: RHB FIC Credit Market Update - 9/7/15

9 July 2015

Credit Market Update

                                       

Dovish FOMC Minutes may Limit CDS Injury; Thai Oil begins Roadshows; Hold UniTapah 6/27

REGIONAL                                                                                      

¨      Dovish FOMC minutes may limit CDS injury; Thai Oil begins roadshows. iTraxx AxJ IG widened further by 3.9bps to 119.6 due to a panic-sell off in bonds caused by equity market shocks. In the secondary market, sellers far outweighed buyers with issuers from real estate like KAISAG 17-20 AGILE 17-49 from CN and O&G longer-dated like CNPC 19-41 and PETMK 19-45 bearing the brunt. Better buying were observed in longer-dated papers in defensive markets and sectors REITS like SCGAU 19-25 and GMGAU 20-22 in AU and utilities like KORELE 20-34 and KOREAT 34 and TELSTRA 21-25a. USD pipeline remains relatively active with progress seen for Thai Oil Pcl (TOPTB, Baa1/BBB/NR) starting roadshows for their USD1bn MTN programme. Economic data today include June CPI and PPI in China (consensus flat at 1.3% and -4.6% respectively); Australia June employment data (slightly weaker consensus); Bank of England (BOE) rate meeting (no change expected at 0.5%); and US 4-July initial jobless claims (consensus: 275k; prior: 281k).

¨      SGD govvies supported on safe-haven flows; secondary credits softened on regional equity rout. SORs maintained their decline, with the curve bull-flattening 2-6bps; we noted the 3y and 5y rates compressing 2.9bps and 4.5bps to close at 1.63% and 2.12% respectively. We also observed Singapore govvies to be well supported on safe-haven demand, reflected by yields coming down 4-8bps. Conversely secondary credit yields softened 3-4bps on average as risk appetite waned amid the slide in Chinese stocks. On new bond sales, Centurion Corp (NR) has launched SGD65m 3y notes at 5.25% (IPT: 5.5%).  

MALAYSIA

¨      Local bond market remain defensive; WCT won MYR1.2bn arbitration against Meydan (Credit Update). Yields continue to edge north in the govvies space with the 3y-7y conventional benchmark yields rose by 1bps-8bps, settling at 3.26%-3.94%; although the 10y-MGS ending flat at 4.07%. Market remained in defensive tone ahead of few key events this week – FOMC minutes (which was released early morning today), Malaysia MPC meeting (today), Fed Yellen’s speech (10-July) and EU Leaders’ Summit (12-July). Concurrently, the corporate market were quiet yesterday on MYR391m trades, skewing toward banking names. Notably, Maybank subdebt and Tier-1 notes moved at opposite directions – LT2 5/24c19 increased 0.8bps to 4.485%; while IT1 68c18 tightened 2.6bps to 4.641% narrowing the sub/perp spread to 25.6bps.

TRADE IDEA: SGD

Bond(s)	UniTapah 6/27 (RAM: AA2) (Last trade: 19-Jun; Price: 103.14; Yield: 5.459%; 10y-MGS+ c.139bps)
Comparable(s)	UniTapah 12/25 (RAM: AA2) (Last trade: 26-Jun; Price: 103.19; Yield: 5.288%; 10y-MGS+ c.122bps) UniTapah 12/27 (RAM: AA2) (Last trade: 10-Jun; Price: 103.045; Yield: 5.529%; 10y-MGS+ c.146bps) Tanjung O&M 7/26 (RAM: AA3) (Last trade: 26-Feb; Price: 98.74; Yield: 5.419%; 10y-MGS+ c.152bps)
Relative Value	We continue to see value in UniTapah 6/27 as it remains at least 30bps cheap against our proprietary AA2 curve. Additionally, in terms of MTM yields, UniTapah 6/27 offers at least 10bps over Tanjung O&M 7/26 at a 1-notch rating advantage after adjusting for a tenure extension of 1 year.
Fundamentals	UniTapah’s credit profile is supported by the following: 1.    Stable business profile. UniTapah runs a concessionaire of 23 years (till Jan-34) to construct and maintain the UITM campus in Tapah, Perak. The campus is estimated to have 3,000 students. Unitapah entitled to receive approximately MYR43.7m/year of availability charges, compared to MYR25-30m annual principal repayments. In addition, the maintenance expenses to be covered under the maintenance charges of c. MYR11.5m in the first 5 years, subject to review every 5y interval thereafter. 2.    Low counter party risk with UITM as paymaster, ultimately from Ministry of Education. 3.    No construction risk. The construction of the campus was completed on Jan-14. 4.    Maintenance risk. We view that the difficulty of the maintenance job is moderate. In addition, an amount of MYR5m is set aside in the designated account (“Maintenance Account 2”) as contingency maintenance funds in the event of insufficient funds in Maintenance Account 1.

CREDIT UPDATE

Company/ Issuer	Sector	Country	Update	RHBFIC View
Sime Darby (A3,Sta/A-,Neg/A,Neg)	Conglo-plantation	MY	Sime eyeing to sell its 30% stake in Tesco Malaysia, net assets worth c.MYR90m-95m.	Neutral. Expected proceeds worth estimatedly at c.0.5% of Sime's total debt of MYR17.9bn in Mar-15. Sime 18 and Sime 23 was last seen quoted at T+137/127 and T+155/145 respectively. .
WCT Holdings (AA-)	Construction	MY	WCT won the arbitration on contract dispute with Meydan Group LLC (Meydan), which will see the latter paying MYR1.2bn to WCT.	Positive. The cash proceed could reduce WCT’s relatively high net gearing level of 0.7x as of Mar-15. Pro-forma net gearing estimated to drop to 0.2x, assuming the whole proceed is used for debt repayment.