RHB FIC Credit Market Update - 23/7/15

23 July 2015

Credit Market Update

                                       

Mixed Performance for BOCOM AT1 and FUKOKU PerpNC10; Quiet in SGD and MYR

PAC USD CREDIT MARKETS                                                       

¨      Quiet session for markets; primaries issuance pick up. Asian credit markets were quiet ahead of another round of voting session in the Greek parliament as the iTraxx AxJ IG widened 1bp to 106.4. Overnight, UST were mixed as the 10y and 30y declined 1-2bps, while the 2y and 5y rose 2-3bps likely from the better US existing homes sales data at 5.49m (consensus: 5.4m; prior: 5.35m) and another day of large US corporate issuances, compounded by weaker corporate results.

¨      In the secondary market, we observed that IG banks and corporates yields under our coverage were flat at 2.18% and 3.17%. While we see a similar trend for IG credits. We note that Indian O&G companies such as OINLIN 19-24s, RILIN 22-45s, BPCLIN 22-25s and IOCLIN 21-23s yields tightened following reports that the recent Iran nuclear deal is positive for the Indian O&G industry (due to strong ties between the two nations O&G industry).

¨      In the primary market, Adani Ports (Baa3/BBB-/BBB-) plans to sell USD650m 5y Bond at T+195-200 (IPT: 210 bps). Adani Ports operates a shipping port on the west coast of India (The Company also provides services for bulk and container cargo, crude oil and railway amongst others). Additionally, China Minmetals (A3/NR/BBB+) (a Chinese mining company) looks to sell USD 5y & 10y bond (IPT: 215bps/265bps). Bank of Communications (Bocom) (A2/A-/A) priced a USD2.45bn of PerpNC5 at 5.00% and Fukoku Mutual Life (A2/NR/A) priced a Perp NC10 of USD500m at 5.00% with a whopping 11x bid-to-cover. Furthermore, Shanghai Electric Power (Baa2/BBB/BBB+) is meeting with investors for a USD Bond issuance.

SGD CREDIT MARKETS

¨      Flows into yielder names; Ezra completes rights issue. The short-to-mid benchmark curve was mostly unchanged yesterday, with the 3y and 5y closing at 1.73% and 2.21% respectively. We observed that interest tilted towards the yielder space, with pickings in names like IHCSP, GALVSP and CENCHI as well as buying into the recently printed RHTSP, which has tightened c.8-12ps since issuance. Selling was seen in EZRASP even as it announced yesterday that it has successfully completed its SGD200m rights issue (see Credit Updates for details). Investors will be eyeing the Jun CPI which set for release this afternoon (consensus: -0.3%; May: -0.4%).

MALAYSIA CREDIT MARKETS

¨      Mixed movements in corporate space amid thin trading flows. Corporate market ended mixed yesterday with trading flows remained quiet at MYR232m, slanted toward mid-to-long duration bonds. We note tightening in some AA3-rated bonds such as Malakoff 12/20 and BGSM 12/22, both settling 5bps lower at 4.658% and 4.849% respectively. Elsewhere, longer-end Danajamin curve steepened with tranches 4/24 and 4/25 narrowed 5bps-9bps (4.273%-4.319%), while the 4/45 increased 1bps to 4.939%.

¨      The local govvies extended its positive momentum with the 3y-10y MGS benchmarks clinched 1bps-4bps lower to 3.17%-3.91% amid lack of sovereign supply this month (with only two auctions – MYR2bn of MGS 30y reopening on last week and GII 10y reopening next week) vs maturity of MYR7bn in July.

TRADE IDEA: USD

Bond(s)	Tanjung Bin Energy Issuer (“TBEI”) TBEI 3/24 (RAM: AA3) (Last trade: 3-Jul; Price: 102.8; Yield: 4.998%; 10y-MGS+ c. 104bps) (Amount O/S: MYR 60m)
Comparable(s)	Sarawak Energy Bhd (“SEB”) SEB 7/24 (RAM: AA1) (Last trade: 14-Jul; Price: 102.86; Yield: 4.606%; 10y-MGS+ c.65 bps (Amount O/S: MYR600m)
Relative Value	We see value in TBEI 3/24 as it offers pick-up of c.35-39bps over SEB 7/24. We opine that yields of TBEI will tighten once it the plant construction risk is eliminated and when it is able to achieve actual commercial operations date (COD) before and within the allowed 6 months delay in Scheduled COD. Currently, actual construction progress is at 90.3% as at end-Mar 15 (5% behind schedule).
Fundamentals	TBEI’s credit profile is supported by the following: 1)     Predictable cash flow. As TNB is the sole electricity offtaker (lower counterparty risk), it is shielded from demand risk and able to earn available capacity payments as long as it achieves certain performance/availability requirements. Additionally, fuel costs is fully pass through to TNB subjected to heat rate requirements. Once fully operational,  we expected TBEI to have stable and strong cash flow generating capacity with a FSCR ratio of at least 1.50 – 1.60x. 2)     Strong project sponsor. Malakoff Corporation Bhd (“MCB”) being the project sponsor has a strong track record and presence in the Malaysia’s power industry (largest IPP). We opine that MCB is committed to seeing the completion of the power plant as they believe that delay in construction of the plant would not exceeding a period of 2 months after SCOD. TBEI’s credit positives are mitigated by: 1)     Construction risks. As construction is still in progress, it is vulnerable to further delays in construction or cost overruns. Construction delay is still behind schedule and it may still miss its August 2016 COD deadline. Further delays and costs will definitely affect projected cash flows. 2)     Force majeure risks. TBEI’s asset is located on a single site, it is highly vulnerable to this risk as it may affect the plant’s operation.

CREDIT UPDATE

Company/ Issuer	Sector	Country	Update	RHBFIC View
Ezra Holdings	O&G services	SG	The O&G player announced that it has successfully raised SGD200m via a rights issue, with the proceeds being used towards the redemption of its SGD225m perpetual due 18-Sept-2015.	Positive event. We opine that this provides the means for the company to fulfill its explicit promise made this year to redeem its Sept-2015 perpetuals. As of 3QFY8/2015, it had a cash balance of USD179.9m and ST borrowings of USD566.4m. It continues to suffer from a weak financial profile, with Total Debt/ EBITDA at 16.3x and EBITDA Interest Coverage at 2.2x, though this is partially mitigated by its strong orderbook of around USDD2.3bn (~ 6-8x annual revenue).