RHB FIC Credit Market Update - 10/7/15

10 July 2015

Credit Market Update

                                       

Dovish FOMC Minutes and Equity Rebound Offers Some Respite; Beijing Infra Eyes USD Issue; Initiate on PWONIJ 7.125% 7/19

REGIONAL                                                                                      

¨      Equity rebound offers some respite; Beijing Infrastructure eyeing USD bonds. Risk aversion alleviated yesterday as regional markets rebounded on China’s stop-gap measures, which entailed barring shareholders with over 5% stakes from selling for 6 months; we noted the iTraxx AxJ IG declining 4.6bps to 115.0. In the secondary market, IG bank and corporate bonds saw yields traded flat and 4-5bps wider respectively. On the other hand, HY credits rebounded as yields dropped 28bps on average, led by mostly real estate names. In the news, S&P cut Berau Energy to selective default following the granting of moratorium by Singapore courts on the issuer’s USD450m 2015 notes due on 8-Jul. Elsewhere, Greek PM Alexis Tsipras is seeking a 3y EUR53.5bn bailout loan as a final attempt to stay within the EU. On the primary front, Beijing Infrastructure Investment Co Ltd (A1/A+/A+) is planning a corp-guaranteed USD Reg issue. On economic data, China CPI showed pickup at 1.4% (consensus: 1.3%; prior: 1.2%). Today, China will release money supply and foreign reserves data.

¨      SOR ended the day roughly unchanged with the 3y, 5y and 10y rates settling at 1.61%, 2.10% and 2.73% respectively. Similarly, SGD credits moved flat – notably in the real estate bonds such as Cheung 11/15 and OHL 9/15.  

MALAYSIA

¨      Mixed credit flows amid volatile sovereign front. Local govvies recovered from previous day’s losses with 5y-10y benchmark yields inched 2bps-5bps lower to 3.59%-4.02%, along with recuperating MYR as risk sentiments improve on stabilizing China’s equity market and dovish FOMC’s minutes increase the odds of a delay in policy normalization. At the end of the day, BNM as expected maintained the OPR at 3.25% while recognizing the heightened risks on the global front. Meanwhile, corporate flows remained slow at MYR491m, in relative to YTD daily average of MYR555m. Credit flows generally ended mixed where we saw Woori ‘16s tightened 2bps to close at 4.143% on combined MYR85m; while MAHB Perps rose 1bps to 5.049%.

TRADE IDEA: USD

Bond(s)	Pakuwon Jati (PWONIJ 7.125% 7/19) (B1/B+/BB) (7.58%/7.52%, Outstanding USD200m)
Comparable(s)	Lippo Karawachi (LPKRIJ 7.00% 5/19) (Ba3/BB-/BB-) (6.38%/5.88%, Outstanding USD250m)
Relative Value	We initiate an idea for tactical exposure in Pakuwon Jati, an Indonesia property developer with growing recurring income from investment property (seven retail malls, three office blocks, service apartments and hotel across Jakarta and Surabaya) as an alternative pick vs LPKRIJ 5/19 with juicy pick-up of c.114bps. Fitch has recently upgraded the issuer to BB- (from B+) underpinned by its strong recurring cashflows.
Fundamentals	Pakuwon’s credit metrics are supported by the following factors: 1)     Stable recurring income from investment property, which forms c.50% of its operating income; 2)     Discipline and conservative capital management. Its USD200m bonds are fully hedged, hence mitigating the weaknesses seen in IDR, debt/EBITDA at 2.21x (vs its self-regulated policy of 2.5x) 3)     Strong EBITDA margins and profitability of more than 50% (for the past 4 years) Nonetheless, the key risks to our call are: 1)     Operational risks; i.e lower occupancy rates, slower takeup on property development division; 2)     Significant deterioration on financial profiles resulted from aggressive expansion; 3)     Slower-than-expected reforms in Indonesia could dragged property market.