RHB FIC Credit Market Update - 100815

10 August 2015

Credit Market Update

           

Low Oil Positive for Airlines as Qantas Upgraded to Ba1; Hold HKLSP 6/22

APAC USD CREDIT MARKETS                                                    

¨      CDS rose fueled by a still healthy job numbers (with rising probability of September hike). The iTraxx AxJ IG was up marginally to close at 113.2 ahead of the heavy Chinese economic data over the weekend. On the other hand, the UST fell with the exception of the 2y, as the 10y shed 7bps to close below 2.20%, after the better US jobs data. The July report shows 215k (consensus: 225k; prior: 223k) of jobs were added during the month. While the unemployment rate held steady at 5.3% (or 7 year low), which fueled market expectations for a rate hike next month.

¨      Improved interest seen in IG and HY on drier primary tap. The average IG and HY corporates yields tightened 1-2bps to 3.16% and 8.6% as investors search for better yields. We saw buying interests in long-ended IG O&G names such as CNOOC 33-45s, SINOPE 43-45, SINOPC 43s, CNPCCH 41s, and RILIN 27s despite the falling Brent oil prices closing in on the c.USD48/bbl mark.

¨      Qantas upgraded to Ba1 by Moody’s on improved financials and low oil. This reflects Qantas’ improving financial and operating profile which allowed room for debt reduction at the group as seen with the rise in cash funded purchase of newer aircraft and the increased the number of unencumbered aircraft. Over the next 12 months, the lower fuel price and weaker Australian dollar should lead to improving earnings and credit metrics, supported by its strong domestic market.

¨      Weak data sets from China are yield-friendly. China’s July imports & exports weakened to -8.1% (consensus: -8%; prior: -6.1%) and -8.3% (consensus: -1.5%; prior: 2.8%), this lead to a weaker trade balance of USD43bn (consensus: USD55bn; prior: USD47bn). Additionally, China’s CPI ticked up 1.6% (consensus: 1.5%; prior: 2.8%), while its PPI index fell -5.4% y-o-y (consensus:-5.0%; prior: 4.8%), which may lead to more stimulus measures.

SGD CREDIT MARKETS

¨      Upcoming O&G callable perpetuals due will test the perpetual market. SG market was out on Friday due to its jubilee national day celebrations. In the next one month, key maturities include a SGD500m from City Development (due 3-Sept), SGD320m from SP Power (due 18-Aug), and SGD225m from EZRASP (7-Sept). In addition, EZRASP has a SGD150m perpetual which is callable on 18-Sept. EZRA’s position is admittedly tight, with cash position of USD180m (~SGD250m) as of end May-15. Nevertheless, Ezra recently completed a SGD200m rights issue at end-July 2015, which will be used to redeem the perpetual. This will save them c.13% (or SOR+11.045%) if not called. Looking ahead, the finalized SG 2Q GDP will be released tomorrow (consensus: 1.6%).

MALAYSIA CREDIT MARKETS

¨      Long-end GG tracked higher sovereign yields. Trading volume were rather subdued last Friday at MYR244m, less than half of YTD daily average of c. MYR540m. About 55% of the trading activity were concentrated in the GG names, biased toward widening trend for the long tenure – notably, tranche maturing 29s for DanaInfra, Prasarana and BPMB rose 3bps-4bps to settle at 4.585%-4.594% (15yMGS + c.34bps). Elsewhere, AA1-rated SEB 7/29 tightened 9bps to 4.99% on MYR40m trades.

¨      Govvies continued the bearish momentum last Friday with 3y-10y MGS benchmarks inched 2bps-14bps higher to close at 3.30%-4.18%. Top loser was the 5y-MGS ended the day at 3.85% (+14bps), before its MYR3.5bn reopening auction closing tomorrow with the WI now trading at 3.84%-3.85% mid-price. The Ringgit is trading slightly weaker this morning at the range of 3.927-3.922/USD, after Malaysian foreign reserves reduced further to USD96.7bn for end-July (from USD100.5 in mid-July). The reserves position is sufficient to finance 7.6 months of retained imports and is 1.1 times the short-term external debt.

¨      On the macro front, Malaysia set to release the 2Q GDP number this Thursday (13-Aug) with our economist is expecting slower growth of 4.0% y-o-y (consensus: 4.5%, 1Q15: 5.6%). We retain full year growth of 5% in 2015 (2014: 5.7%).

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TRADE IDEA: USD

Bond(s)	Hongkong Land, HKLSP 6/22 (yield: 3.27%; price: 107.5; T+133bps) (A2/A/-) (O/S: USD500m)
Comparable(s)	Swire Properties, SWIPRO 6/22 (yield: 3.29%; price: 106.1; T+135bps) (A2/A-/-) (O/S: USD500m)
Relative Value	We prefer to keep HKLSP 6/22 for now until we find good alternative for switching as price has rallied since our last call on 31 July. If compared to similar duration SWIPRO 6/22, HKLSP 6/22 offers similar yields but with better credit quality due to HKLSP’s one notch higher S&P rating (if compared to SWIPRO).
Fundamentals	We like Hongkong Land for the following reasons: 1)     Strong-exposure to HK office space. In terms of its commercial portfolio, office space comprises close to 81% of total gross floor area (GFA), with HK office space itself around 50% of total GFA. As of 1H2015, the Group’s retail portfolio is fully occupied, while office space was above 95%. 2)     Resilience of HK rental yield. HK office rental yield has grown by around 7.5% since Jan-2014 (and by 2.1% since Jan-2015), over-taking HK retail rental yield which has slowed this year (1.8% since Jan-2015). Due to its strong rental income component (close to 50% of revenue derives from commercial rental), this company is well positioned to encounter the upcoming headwinds of further property tightening initiatives and normalizing interest rates. The Government has previously tightened the mortgage policy in Feb-2015.  3)     Robust fundamentals. HKLSP has a healthy credit profile, with LTM Total Debt/EBITDA at 4.3x (peers: 4.6x) while EBITDA Interest Coverage is at 6.6x (peers: 10.5x), and has good access to the capital markets due to its robust fundamentals and name familiarity. ¨                  *HK property peers: Swire, Wharf, Kerry Properties, Wheelock, Sun Hung Kai