RHB FIC Credit Market Update - 6/7/15

6 July 2015

Credit Market Update

                                       

Greek Crisis Escalates; China Enacts More Market Measures; Maintain Preference for CENCHI 5/17 SGD

REGIONAL                                                                                      

¨      Friday trade session firm; Greek crisis escalates; China enacts further measures. Asian market sentiment last Friday was generally stable, despite iTraxx AxJ IG inching up 0.8bps to 110.3bps, as investors picked up bonds following selloffs in the prior days and continued general weakness in regional equities, particularly the Shanghai Index which dropped 6% on the same day. We noted IG bank and corporate yields shedding 1.7bps and 4.4bps respectively, while HY credits traded flat amid benign UST movements which saw the curve bull-flatten 3-15bps. Today, credit markets open to a solidified Greek crisis as voters rejected bailout terms in a landslide fashion, 61.3% saying “no”, raising the possibility of a “Grexit.” Over the weekend, in response to its ailing equity markets, China suspended initial public offerings, while brokerages pledged to buy shares and the central bank said it would provide liquidity for margin trading; so far the measures seem to be having a positive effect as the Shanghai Index is currently up 3.5%. We expect risk sentiment to weaken nonetheless, but believe Asian credits will maintain some resilience. In the week ahead, key economic data and events to monitor include US June ISM non-manufacturing and Fed minutes; China money supply and foreign trade data; and Eurozone June retail PMI.

¨      Uncertainty to reign over flows. We saw a bull-flattener in the short-to-mid curve, with the 3y and 5y declining by -1.8bps (to 1.72%) and -2.4bps (to 2.22%). Investors mostly stayed on the sideline on Friday in lieu of the Sunday Greece referendum, with uncertainty expected to reign today with the ‘No’ vote. We saw buying interest on Friday in short-dated SPSP, CITSP, HKLSP and YLLGSP. Investors will be eyeing the release of the SG 2Q GDP numbers tomorrow (consensus: 2.5%; 1Q: 2.6%).  

MALAYSIA

¨      Quiet secondary market amid cautious trading sentiment. Trading activity was relatively quiet at MYR430m in the corporate space last Friday. Manjung 11/19 led the chart with MYR105m reportedly done, settling 0.5bps lower at 4.064%. Elsewhere, BGSM complex moved -4bps to +3bps to 4.021%-4.999% for maturity 12/15-6/24. Meanwhile, govvies generally ended in red territory amid ongoing uncertainty in Greece. Notably, the 5y and 7y MGS inched 1bps to 3bps higher, closing at 3.57% and 3.86% respectively; although we also saw the 10y MGS trading near to previous level at 3.97%.

TRADE IDEA: SGD

Bond(s)	Central China Real Estate; CENCHI 5/17 (yield: 6.13%; SOR+c.476bps) (Ba3/BB-/-) (O/S amount: SGD200m)
Comparable(s)	Yanlord Land Group; YLLGSP 5/17 (yield: 5.93%; SOR+c.455bps) (Ba3/B+/-) (O/S amount: SGD400m)
Relative Value	We reiterate a preference for CENCHI 5/17, which was first mentioned in our Credit Market Update (dated 8-Dec). Fundamentally, CENCHI looks attractive if compared to YLLGSP, which saw downgrades in outlook in Nov-2014 (BB-/Neg from BB-/Sta) and rating in April-2015 (B+/Sta from BB-/Neg).
Fundamentals	We believe that Central China Real Estate (CCRE) will continue to be a robust pick as: 1)     Better credit profile then peers. The Henan-based developer’s credit profile is better than its SGD property peers, with Debt/ Assets at 28.3% (peers: 28.5%) and Total Debt/ EBITDA at 4.6x (peers: 10x), though its EBITDA Interest Coverage is weaker at 2.8x (peers: 6x). As a Henan-centric developer, CCRE has gained from the looser mortgage policies in that province (regulatory guarantee of mortgages, lower downpayments for 2nd properties). 2)     Chinese property market shows signs of improvement.  China’s looser housing market policies have started to make an impact on the Chinese property market. Following up from last year’s liquidity injections and property regulation easing, PBoC further loosened regulations in Mar-2015 by lowering the down payment for second homes (from minimum 60% to 40%) and cutting to two years (from five years previously) the length of time needed to get a tax exemption from selling the property. The property space saw continued improvement, with May’s statistics showing positive price growth in 42 cities (Apr: 36 cities). 3)     Strong parentage. The company is 27% owned by CapitaLand, which should give some comfort in terms of corporate governance. *Regional peers: Shimao Property, Swire Properties, Sun Hung Kai, Capitaland, UEM Sunrise, Kerry Properties