RHB FIC Credit Market Update - 25/6/15

25 June 2015

Credit Market Update

                                       

Balanced Trading in Reactivated Primary Market; Pavilion REIT Establishes MYR8.0bn MTN Programme; Eversendai Lowered to A2

REGIONAL                                                                                      

¨      Risk priced slightly higher; balanced secondary trading. Price of risk protection rose slightly as the iTraxx AxJ IG added 1.8bps to 108.1bps, driven mainly by risk aversion on Greece reaching an impasse with creditors yesterday. This led to the UST curve flattening as the 3y, 5y and 10y rates tightened 2.4bps, 3.0bps and 4.2bps respectively, despite mixed economic prints, namely a positive final revision in 1Q GDP to -0.2% YoY (from -0.7%); higher home sales of 546k in May (prior: 517k, consensus: 523k); but lower PMI of 53.4 in June (prior: 54.0, consensus: 54.1). Back in APAC, secondary trading ended with equal gainers and losers. Gainers were led by NOBLSP complex and Chinese real estate papers like CHIOLI complex; while wider yields were seen for Australian and Korean banks like NAB 31-43 and WOORIB 15-24.

¨      Active primary led by BCHINA. Primary markets were reactivated after a quiet 2 weeks leading up to FOMC. The USD portion of Bank of China’s (BCHINA, A1/A/NR) ‘Silk Road’ issuance sold USD1bn 3y bonds at +115bps (IPT+140), USD800m 5y at +125 (IPT+150), and USD500m 10y at +157.5 (IPT+180); China SCE (CHINSC, B2/B/NR) sold USD350m 5nc3 bonds at 10% (IPT of 10.5%); and Korea Resources (KORESC, Aa3/A+/NR) tapped USD120m 2.875% 2019s (IPT+100bps). Developments in the pipeline include Shanghai Construction Group (SHCONS, Baa1/BBB/BBB) beginning roadshows and CJ Chiljedang (CJCHEI, NR) appointing arrangers.

¨      FESHRU and CMHI upgraded. Rating actions seen include Far Eastern Shipping (FESHRU, NR/B-/B-) upgraded to B- by S&P; China Merchants Holdings (CMHI, Baa1/BBB+/NR) upgraded to Baa1 from Baa2 by Moody’s; while China Shanshui Cement Group (SHANSHU, NR/CCC-/B+) was placed on negative watch by Fitch.

¨      Interest tilted towards IG names. The short-to-mid curve marginally flattened, with the 3y and 5y rising by +1.7bps (to 1.71%) and +0.25bps (to 2.18%) respectively. We saw interest tilted towards IG names, with demand seen in property papers like CITSP and FCLSP as well as O&G and logistic names such as NOLSP and KEPSP. In the primaries, Bank of China (A1/A/A) printed a SGD500m 4y at final price of 2.75%, 25bps inside initial guidance, with BTC around 3x. Looking ahead, investors will be eyeing the release of the SG May Industrial Production numbers, which is expected to dampen (consensus: -2.6%; Apr: -8.7%).

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MALAYSIA

¨      Credit moved sideways; New MYR8bn MTN Programme from Pavilion REIT; RAM downgraded Eversendai to A2/stable from AA3/negative (refer Credit Idea).  Credit market closed sideways on relatively thin trading session. Investors were active in concessionary bonds – notably, BFB 1/29 settled flat at 5.459% whereas K-Prohawk 6/26 widened 2bps to 4.789%. Meanwhile, yields for the 3y-10y MGS benchmarks inched 2bps-3bps higher to 3.19%-4.01% before the auction announcement of 5y-GII reopening. On the primary front, Pavilion REIT established a new MYR8bn MTN Programme for its investment activities, refinancing and working capital purposes. We view part of the bond proceeds could also be utilized to finance the acquisition of the upcoming Pavilion 2 in Bukit Jalil once completed.

TRADE IDEA: USD

Bond(s)	Bank of China Ltd (BCHINA, A1/A/A) BCHINA 2.125% 6/18 (T+115bps) (O/S amt: USD1.0bn) BCHINA 2.875% 6/20 (T+125bps) (O/S amt: USD800m) BCHINA 3.875% 6/25 (T+158bps) (O/S amt: USD500m)
Comparable(s)	AGRBK 2% 5/18 (A1/NR/A-)(price: 100.025; yield: 1.991%; T+95bps; Z+75bps)(O/S amt: USD500m) AGRBK 2.75% 5/20 (A1/NR/A-)(price: 99.916; yield: 2.768%; T+109bps; Z+100bps) (O/S amt: USD500m) ICBC 2.625% 5/20 (A1/A/A)(price: 99.136; yield: 2.814%; T+113bps; Z+104bps) (O/S amt: USD500m) BCHINA 3.125% 1/19 (A1/A/A)(price: 102.48; yield: 2.395%; T+135bps; Z+96bps)(O/S amt: USD500m) CCB 3.25% 7/19 (A2/NR/NR)(price: 101.912; yield: 2.743%; T+187bps; Z+119bps)(O/S amt: USD600m)
Relative Value	We prefer the new BCHINA 18 and 20 over recently-issued Chinese seniors, AGRBK 18, AGRBK 20 and ICBC 20, as they offer 10-20bps spread pickup as well as larger sizes. We also think the BCHINA 25 offers a decent yield pickup for the duration extension, adding c.20bps/year over the new BCHINA 20; however, BCHINA 25’s liquidity profile is weaker due to its smaller size and longer tenure.
Fundamentals	BCHINA has a strong credit profile backed by the following key factors: 1)      Significant asset size and reach as China’s fourth-largest commercial bank, with a share of 9% of total system assets. BCHINA is also the world’s ninth-largest bank by assets and is designated as a global systemically-important financial institution (GIFI); 2)      Very strong systemic support assumptions uphold BCHINA’s credit standing, given an effective 70%-ownership by the state (via Central Huijin Investment) and the bank’s GIFI status; 3)      Better diversification in credit exposure than other major Chinese banks, as BCHINA’s foreign credit exposure is larger (26% of total assets) moderating rising asset quality risks in China. Presently, we view BCHINA’s asset quality to be manageable, reflected by a gross NPL ratio of 1.33% (industry: 1.38%); 4)      Well-capitalized, evidenced by CET1, T1 and CAR ratios of 10.87%, 11.85% and 14.13% respectively (FY14 industry: 10.56%, 10.76% and 13.18%); and 5)      Decent liquidity and funding profile, with loan/deposit ratio standing at 74.48%, just under the 75% regulatory limit. Key moderating factors to BCHINA’s credit profile are 1) its weaker-than-average net interest margins owing to its lower-yielding, foreign-currency loans; and 2) increasing competition for deposit funding and higher wholesale funding requirements for overseas exposures which leads to greater liquidity risks. *all financial data as of 31-Mar 15

CREDIT IDEA

Company/ Issuer	Sector	Country	Update	RHBFIC View
Eversendai  Corporation Bhd (“Eversendai”) (RAM: A2/Stable)	Construction	MY	RAM has downgraded Eversendai to A2/Stable from AA3/Negative underpinned by the deterioration of Eversendai’s balance sheet and debt protection metric over the last 2 years. Gearing has increased to 0.85x as at end-Mar (compared to 0.33x 2 years ago), following the investments in the O&G fabrication business and land acquisition in 2013. Bottomline for the past few years, meanwhile, had plunged due to variation works in 2 projects in Qatar and India. RAM views that gearing could edge up further to supports its working capital needs amid  plans to double its top line to RM2 billion by 2017.	The downgrade is in-line with our earlier underweight view on Eversendai’s credit outlook pressured by its high borrowings, dismal profitability as well as weaker outlook for O&G sector. In addition, project concentration in the Middle East region (c. 75% of orderbook is from the region) could potentially pose risk to Eversendai vis-à-vis the geopolitical tension and regulatory environment.