RHB FIC Credit Market Update - 20/8/15

20 August 2015

Credit Market Update

           

FOMC Minutes Offer Little Clues; AMMB Results Lackluster; Pertamina  5/23 Looks Attractive

APAC USD CREDIT MARKETS                                                    

¨      CDS continue to normalize; FOMC minutes offer little guidance. Credit protection reflected by the iTraxx AxJ IG inched up 2bps to 120.8 despite gains in the Chinese equity markets. Separately, the UST yields tightened as the 2y and 10y declined 7-8bps to 0.67% and 2.12% respectively after the July CPI printed at 0.1% missing consensus estimates of 0.2% (prior: 0.3%), while the FOMC minutes offer little cues for a rate hike in September.

¨      In the secondary space, IG corporate yields tightened 2bps to 3.22%. The notable outperformer was TNBMK 25, followed by Chinese O&G and tech corporates like CNOOC 20, CNPC 21, Sinopec 19, Tencent 16-25s, Baidu 17-25s, and Alibaba 17-24s. On the other hand, we continue to see sustained weaknesses in IG and HY despite weakness in Noble 18-20 as well as PTT 42. Contrastingly, the average HY bonds remained weak as yields pushed up to 9.8%, we continue to see weakness in Vedanta Resources 16-23, Yingde Gases 18, China Hongqiao 17, MIEHOL 19 and Greenland HK 16-17 as yields continue to rise.

¨      Greenland Holding Group’s ratings was cut by S&P to BBB- from BBB as the outlook remained negative. Greenland Holding was downgraded following deterioration of the company’s financial position whereby leverage has weakened materially, with debt-to-EBITDA ratio rising to 9.7x in 2014, from 6.9x in 2013. Similarly, its Hong Kong subsidiary Greenland HK Holdings was cut to BB+ from BBB-given its reliance on its parental support.

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SGD CREDIT MARKETS

¨      Keen activity in Chinese bonds taking cues from equities. The short-to-mid SOR curve flattened yesterday, with the 5y dipping by a larger 4.25bps (to 2.27%) while the 2y also saw marginal declines of 0.5bps (to 1.67%). In the secondary market, there was interest into ASPSP 19’s on the back of Aspial’s 5y print while there was initial selling in Chinese names or those with Chinese exposure (BNKEA, FRESHK, PCRTSP, QNMSP) in the morning post-Tuesday’s rout in Chinese equities (Shanghai Comp falling over 8% on Tues), but some buying appetite returned once the PBoC was reported in the afternoon to be offering medium-term lending facilities (MLF) to selected banks. In the primaries, Aspial Corp (NR) printed a SGD50m 5y at a final price of 5.25%, three times oversubscribed.

MYR CREDIT MARKETS

¨      Yields widened in AAA-space amid quiet session. Trading activity were focused in the AAA-space yesterday amid quiet trading session of MYR216m. We note yields for AAA shifted upward, reflecting higher MGS yields over the past few weeks. Notably, Boustead 11/15 rose 18bps to 4.025% on MYR69m trades; while TNBWE 7/25-7/29 widened 14bps to 4.749%-4.879%.

¨      MGS recouped some losses after days of selling pressure; new SPK 2/19 come in smaller size. Govvies ended the day on positive tone with the 3y-10y benchmarks pared 3bps-9bps to 3.55%-4.25%. Meanwhile, auction for small new issue of MYR500m 3.5y SPK 2/19 is closing today, with the WI last traded at 4.2% yesterday.

¨      On the primary front, we saw Time dotcom (TDC) obtained preliminary rating of AA3/Stable by RAM for its proposed MYR1bn IMTN programme. The bond are made available for capital expenditure (fibre/data operation expansion), refinancing and working capital purposes.

¨      On the macro front, Malaysia’s July inflation surged to 3.3% y-o-y (Jun-15: 2.5%, May-15: 2.1%) mainly due to higher transportation cost following increase of retail fuel price in early July. Nevertheless, our economist is forecasting a slower inflation of 2.3% for full year 2015 (2014: 3.2%) on the back of subdued oil prices, lower consumption post-GST and tightening in the property sector.

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TRADE IDEA: USD

Bond(s)	PT Pertamina Persero (Pertamina) 4.3% 5/23 (Baa3/BB+/BBB-)(Price: 95.23, YTM: 5.051%; z+302bps)(Amount O/S: USD1.6bn)
Comparable(s)	Indian Oil Corp Ltd (IOCL) 5.75% 8/23 (Baa3/NR/BBB-)(Price: 110.66, YTM: 4.158%; Z+207bps)(Amount O/S: USD500m) Oil & Natural Gas Corp (ONGC) 3.75% 5/23 (Baa2/BBB-/NR)(Price: 98.32, YTM: 4.004%; Z+196bps)(Amount O/S: USD500m) Thai Oil 3.625% 1/23 (Baa1/BBB/NR)(Price: 98.72, YTM: 3.825%; Z+181bps)(Amount O/S: USD500m)
Relative Value	We see value Pertamina 5/23 which offers pickup of c.89bps over IOCL 8/23, rated similarly by both Moody’s and Fitch. The selling could have been deem overdone and valuation started to look attractive, in our view.
Fundamentals	The delayed Global Bond issuance is credit positive. Pertamina is reportedly postponed its USD5bn global bond issuance initially planned to be released in 2H15. The company announced that they have sufficient funding for working capital at this juncture. Capital structure has improved after the government paid its debt to the company, reducing funding needs to less that USD 1 billion. Pertamina will consider other options to fulfill the remaining needs Pertamina credit profile supported by: 1)     Its status as Indonesia’s national oil & gas company, with vertically integrated operations and as the dominant fuel retailer in the country. 2)     Strong support from the Indonesian government in event of distress. Currently, Pertamina markets its refined products below international market prices, and in return it receives a government subsidy as compensation for its public service obligations. Other examples of support dates back to the 1970's when the government had bailed out Pertamina during its debt crisis. 3)     Manageable gearing levels of 1.0x with an debt/EBITDA of 3x in FY14, although expected to weaken due to the volatile fuel prices. However this is mitigated by, 4)     Elevated debt levels due to the high capex of USD5bn in 2016. 5)     Volatile international crude oil prices may continue to weaken its financials metrics. Its top-line and bottom-line net profits fell sharply by 40% and 50% yoy respectively as it sold fuel at government set prices, which are below international market rates. As the oil prices outlook continues to be weak, we expect Pertamina credit profile to weaken accordingly.

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CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
AMMB Holdings Bhd (AMMB) (AA3)	Banking	MY	1QFY3/16 NP -33% q-o-q to MYR369 due to margin compression and one-off divestment gain of AmFraser Securities  in 4QFY3/15; NIM compressed to 2.08% (-18bps); Loan and deposit contracted by 2.5%; LDR remained high at 95%; Healthy asset quality with NPL of 1.8% and LLC of 103%; Strong capitalization with CET1, T1 and RWCAR at 10.7%, 12% and 16.1%.	We maintain marketweight on AMMB on the back of its strong capitalization and healthy asset quality. AMMB 8/17 was last quoted at 4.449% in Apr-15.
Fraser and Neave (FNHMK)(NR)	Consumer (Beverage)	ASEAN	Completed the sale of its 55% stake in Myanmar Brewery (largest and state-backed brewer in Myanmar) for USD560m to Japan’s Kirin Holdings (Japan’s second largest drinks maker).	Marketweight on credit. The divestment is mildly positive as it shows F&N’s prudent risk appetite to avoid exposure to Myanmar’s depreciating currency (of c.24% YTD to MMK1275/USD) and rising competition (i.e. with Heineken’s entrance) following recent sanctions uplift. We expect its beverage EBIT (USD153m 9m FY9/15 or 67% of Group) to be mildly impacted. F&N’s credit profile is commendable given low leverage with debt/EBITDA of 0.58x, and net cash position with cash of c.USD374m sufficient to cover ST debt of USD61.2m and total debts of USD108.2m. Earnings are positive with EBITDA growing c.7.6% YoY to USD290m and EBITDA margin widening 53bps to 11.9% for 9M FY9/15. Yield on FNHMK 18 has dropped 7bps YTD to 4.271%.