RHB FIC Credit Market Update 120515

12 May 2015

Credit Market Update

Credit Protection Costs Fell Following PBoC Cut; Huawei to Tap USD10y; New CCB B3T2 Fairly Priced               

REGIONAL                                                                                         

¨      Huawei to deliver 10y tap today; mixed performance on Monday post PBOC rates cut. Credit protection costs continued descending, with the iTraxx AxJ IG inching down 1.5bps to 105bps yesterday, following news of China’s 25bps rate cut. However, APAC credit markets, which opened to a bull steepened (1-8bps) UST curve and the positive rate cut news, saw relatively light flows and mixed performance. In IG banks, yields closed 3bps tighter led by higher-yielding Thai and Indian names including BBLTB 29, KBANK 16, BOIIN 20 and ICICI 18. Conversely, IG real estate yields were 7bps wider, while O&G yields added 3.6bps on average amid a marginal 0.7% decrease in Brent crude to USD64.91/bbl. On the HY front, China-based coal importer Winsway Enterprises Holdings defaulted on its 8.5% 2016 notes, failing to meet USD13.15m in coupons. HY credits were generally weaker partly on this news but mostly due to a 23bps widening in real estate yields, although we did note O&G yields shedding 1.7bps. 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.

¨      On the USD primary front, Korea Development Bank (Aa3/A+/AA-) sold USD500m 5y notes yesterday at T+72.5bps (IPT: T+80bps), its first USD tap since last September and oversubscribed 2.6x. Today, we expect Huawei Investment & Holding Co Ltd (NR) to lead activity with USD 10y papers at an initial price target around T+220bps. In addition, China General Nuclear Power Corp (A3/A-/A+) will price 10y notes at an initial guidance of T+200bps along with Agile Property Holdings Ltd (Ba3/BB-/NR) which is supplying 5NC3 papers is starting at an initial guidance of 9.375%. Meanwhile, Shanghai Electric Group Co Ltd (A2/A/A) is holding investor calls today while Beijing State-Owned Assets Management (Hong Kong) Co. (A3/A-/A) is planning USD Reg S bonds, with investor meetings commencing tomorrow.

¨      SGD issuance space quite on volatile SORs. The short-to-mid swap curve saw a parallel decline, with the 3y and 5y tightening by -4.5bps to close at 1.73% and 2.14% respectively. We saw demand interest in higher-yielding names like UENVSP and HYFSP as well as buying into CENCHI, probably from the recent PBoC interest rate cut of 25bps. The primaries continue to be quiet as issuers stay at the sidelines due to the volatility in the swap rates this past two weeks.

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MALAYSIA

¨      Slower start on Monday for MYR bonds, index gain +0.09% as China cuts further. Only MYR1.86bn was transacted for the govvies, with MGS 10/20 top the volume at MYR359m, ended the day at 3.581% (-2.2bps), while GII 8/20 and 10/25 yields fell 0.3bps-1.2bps to close at 3.71% and 3.984% respectively. We saw interesting trade on the off-benchmark 7/24 at 4.016% vs the benchmark MGS10y at 3.878% for yield pick-up of up to 13.8bps, ceteris paribus. On the corporates, MYR597m was reportedly done, dominated by the PLUS complex maturing 2022-28 at the range of 4.248%-4.569% worth MYR161m in nominal. MYR80m of KLIA 1/16 changed hands, ended at 3.531% while CIMB 38c18 shaved 1.1bps to 4.646% with MYR20m transacted.

TRADE IDEA: USD

Bond(s)	China Construction Bank Corp (CCB, A1/A/A) CCB 3.875% 25c20 B3T2 (price: 99.77; ytc: 3.925% ; T+234bps)(NR/BBB+/BBB+)(amount o/s: USD2.0bn)
Comparable(s)	CCB Asia 4.5% 24c19 B3T2 (price: 102.19; ytc: 3.689%; T+211bps)(Baa1/NR/A-)(amount o/s: USD750m) BOCOM 4.5% 24c19 B3T2 (price: 102.679; ytc: 3.829%; T+225bps)(NR/NR/BBB+)(amount o/s: USD1.2bn)
Relative Value	We think the recently issued CCB 3.875% 25c20 B3T2 is reasonably priced against its closest peers after adjusting for duration and credit differences. On its own curve, CCB 25c20 offers a 10bps pickup in yield over CCB Asia 24c19 after accounting for the 1-notch lower rating of the former due to its full-write down mechanism, as opposed to the latter allowing for partial write-downs in a non-viability event (PONV). Additionally, CCB 25c20 PONV trigger falls within China’s jurisdiction, where statutory bail-in rules have yet to be adopted and the consensus of authorities, including the central bank (PBOC) and regulatory bodies (e.g., CBRC), is still not firm on bail-in being the preferred method of resolving banks and ensuring financial system stability. In CCB Asia 24c19’s case, however, Hong Kong Monetary Authority is expected to adopt statutory bail-in rules by the end of 2015.
Fundamentals	We view CCB’s credit profile to be fundamentally strong on the following key considerations:  1)     Second-largest commercial bank in China by assets, with a 10% share of total system assets as well as 12% shares in both system loans and deposits; 2)     Extreme likelihood of systemic support, given CCB’s tight government linkage (57% state-owned), its significant size and strong connection to the domestic financial system; 3)     Above-average profitability, reflected by net interest margin and return on assets of 2.72% and 1.57% respectively; 4)     Superior capitalization, evidenced by CET1, T1 and CAR ratios of 12.5%, 12.5% and 14.97% respectively; and 5)     Good funding base and liquidity, as CCB maintains a healthy loan/deposit ratio of 71.8% (1Q14: 69.38%) under the statutory limit of 75%. All financial data as of 31-Mar 15