RHB FIC Credit Market Update - 30/6/15

30 June 2015

Credit Market Update

                                       

Risk Aversion Spreads; Asian Credits Generally Stable; See Value in BFB 1/22 MYR; Senior Creditors Safe Under Singapore Bail-In Proposal

REGIONAL                                                                                      

¨      Risk aversion spillover from Greece predicament; Asian credit appears resilient. Market risk aversion took a turn for the worse after Greece failed to secure an agreement with creditors last Friday, where in Asia the iTraxx AxJ IG surged 6.6bps to 114.8bps as a result. Regional equity indices were also hit, particularly Shanghai’s Composite Index, which weakened 3.3% despite the People’s Bank of China’s rate cuts. On the other hand, USTs drew safe haven flows in response and saw rates narrow 7-15bps overnight. In addition, Asian credits were generally resilient, reflected by IG bank and corporate yields shedding 2-5bps on average, while HY corporates erased just over a week’s worth of gains as yields widened 15bps, not overdone in our view. Nonetheless, we expect the market to adopt a cautious stance toward HY credit at least until Greece’s crisis resolves, although we think the impact of such an event should rightfully be contained within the Eurozone. Turning to the primary front, there were no new USD sales yesterday and we expect new issues will be held back until the dust settles. Key economic data coming out today includes US consumer confidence index, Eurozone CPI and unemployment, and China PMI data.

¨      Thinner flows expected; Interest in IG names. The short-to-mid curve marginally flattened, with the 3y rising by +0.25bps (to 1.72%) while the 5y fell -1.5bps (to 2.22%). Greek concerns dominated headlines, with corporate flows on Monday treading carefully, and we expect this trend to continue throughout this week before the release of the US June NFP on 2-July and the Greek referendum results on 5-July. That said, we still saw some interest towards the IG space, on names like SCISP and CHEUNG Perps as well as SGREIT and SUNSP.

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MALAYSIA

¨      Tightening in PDS market; 5y-GII well received at 2.2x BTC. Yields increased 4bps-6bps on the belly of the MGS curve as investors remained sideline amid Greek crisis while Fitch’s decision on Malaysia sovereign rating is expected to be released later today. Nevertheless, the 5y-GII auction was well demanded with BTC of 2.2x (lower than previous auction at 3.014x), averaging at 3.743%. Corporate market ended in positive tone – notably, Noble 1/16 saw MYR45m tightened 12bps to 4.215%; whereas TF Varlik fell 17bps to 5.696% on MYR30m trades.

TRADE IDEA: MYR

Bond(s)	Bright Focus Bhd (“BFB”) BFB 1/22 (RAM: AA2) (Last trade: 17-Jun; Price: 100.38; Yield: 4.732%; 7y-MGS+ c.73bps) (Amount O/S: MYR70m)
Comparable(s)	ANIH 11/22 (MARC: AA) (Last trade: 15-Jun; Price: 104.13; Yield: 4.56%; 7y-MGS+ c.56bps) (Amount O/S: MYR160m) KESAS 10/22 (RAM: AA2) (Last trade: 5-Jun; Price: 101.815; Yield: 4.456%; 7y-MGS+ c.37bps) (Amount O/S: MYR90m) KESTURI 12/22 (MARC: AA-) (Last trade: 24-Jun; Price: 97.58; Yield: 4.638%; 7y-MGS+ c.64bps) (Amount O/S: MYR120m)
Relative Value	In toll road sector, we see value in BFB 1/22 which offer 17bps-27bps pick up over similarly rated ANIH 11/22 and Kesas 10/22, while is also trading 9bps cheaper than 1-notch lower rated Kesturi 12/21.  Nevertheless, we note that the smaller BFB 1/22 tranche could constrain its liquidity.
Fundamentals	BFB’s credit profile is supported by the following: 1)     Strategically aligned expressway. The toll road is the fastest route that connects KL city center to Putrajaya/Cyberjaya and KLIA. As at 9M14, BFB has solid traffic base with average daily traffic (ADT) of 109k, although c. 5% below the base case projected traffic of 115k for 2014. 2)     Strong debt servicing capability. Based on our estimation, BFB needs c. 116k ADT in between 2015-2033, in order to service the debt obligations (compared to base case projection of average 214k). At flat ADT of 116k, we estimate the FSCR to average at 3.1x. Hence, we view that BFB able to absorb significant traffic shock from the initial projection. 3)     Seri Kembangan Link set to boost collection. The construction of Sri Kembangan Link (SK Link) is ahead of schedule (progress as at Jun-14 at 66% vs scheduled timeline of 42%).  Expected to be completed in Jul-16 (while we saw the banner stated ‘to be completed by Nov-2015” from recent sighting”), SK Link is estimated to contribute about 9% to total revenue (based on the initial year ADT forecasted by traffic consultant). 4)     Regulatory risk.  We opine that the government to honour concessionaires in the event of delay in toll rates hike as shown from past records.

CREDIT IDEA

Company/ Issuer	Sector	Country	Update	RHBFIC View
Singapore Banking Sector	Banking	SG	Monetary Authority of Singapore (“MAS”) published a consultation paper in regard to resolution regime to financial institutions. Among the proposal are: 1.     The statutory bail-in regime be applied to unsecured subordinated debt/loan (excluding senior debt), issued and contracted after the effective implementation date. 2.     MAS has the power to convert into equity or write down contingent convertible instruments and contractual bail-in instruments.	The exclusion of senior debt obligations from the bail-in resolution maintains their payment priority and is positive news for senior noteholders. There will be no impact to Basel 3-compliant subordinated debt as they already incorporate loss-absorption features.
YTL Power International (AA1/P1, RAM)	Power	MY	YTLPI may receive MYR700m from Petronas on overpaid gas, based on gas supply agreement in 1994, after London arbitrator ruled in favour of YTLPI.	Neutral. The amount only represent c.2.8% of YTLPI total debt as of March-15, but could cushion the group’s full year’s finance cost. The more pressing part for YTLPI would be on the extension of PPA for its 808MW Paka and 404MW Pasir Gudang Power plant which should expire by Sep-15 and early 2016 respectively. Nonetheless, short term liquidity is well buffered, with cash of MYR9.7bn vs ST debt of MYR3.55bn. YTLPI 8/18 last done at 4.229% on 24/6, current MTM at 4.223% (MGS+104bps).