RHB FIC Credit Market Update - 4/8/15

4 August 2015

Credit Market Update

           

Yields Tightened as Oil Nosedived to Below USD50/bbl; GLP’s Outlook Revised to Negative; Hold BFB 1/22

APAC USD CREDIT MARKETS                                                    

¨      UST gained on weaker oil prices. The iTraxx AxJ IG inched up 1bp to 111.7 as the Shanghai index fell 1.11% despite Chinese regulators latest restrictions on short selling aiming to stabilize the stock market. Overnight, the UST fell 1-6bps with the exception of the 2y, on the combination of growing expectations for a September rate hike and falling commodities prices (Brent oil falling 3% to c.USD49/bbl).

¨      On flows, the average IG Corporates under our coverage tightened 3bps to 3.14%. IG Korean power and O&G credits were the notable gainers in KOHNPW 18-25s, KOROIL 17-24s, GSCCOR 17-19s, KOEWPW 17-19s, KORGAS 20-26s and KORELE 26-27s with yields tightening over 7bps. In the HY space, average yields rose 3bps to 8.57% probably on profit taking initiatives. Other notable trade was Noble Group, whereby yields of NOBLSP 18-20s tightened 60-110bps after the group announced it will bring forward its 2Q results by 3 days to 10-Aug to address ‘misleading and untruthful information’ along with PwC’s findings on its accounting policies and long-term contracts. We remain neutral on this development, but we will have to further access information of the group when it releases its results.

¨      In the primaries front, Shanghai Electric (Ba2/BBB/BBB+) priced its USD500m 5y bond at T+220bp (IPT: 250bp; BTC: 4.8x) taken up mostly by banks (57%) and fund managers (21%). New issue, Car Inc’s USD300m 5.5NC3 6.25% bond received over USD3bn offers with a BTC: 10x. Other the other hand, Oceanwide Real Estate (NR/B/B) may price a USD 5Put3 (IPT: 9.875%) this week.

¨      On economic data releases, the US will release its official July official jobs report this Friday. Yesterday, US ISM data for July printed lower at 52.7 (consensus: 53.5; prior: 53.5), while June personal spending rose 0.2% (consensus: 0.2%; prior: 0.7%).

SGD CREDIT MARKETS

¨      Oil prices breach USD50/bbl as net selling seen in commodity names.  We observed a parallel dip by around 4.5bps in the short-to-mid SOR curve, with the 2y and 5y closing at 1.52% and 2.20% respectively. Brent oil prices breached the USD50/bbl psychological level (ending at USD49.5/bbl) yesterday as saw some net selling on O&G names like SWIBSP, EZRASP as well as commodity trader OLAMSP while pickings were seen into yielder names like YLLGSP, CENCHI and OHLDP.

¨      Singapore’s July PMI came in weaker at 49.7 (consensus: 50.1; June: 50.4), and this, coupled with lackluster IP numbers for the past 5 months, point to a weaker industrial outlook in the near-term. We continue to have a negative outlook for the SG Industrial REIT sector, as REITs with weaker operating metrics (SSREIT, VITSP) have had their ratings/ outlook downgraded.

¨      Global Logistic Properties’ outlook revised to Baa2/negative (from Baa2/stable) by Moody’s on increased appetite for acquisitions. To recap, the company announced in late July that it has entered into a definitive agreement to acquire a portfolio of logistics-related real estate assets from Industrial Income Trust (unrated), valued at USD4.55 billion, which has assets of 58 million square feet spread over 20 major US markets.

MALAYSIA CREDIT MARKETS

¨      Credit yields generally inched lower amid quiet trading day with MYR288m volume, in relative to MYR398m last Friday. PTPTN led the activity chart on MYR100m trades, ended the day at 4.317% (-0.3bps). Elsewhere YTLPI 8/18 and 3/23 tightened 1bps-2bps to 4.18% and 4.599% respectively, on combined MYR40m transactions.

¨      Benchmark MGS yields continue to move higher along with weakening Ringgit which concluded the day around 3.854 level against the greenback. Trading activity were thin throughout the day with a total of MYR1.7bn exchanged hands. We saw the 5y, 7y and 10y conventional benchmarks climbed 1bps-2bps to 3.64%, 3.96% and 4.07%; although the 3y-MGS settled 1bps lower at 3.21%.

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TRADE IDEA: SGD

Bond(s)	Bright Focus Bhd (“BFB”) BFB 1/22 (RAM: AA2) (Last trade: 29-July; Price: 100.39; Yield: 4.729%; 7y-MGS+ c.77bps) (Amount O/S: MYR70m)
Comparable(s)	ANIH 11/22 (MARC: AA) (Last trade: 15-Jun; Price: 104.13; Yield: 4.56%; 7y-MGS+ c.56bps) (Amount O/S: MYR160m) KESAS 10/22 (RAM: AA2) (Last trade: 5-Jun; Price: 101.815; Yield: 4.456%; 7y-MGS+ c.37bps) (Amount O/S: MYR90m) KESTURI 12/22 (MARC: AA-) (Last trade: 24-Jun; Price: 97.58; Yield: 4.638%; 7y-MGS+ c.64bps) (Amount O/S: MYR120m)
Relative Value	In toll road sector, we continue to see value in BFB 1/22 which offer 17bps-27bps pick up over similarly rated ANIH 11/22 and Kesas 10/22, while is also trading 9bps cheaper than 1-notch lower rated Kesturi 12/21. BFB 1/22 has tightened mildly by c.0.3bps from 4.732% since our last call on the 30-Jun. Nevertheless, we note that the smaller BFB 1/22 tranche could constrain its liquidity
Fundamentals	BFB’s credit profile is supported by the following: 1)   Strategically aligned expressway. The toll road is the fastest route that connects KL city center to Putrajaya/Cyberjaya and KLIA. As at 9M14, BFB has solid traffic base with average daily traffic (ADT) of 109k, although c. 5% below the base case projected traffic of 115k for 2014. 2)   Strong debt servicing capability. Based on our estimation, BFB needs c. 116k ADT in between 2015-2033, in order to service the debt obligations (compared to base case projection of average 214k). At flat ADT of 116k, we estimate the FSCR to average at 3.1x. Hence, we view that BFB able to absorb significant traffic shock from the initial projection. 3)   Seri Kembangan Link set to boost collection. The construction of Sri Kembangan Link (SK Link) is ahead of schedule (progress as at Jun-14 at 66% vs scheduled timeline of 42%).  Expected to be completed in Jul-16 (while we saw the banner stated ‘to be completed by Nov-2015” from recent sighting”), SK Link is estimated to contribute about 9% to total revenue (based on the initial year ADT forecasted by traffic consultant). 4)   Regulatory risk.  We opine that the government to honour concessionaires in the event of delay in toll rates hike as shown from past records.