FW: RHB FIC Credit Market Update - 17/6/15

17 June 2015

Credit Market Update

Negative Sentiment Picks Up, Yields Resilient; Favour HUWHY 1/22 USD

REGIONAL

¨      Negative sentiment picks up; yields resilient. Credit protection costs continued their ascent, with the iTraxx AxJ IG up 1.2bps to 113.0bps as growing concerns over a Greek default added pressure on risk appetite. Credit markets opened to more benign UST rates, which were 2-4bps lower the night before; USTs subsequently traced downward by the roughly the same quantum on persisting safe haven demand and softer housing starts data. However, credit trading volume remained dampened on generally weaker sentiment and in the absence of new deal flows. However, average yields on both IG corporate and banking fronts held resilient, shedding around 1-2bps. The exception in yesterday’s session was HY Indonesian corporates, which saw yields spike 17-18bps in general.  In the pipeline, DBS Bank Ltd (Aa1/AA-/NR) is expected to hold investor meetings for a USD10.0bn covered bond program (expected rating: Aaa/NR/AAA), Singapore’s first covered bond issuance, with more details to emerge. In India, Power Finance Corp Ltd (Baa3/BBB-/BBB-) is planning to raise USD issues to fund projects, meetings to begin from 18-Jun onwards. Meanwhile, the markets continue to monitor developments on the FOMC meeting and Greek financial situation.

¨      The SOR curve flattened with the 10y inched 4bps lower (to 2.74%); while the 3y and 5y rates fell 2bps to 1.71% and 2.17% respectively. On the primary front, CW Group Holdings Ltd (UR) priced a 3y SGD75m note at 7%.

MALAYSIA

¨      MYR bonds traded flat; IJM granted extension on Kuantan Port concession. MYR credits closed flat during yesterday’s relatively quiet session, as market players stayed cautious ahead of the FOMC meeting today.  In the corporate market, we saw MYR70m traded in the long-dated PLUS complex, yields ending flat and ranging from 4.488%-4.779% for tranches 1/26-1/32. In rating news, RAM assigned a AAA rating to Toyota Capital’s proposed CP/MTN programme of up to MYR2.5bn. Elsewhere, IJM’s concession to operate Kuantan Port has been extended by 30 years, commencing 1-Jun-15.  The concession period shall be extended for a further period of 30 years subject to the fulfillment of the Phase 2 development of the New Deep Water Terminal by 31 December 2039. Meanwhile, Press Metal is to take up 500MW power by 4Q 2015, as its Phase 3 smelter is expected to come into operation by then.

TRADE IDEA: USD

Bond(s)

Hutchison Whampoa Ltd (HUWHY) 4.625% 01/22 (A3/A-/A-) (Price: 108.66; YTM: 3.15%; Z+113bps) (Amt o/s: USD1.48bn)

Comparable(s)

HUWHY 3.25% 11/22 (A3/A-/A-) (Price: 100.63; YTM: 3.15%; Z+101bps) (Amt o/s: USD500m)

Relative Value

We favor HUWHY 01/22 among the HUWHY complex and opine that it offers about 10bps yield pickup against the curve as well as slightly longer-dated HUWHY 11/22. We see the pickup in developed markets' economic growth relative to China's slowdown as a catalyst to invest into the bond, which offers an attractive yield above 3% for well-diversified and defensive exposures to ports, telco and infrastructure businesses across UK and Europe. Additionally, we expect these businesses to scale following the Group's recent purchase of Eversolt Rail, corporate restructuring with Cheung Kong, and pending mega acquisition of O2 for over GBP9.25bn.

Fundamentals

We are comfortable with HUWHY's fundamentals given its:

1)     Consistent EBITDA and EBITDA margin improvement since FY11, from HKD34.7bn and 14.8 to HKD51.9bn and 19.05% respectively.

2)     Well-diversified portfolio with Telco (35% of EBITDA), Retail (Watson) (24%), Ports (16%), Property (15%), Infrastructure (5%), and other (5%) business operating across Europe (48% of EBITDA), Hong Kong (16%), Mainland China (15%), and others (21%).

3)     Cash generation and debt level improvement with FCF rising to HKD26.6bn and net debt reducing to HKD130.3bn, 25.1% of equity and 2.5x of EBITDA (FY13: HKD21.5bn, HKD145.1bn, 30.5% and 3.2x).

4)     Credible management track record (controlled by tychoon Li Ka-shing) and commitment to maintain credit ratings at current levels despite active M&A activities.

All financial data as at Dec-2014