: RHB FIC Credit Market Update - 3/8/15

3 August 2015

Credit Market Update

           

Credit Markets Emerged Steady Post-FOMC; Value in FIRTSP 5/18

APAC USD CREDIT MARKETS                                                    

¨      Asian credit markets emerged steady post FOMC. The iTraxx AxJ IG was unchanged at 110.6 as investors absorbed the weaker Chinese manufacturing data as the Shanghai index fell 1.13%. Last Friday, the UST fell 3-9bps with the 10y falling below 2.20% likely from the weaker commodities prices and wage growth.

¨      On flows, the average IG Corporates which we track tightened 3bps to 3.17% from 3.20% similarly with the UST. Chinese IG and HY corporates bonds continue to fall 5 and 3 bps respectively to 3.46% and 8.60% as investors look towards bonds after the rout on Chinese stocks with notable trades such as CHGRID 19s, CHIOLI 19s, SHIMAO 22s and COGARD 19-23s. O&G names surprisingly tightened 3bps on average with notable trades such as CNPCCH 16-20s, CNOOC 20-24s, RILIN 20 and PTTEP 21s despite Brent oil prices declining c.3% last Friday at USD52/bbl. Chinese tech giants BIDU 17-25s, TENCNT 19s and BABA 19s regained 7bps on average after weakening mid-last week due to weaker than expected results.

¨      In the primaries front, Car Inc (Ba1/BB+/BB+) may price a USD300m 5.5NC3 bond (IPT: 6.625%). Car Inc operates a car rental business, financial leasing services, short & long-term rental and other auto assistance.

¨      On ratings, Shimao Property was upgraded by S&P to BB+ from BB with a stable outlook, citing its good track record of financial management, hotel management, profitability, sustainable and quality growth strategy, along with its improving cash flow and leverage profile. Going-forward, S&P expects its debt-to-EBITDA and EBITDA-interest coverage ratio to improve to 3.5-4.0x (FY14: 4.2x) and 4.0-4.5x (FY14: 4.0x) respectively. The Chinese property sector may continue to face headwinds on a  wealth depletion in the equities market and generally poor sentiment, however, Shimao has moved to developing properties the mass market, which buffers the company from the more speculative high-end segment.

SGD CREDIT MARKETS

¨      Flows towards HY names. There was a flattening in the short-to-mid curve, with the 2y and 5y closing at 1.56% (+2.5bps) and 2.25% (-0.9%) respectively. We observed a buying orientation towards HY names such as TRIOIJ, CENCHI and CENSP which traded 5-15bps tighter while selling was seen in short-to-mid duration HDBSP papers which rose 2-5bps.

¨      There were also two-way flows into NOLSP as NOL Ltd posted its first profit in 6 quarters in 2Q2015 of USD3m. This excludes the one-off gain from its USD887m divestment of APL Logistics to Kintetsu World Express in Feb-2015. NOL has thus seen an improvement in its EBITDA Interest Coverage to 3.4x (1Q2015: 3.0x) while Total Debt/ EBITDA was at 8.1x (1Q2015: 12.5x).

¨      In the primaries, SGD100m of Capitaland Commercial Trust (A3) priced a 6y at 2.96%, with nearly 90% of demand coming from institutional investors.

MALAYSIA CREDIT MARKETS

¨      Corporate bonds remain subdued since FOMC. Corporate bond flows remained at softer levels of MYR398m on Friday even as spreads seem tighter overall. Most actively traded were PTPTN 3/24 and ADB 2/17 seeing MYR50m and MYR46m exchange hands while yields held at 4.32% and 3.70% respectively. Meanwhile, Boustead 11/15 widened 5bps to 3.85% after MYR35m was traded.

¨      Govvies ended with higher yields after stronger 2Q GDP in US. Benchmark yields continued to rise in general, with MGS 10y closing 5 bps wider at 4.06%, 7y rose 2bps to 3.95%, 5y rising 11bps to 3.62% and 3y rising 6bps to 3.22%. There appears to have been a recently increased negative correlation with USTs, where the MGS selldown coincided with strong global reallocation flows to USTs. Most actively traded was the MGS 8/15 which saw its yield inch down 1.5bps to 3.277% after MYR945m exchanged hands, on potential interest in shorten duration. Overall volume was moderately higher at MYR5.2bn (YTD average c.MYR3.1bn).

¨      2Q15 results weak for CIMB Niaga and flat for Westports; WCE to meet investors today, 3 August. CIMB Niaga net profit fell 89% YoY to IDR94bn as loan provisioning remained high, while Westports’ EBITDA grew c.6% YoY to MYR216.2m as throughput growth was soft at 3% YoY in 2Q15, Westport 4/22 last traded on 23 July at 4.428%. Meanwhile, West Cost Expressways (WCE) will be meeting investors today for its MYR1bn sukuk facility backed by Danajamin and Bank Pembangunan.

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TRADE IDEA: SGD

Bond(s)	FIRTSP 5/18 (yield: 3.57%; SOR3y+178bps) (NR) (outstanding: SGD100m)
Comparable(s)	SUNSP 2/20 (yield: 2.90%; SOR4y+90bps) (Baa2) (outstanding: SGD310m)
Relative Value	We reiterate a preference for FIRTSP 5/18, a healthcare REIT with strong exposure in Indonesia (c.95% of revenue), due to its stable expected cash flows and cheaper valuations. In addition, its lease agreements are structured in SGD, providing a hedge against the more volatile IDR. If compared to SUNSP 2/20, and allowing for a 2y difference in duration, we opine that FIRTSP 5/18 should provide a pick-up of around 15-20bps.
Fundamentals	We believe that FIRST REIT has strong fundamentals and outlook due to:  1)     Robust credit fundamentals. If compared to its SG REIT peers, it has a healthier credit profile, with leverage at 32.7% (peers: 33%), Total Debt/ EBITDA at 4.55x (peers: 9.3x) and EBITDA Interest Coverage at 5.4x (peers: 4.6x). 2)     Stable cash flows. It has stable cashflows as it has full occupancy rates and long lease rental agreements (averaging 11.2 years) with the hospital operator, Siloam Hospitals. As most of its operations are in Indonesia, the REIT is insulated from forex fluctuations as the Indonesian rental agreements are structured in SGD. 3)     Strong franchise supported by established sponsor. Siloam Hospitals is owned by PT Lippo Karawaci Tbk, an established property developer in Indonesia, who is also the largest shareholder in FIRST REIT at 27.7%. Though we acknowledge the presence of concentration risk, we believe that the underlying stable demand for healthcare and the established business of PT Lippo Karawaci should moderate any concerns in this area.