RHB FIC Credit Market Update - 6/5/15

6 May 2015

Credit Market Update

More USD Supply in Store; CCB to Price USD B3T2 Today; Maintain Preference for NCLSP 8/17 SGD                      

REGIONAL                                                                                      

¨      Further supply in store amid sustained risk appetite; CCB to price USD B3T2 today. Credit protection costs rose marginally, with the iTraxx AxJ closing 0.34bps wider at 105bps. Credit markets saw a slightly steeper (0-3bps) UST curve at opening, the 2y and 10y rates up 0.4bps and 3bps respectively, ahead of Brent crude prices settling 1.6% higher at USD67.52/bbl. Secondary markets remained in a lulled state amid new deal flows, with credit yields adjusting upward slightly by 1-2bps and the O&G space seeing similar broad moves despite better crude pricing. We noted OCBCSP complex yields closing 1-2bps wider in general while the bank announced plans to boost consumer-banking efforts in mainland China. Meanwhile, investors returned to train their sights on new prints including Shinsegae Inc.’s USD300m 30y PNC5 notes, guaranteed by Kookmin Bank (A1/A/A), sold at T+125bps (IPT: T+150bps), and China Energy Reserve’s (NR) USD200m 3y tap priced at 5.25% (IPT: 5.375%), oversubscribed 4.25x and mostly secured by Asian banks (33%), private banks (33%) and funds (24%). In today’s primary lineup, China-based downstream natural gas player and subsidiary of China National Petroleum Corp, Kunlun Energy (A1/A+/A), is debuting USD 5y and 10y notes at IPTs of T+165bps and T+190bps respectively; while China Construction Bank (CCB, A1/A/A) will be selling USD 10NC5 T2 notes at an IPT of T+255bps. Adding on to the pipeline, China General Nuclear Power (A3/A-/A+) will begin roadshows from 7-May for a potential corp-guaranteed USD deal.

¨      SORs continued to broaden; Interest seen in real estate names. We saw continued widening in the short-to-mid SORs, with the 3y and 5y broadening by around 5.25-6bps to close at 1.68% and 2.01% respectively. We observed interest in real estate names such as HPLSP and OUESP as well as some pickings in SWIBSP PcSept-2015 after yesterday’s partial buyback (SGD0.75m of SGD80m), though it is still too early to say if its papers are bottoming out.

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MALAYSIA

¨      Quiet start to May, curve mildly flatter before MPC tomorrow. Corporate bonds netted total of MYR471m transactions, with Danainfra complex 22-39 reportedly traded at 4.089%-4.78% range for MYR95m. BFB 1/31 shaved 21.6bps to its yield to 5.928% with MYR50m changing hands. HSBC Amanah 10/19 ended the day at 4.098%, rose 0.4bps with total MYR35m trades. Onto govvies, main bulk of MYR2.576bn transacted coming from MGS 10/20's MYR981m trade, ended the day 1.4bps lower to 3.573%. Meanwhile Etiqa and Etiqa Takaful was reaffirmed at AAA/P1 by RAM.

TRADE IDEA: SGD

Bond(s)	NCLSP 8/17 (yield: 5.47%; SOR+c.400bps) (NR) (outstanding: SGD90m)
Comparable(s)	EZISP 8/18 (yield: 5.07%; SOR+c.360bps) (NR) (outstanding: SGD60m)
Relative Value	We continue to like NCLSP 8/17, and believe its wider yields are not indicative of its strong fundamentals as well as improving outlook. NCLSP 8/17, together with the broader OSV space, is under water due to overall bleaker sentiment since 4Q2014 due to falling oil prices. Nevertheless, there are signs that Brent oil prices are reversing upwards, and are now trading at c.USD68/bbl. We opine that Nam Cheong, with its build-to-stock model (as elaborated below), will gain in the event of a recovery.
Fundamentals	We like Nam Cheong as the company displays:  1)     Robust credit fundamentals and strong orderbook. The company has solid financials compared to its other OSV peers, with FY2014 Total Debt/ EBITDA at 4.1x (peers: 8.2x) and EBITDA Interest Coverage at 20.2x (peers: 14.7x). In addition, it has a comfortable order book of around MYR1.7bn (end FY2014). Lastly, its current cash position (SGD800m) is adequate to cover the maturing its short-term debt of MYR556m. 2)     Build-to-stock model potentially gain from oil price recovery. In this volatile oil price environment, vessel owners may prefer to secure contracts before ordering vessels, with owners having between 6-9 months to commence chartering. Nam Cheong will benefit as it will be able to give faster delivery than build-to-order as vessel construction takes between 14-24 months.  3)     Clear earnings and hence better cashflow visibility. Nam Cheong has sold over 75% of its planned vessel stocks (35 vessels) for 2015, hence this provides some cash flow visibility for the company for this year and allays any fears of unsold stock remaining on its inventory. OSV peers: Ezion, Swiber, Ezra, Keppel Corp, Sembcorp Marine, Pacific Radiance, KrisEnergy