A More Dovish (or Less Hawkish) Fed to Cap Credit Volatility; Maxis Plans MYR5bn Sukuk; Switch to YTL 4/23

18 June 2015

Credit Market Update

A More Dovish (or Less Hawkish) Fed to Cap Credit Volatility; Maxis Plans MYR5bn Sukuk; Switch to YTL 4/23

REGIONAL

¨      Fed holds rates, lowers FFR forecast; no major volatility pickup in credits. Credit protection costs reversed direction yesterday as the iTraxx AxJ IG lowered 1.4bps to 111.6bps. USTs advanced after the Fed held interest rates and officials cut their long-term forecasts for the federal funds rate; UST rates lowered 1-5bps across the curve overnight. Despite negative sentiment emanating from the Eurozone, Asian credits were fairly supported amid a lack of new supply since last Friday. We noted IG corporate yields ending a touch wider by 1.1bps while bank yields settled flat. On the HY front, yields were 5bps firmer, with real estate names shedding 7bps on average. Meanwhile, Indonesian HY credits recouped losses from the prior session as yields narrowed 8bps in general. In the news, Shanshui Cement’s 2020 bonds fell 5.5ppts after S&P slashed its ratings to CCC from B on heightened liquidity risks following the firm’s placement into receivership and in consideration of a potential change in control if the chairman is removed, which could trigger early redemption of the notes. Separately, in the primary pipeline, AirAsia Berhad (NR) is eyeing up to USD300m 2y convertible bonds. On the economic front, we noted China’s FDI print lowering to 7.8% YoY (prior: 10.5%) while China May home prices dropped in fewer cities, 41 compared to 47 in April, reflecting some demand recovery.

¨      SORs widened, diverging from UST movements. SORs curve shifted up c.1.5bps with 3y, 5y, and 10y widening to 1.72%, 2.185% and 2.755% respectively, diverging from UST curve bull flattener the night earlier (with 3y, 5y and 10y tightening 3-5bps). Secondary trading was quiet ahead of last night’s FOMC meeting. Yields widened for names like LLCAU 17, SPSP 20 and PSASP 20; while TCOMIN 16, PILLSP 17 and GEMAU 17 saw some buying interest. Economic data was weaker with non-oil domestic exports declining 0.2% YoY in May (prior: 2.2%, consensus: 2.3%) and automobile COE open bids at 61k-75k (1k-5k lower than prior/2 weeks ago).

MALAYSIA

¨      Quiet PDS market amid rally in the government bonds; Maxis to raise up to MYR5bn from unrated Sukuk. MGS gained across the curve with the 3y-10y benchmark yields fell 5bps-7bps to 3.28%-4.04%, taking cue from the lower overnight UST yields. Govvies yields likely to be supported over the near term after the dovish stance from the Fed last night. Meanwhile, activity were thin at MYR386m in the corporate market amid the volatility in the sovereign front. BFB 1/22 led the volume chart with MYR60m exchanging hands at 4.732% (+2.1bps). On the primary market, Maxis established a 30 years unrated Sukuk Programme of up to MYR5bn to fund its capex, working capital and refinancing purposes.

TRADE IDEA: MYR

Bond(s)

YTL Power International Bhd (“YTLPI”)

YTLPI 4/23 (RAM: AA1) (Last trade: 22-May; Price: 97.7; Yield: 4.731%; 10y-MGS+ c.70bps) (Amt O/S: MYR1.0bn)

Comparable(s)

YTLPI 10/24 (RAM: AA1) (Last trade: 22-May; Price: 101.49; Yield: 4.751%; 10y-MGS+ c.71bps) (Amt O/S: MYR700m) Sarawak Energy Bhd (“SEB”) SEB 7/24 (RAM: AA1) (Last trade: 5-Jun; Price: 102.57; Yield: 4.649%; 10y-MGS+ c.61bps) (Amt O/S: MYR600m)

Relative Value

We recommend switching to YTLPI 4/23 from YTLPI 10/24. Meanwhile, we now see greater value in the shorter-dated YTLPI 4/23 which offers 10bps pickup to YTL 10/24 and 18bps against SEB 7/24, after adjusting for tenure. We also note better liquidity in YTLPI 4/23 given its larger amount outstanding. YTLPI continues to demonstrate solid financial position based on its recent 3Q15 result, mitigating the structural subordination of YTLPI debts.

Fundamentals

YTLPI’s credit profile is supported by the following:

1)     Stable business profile. YTLPI’s key profit generators are from its utilities assets in Singapore (Power Seraya) and UK (Wessex Water). Each of the assets has been contributing MYR500-800m to the Group’s PBT for the last 3 years; and

2)     Strong balance sheet. Supported by huge cash and deposit balances of MYR9.7bn, YTLPI net debt stood at MYR15bn (gearing: 2.4x, net gearing: 1.4x) and net debt-to-EBITDA of 4.5x.

Nonetheless, we note some uncertainty in the PPA renewals, with the EC’s decision still pending for YTLPI’s Paka and Pasir Gudang Power Plants (1,212 MW capacity) expiring on 30 Sep 2015.

*All financial figures as at Mar-15.

CREDIT IDEA

Company/ Issuer

Sector

Country

Update

RHBFIC View

Maxis Berhad (Maxis, NR)

Telcos

MY

Maxis is planning to issue up to MYR5.0bn in unrated Islamic MTNs (program tenure: 30 years) to fund capex, working capital needs and refinancing. Approval had been granted by the Securities Commission as of 17-Jun. Further guidance on issue size and the amounts to be allocated to capex are pending.

Maintain marketweight stance on indirect parent, BGSM Management (BGSM). While awaiting further guidance on initial issuance size, we opine that the added indebtedness should not raise BGSM group debt/equity ratio, which was 0.54x as of 30-Jun 14, over the 2.0x covenanted level under its MYR1.0bn sukuk program given that part of the proceeds will be used for refinancing. Maxis’ management has hinted on upside to its FY15 MYR1.1bn capex guidance, which bears further clarification. We think the new issues should help to ease working capital/liquidity demands.