds when SORs widened strongly by 15-20bps in the first half of last week.

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MALAYSIA

¨      Ringgit bonds ended mostly flat post-MPC. The MPC result of an unchanged OPR was widely expected by the market last Thursday, where BNM mentioned soft inflation and spending due to lower oil prices and the GST. This led to a pretty quiet Friday with MGS/GII volume of only MYR1.99bn, yields hardly moved in the absence of fresh catalysts. Focus was seen in the short to mid-tenures as GII 11/16 closed at 3.388% as the most actively traded. MGS 10/20 added 0.5bps to 3.603% while MGS 9/22 ended the day at 3.787%. Corporates appeared to be more active with MYR1.422bn in nominal value done, with trades concentrated on GREs and high-AAA papers. CAGA 5/16 realigned by 23bps to 3.527% on MYR120m volume, while Prasarana, PASB and PLUS contributed the most of the volume.

TRADE IDEA: SGD

Bond(s)	FIRTSP 5/18 (yield: 3.75% ; SOR+200bps)(NR)(outstanding: SGD100m)
Comparable(s)	SUNSP 2/20 (yield: 2.90%; SOR+70bps)(Baa2)(outstanding: SGD310m)
Relative Value	We like FIRTSP 5/18, a healthcare REIT with strong exposure in Indonesia (c.95% of revenue), due to its stable expected cash flows and cheaper valuations. If compared to SUNSP 2/20, and allowing for a 2y difference in duration, we opine that FIRTSP 5/18 should provide a pick-up of around 20-30bps.
Fundamentals	We believe that FIRST REIT has strong fundamentals and outlook due to:  1)     Robust credit fundamentals. If compared to its SG REIT peers, it has a healthier credit profile, with leverage at 32.7% (peers: 34%), Total Debt/ EBITDA at 4.55x (peers: 9.3x) and EBITDA Interest Coverage at 5.4x (peers: 4.6x). 2)     Stable cash flows. It has stable cashflows as it has full occupancy rates and long lease rental agreements (averaging 11.2 years) with the hospital operator, Siloam Hospitals. As most of its operations are in Indonesia, the REIT is insulated from forex fluctuations as the Indonesian rental agreements are structured in SGD. 3)     Strong franchise supported by established sponsor. Siloam Hospitals is owned by PT Lippo Karawaci Tbk, an established property developer in Indonesia, who is also the largest shareholder in FIRST REIT at 27.7%. Though we acknowledge the presence of concentration risk, we believe that the underlying stable demand for healthcare and the established business of PT Lippo Karawaci should moderate any concerns in this area.