RHB FIC Credit Market Update - 24/8/15

24 August 2015

Credit Market Update

           

Investment-Grade Benefits from Widening Spreads as UST Rallied; Chong Hing’s Right Issue is Credit Positive

APAC USD CREDIT MARKETS                                                    

¨      Investors shift towards IG credits amid risk-off environment. Credit protection cost via the iTraxx AxJ IG crept up approximately 5bps to 129.0, its weakest point this year amid the jittery regional equities market. Separately, concerns over China’s growth and stumbling oil prices (Brent: -3% to c.USD45/bbl) drove investors towards safe haven assets as UST tighten across the curve with the 10y closing lower at c.2.05%.

¨      IG credits tighten marginally on the back of volatile market. We saw interest in high grade credits such as Hutchinson Whampoa 16-19, Singtel 21, PSA International 16-21, Swire Pacific 16-23 and CNOOC 16-22, while Chinese O&G and real estate credits were the main underperformers as seen in China Oilfield Services 25, PETMK 19-45, Noble 18-20, Franshion 17-19, Yuexiu Property 23 and Greenland Group 24. 

¨      HY credits struggle on market weakness as yields rose 20bps on average to 10%. Similarly commodities and real estate names such as Yingde Gasses 18, Vedanta Resources 16-23, China Hongqiao 17, Agile Property 17-20s and Greenland HK 16-17 saw renewed selling pressure as yields widened around 30-80bps.

¨      Moody’s affirmed the rating Chong Hing Bank at Baa2 with a stable outlook from negative following its proposed rights issue (HKD3.7bn) which improve the banks Tier1 capital ratio above 12% from 8.7% (Jun-15), thus increases its capital adequacy.

¨      Manufacturing data frail as seen in the US Aug flash manufacturing PMI data which fell to 52.9 (consensus: 53.8), while China manufacturing data similarly fell to 47.1 (consensus: 48.2).

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SGD CREDIT MARKETS

¨      Risk aversion from roil in US markets; Swiber to call its perps on 25 Sep. The short-to-mid SOR curve bear flattened with the 2y rising by 6.5bps (to 1.72%) while the 5y increased by 3bps (to 2.28%) even as risk-aversion gripped markets from the roil that hit US markets on Friday evening. We continued to see buying interest into property names like CITSP, CCTSP, HKLSP while selling was seen in HY issues like PACRA, YLLGSP, MIOAU. Meanwhile, Swiber Ltd (NR) has announced that it is redeeming its outstanding SGD76.5m Perpetual that is callable on 25-Sept 2015. This, together with Ezra’s similar announcement last week that it is redeeming its SGD150m Perps that is due 18-Sept 2015, should alleviate some initial concerns for the wider SGD perpetual market where an uncalled corporate perpetual is virtually unheard off. Looking ahead, investors will be awaiting the release of SG Jul CPI (June: -0.3%) today.

MYR CREDIT MARKETS

¨      Corporate bonds adjusting to higher sovereign yields. We saw a total of MYR604m exchanged hands in the corporate market last Friday. Credit yields continue to move upward reflecting to the surge in the MGS yields in the recent weeks. Danga 4/16 was the top traded with MYR335m closing the day at 4.078% (+42bps compared to a month ago); while we also note yields increased by 18bps-20bps in other AAA names such as MACB, Telekom and Tenaga.

¨      MGS curve continues the upward momentum. On the govvies front, 5y-10y benchmark MGS yields climbed 4bps-9bps to 4.02%-4.35% as trading sentiments lingered on the weak Ringgit. Notably, 7y-MGS rose the most to 4.35% (+9bps), higher than 10y-MGS which settled the day at 4.33%. Meanwhile, the local currency is trading weaker this morning, in range of 4.209-4.246/USD, following a drop in Malaysia’s foreign currency reserves to USD94.5bn in mid-Aug (end-Jul: USD96.7bn), while oil prices remain on downward trend with Brent and WTI are crossing at USD45 and USD39.7 respectively.

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TRADE IDEA: SGD

Bond(s)	Centurion Corp; CENSP 7/18 (yield: 4.78%; SOR3y+290bps)(O/S amount: SGD65m)
Comparable(s)	Banyan Tree, BTHSP 7/18 (yield: 4.96%; SOR3y+308bps)(O/S amount: SGD70m)
Relative Value	We reiterate a preference for CENSP 7/18 that was recently issued in Jul-2015 due to its attractive valuations if compared to BTHSP 7/18. Since last mentioned on 24-Jul, the yield difference between the similar duration papers has widened from 8bps to around 18bps currently (mostly due to tightening in CENSP’s yield by c.12bps).   We opine that the fundamentally stronger position and better outlook of Centurion (as elaborated further below) vis-à-vis Banyan Tree’s cyclical luxury travel market should warrant further yield tightening moving forward.
Fundamentals	We believe that Centurion Corp Ltd is a fundamentally stable company with a strong outlook due to: 1.   Continued robust financial performance in 2Q2015. Centurion’s recent 2Q15 results came in stronger (33% rise in revenue to SGD26.4m), with a corresponding improvement in its credit profile with EBITDA Interest Coverage at 5.4x (1Q15: 5.0x) which should mitigate some concerns of its higher Total Debt/ Assets at 56% (1Q15: 55%). It helps that it continues to enjoy comfortable EBITDA margins of around 60%.  2.   Diversifying revenue base.  Its 2Q15 results also showed continued diversification to Centurion’s revenue base, with the 33% rise in 2Q15 revenue mainly due to higher contributions from its student accommodation business in UK and Australia. In terms of contribution, student accommodation has risen to contribute 28% of total revenue in 2Q15 (compared to 13% in 2Q14). This should buffet against a potential slowdown from Singapore’s tightening of foreign worker regulations (as elaborated under ‘Risk from regulations’).      3.   Strong occupancy rates, low counterparty credit risks. Centurion is buffeted by the higher occupancy rate at 90%, tenancy agreements with established corporations (ie SMRT) and URA regulation that regulates that only specific dwelling can be rented out to foreign workers. 4.   Risk from regulations. Key risk would emanate from Singapore’s tightening of foreign worker regulations, which has seen its foreign worker population growth slow from around 6-7.5% in 2010/2011 to around 2.6% in 2014. In addition, with regards to Centurion’s expansion into Malaysia, the foreign worker’s accommodation policy is not as strictly regulated or enforced if compared to Singapore. ¨

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CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
China Telco Sector	Telecommunications	CH	1H15 results of China Mobile (Aa3/AA-/A+; all stable), China Telecom (NR; NR; A+/Sta) and China Unicom (NR) showed a generally mixed, despite growth in mobile data as revenue from voice and SMS services continue to decline. EBITDA margin for China Mobile, China Telecom and China Unicom rose by 0.8 percentage point, 0.1 pp and 4.4 pp respectively. Meanwhile, capex is expected to increase marginally as telco players continue to invest in the strengthening of its LTE network. Leverage remained strong and unchanged for the top 3 telco players.	We maintain marketweight on the Chinese telco sector. Sector’s catalyst for growth are the transfer of telco tower assets and migration of existing users to mobile data services.
Chong Hing Bank (Chong Hing) (Baa2/NR/BBB, Sta)	Banking	HK	Moody’s revised Chong Hing’s outlook from negative to stable, following the proposed HKD3.7bn right issue plan. Moody’s estimates that the right issue will increase Chong Hing’s CET1 by about 4%, from 8.7% in Jun-15.	Maintain marketweight. The capital raising plan will improve the bank’s capacity to absorb further deterioration in asset quality. Chong Hing’s AT1 Pc19 was seen quoting at bid/ask 5.596%/5.259%.