RHB FIC Credit Market Update - 5/8/15

5 August 2015

Credit Market Update

           

Mixed Performance and Tepid Flows ahead of NFP; Gajah Tunggal Downgraded by S&P; Keep BHARTI 6/25

APAC USD CREDIT MARKETS                                                    

¨      Asian credit markets spreads widened; UST lose traction. The iTraxx AxJ IG crept up 1.2bp to 112.9 despite Chinese regulator’s efforts to stabilize the stock as investors remained cautious. In the US, Hawkish tone from the President of the Federal Reserve Atlanta, Dennis Lockhart remarks of a September hike and the oil price rebound to c.USD50/bbl drove the UST up by 4-9bps, with the 2y and 10y closing at 0.74% and 2.23% respectively.

¨      On flows, Asian credit markets were quiet as investors await the US NFP numbers on Friday. The average IG Corporates under our coverage widened 1bps to 3.15%. We observed that Chinese IG corporates TENCNT 20, BIDU 20, BABA 19-21s, CNOOC 21s, and SINOCE 20s saw yields widened over 10bps. The notable gainers in this space were PETMK, TIAMK, PTTTB 35s, WPLAU 19-21s, GMGAU 20-21s, ORGAU 21s, and SCGAU 21s. Yields of NOBLSP 18-20s continue to tighten 10-20bps following statements from the Group that it had sufficient cash to redeem its 4 August USD735m bond.

¨      Similarly in the HY space, average yields rose 6bps to 8.65% as Chinese HY real estate and O&G were the underperformers as seen with COGARD, LNGFOR and MIEHOL 18-19s.

¨      On economic data, US June factory orders increased by 1.8% (consensus: 1.8%; prior -1.1% m-o-m), which is a positive sign for its struggling manufacturing sector. On the other hand, key data releases later in the day include the US ADP employment, June Trade Balance and the ISM non-manufacturing.

SGD CREDIT MARKETS

¨      Active flows in bank space ahead of WSTP new print. The SOR curve marginally flattened yesterday, with the 5y dipping 1.9bps (to 2.18%) while the 2y saw similar movement by 0.5bps (to 1.51%). Flows were more active, with activity seen in bank names such as OCBCSP LT1 perps and UOBSP B3T2 perp ahead of Westpac’s new B3T2 print. Continued selling was seen in commodity/ O&G names such as OLAMSP, GGRSP, EZRASP and VALSZP as commodity price weakness lingered.

¨      In the primaries, Westpac Banking Corp printed a SGD325m B3T2 (A3/BBB+) 12PNc7 at 4%.

MALAYSIA CREDIT MARKETS

¨      Power names fueled corporate flows amid quiet trading session. Corporate flows remained quiet with only MYR283m transacted or 43% lower than YTD average of c.MYR500m. Credit yields moved sideways in general. Power names were active which formed 48% of total trade as MYR137m exchanged hands. SEB 6/16-6/26 ended the day at 3.905%-4.728% (-1bps to +1bps); while Malakoff 12/19 tightened 0.5bps to 4.55%.

¨      On the govvies front, investors continue to stay sideline on MYR2.3bn trading volumes amid bearish Ringgit trend. The 3y-10y MGS benchmarks concluded the day at 3.23%-4.06% (-1bps to +2bps); while USDMYR is testing new high this morning at around 3.87.

¨                         

TRADE IDEA: USD

Bond(s)	Bharti Airtel Limited (BHARTI) BHARTI 4.375% 6/25 (Baa3/BBB-/BBB-) (Price: 101.38, YTM: 4.202%; Z+193.6bps) (Amount O/S: USD1.0bn)
Comparable(s)	BHARTI 5.35% 5/24 (Baa3/BBB-/BBB-) (Price: 108.68, YTM: 4.159%; Z+198.8bps) (Amount O/S: USD1.0bn) BHARTI 5.125% 3/23 (Baa3/BBB-/BBB-) (Price: 107.16, YTM: 4.021%; Z+195.5bps) (Amount O/S: USD1.5bn) TELMAL 7.875% 8/25 (A3/A-/A-) (Price: 132.16; YTM: 3.944%; Z+171.6bps) (Amount O/S: USD300m) PCCW 5.75% 4/22 (NR) (Price: 107.50; YTM: 4.441%; Z+248.7bps) (Amount O/S: USD300m)
Relative Value	We reiterate BHARTI 6/25 which offers 4-18bps absolute yield pickup and USD5-7 lower cash price versus slightly shorter tenured BHARTI 23 & 24. BHARTI 6/25 has rallied since our pick on 1 July 2015, narrowing 35.7bps in YTM and 19.4bps in Z-spread. We also like BHARTI 25 against peers like TELMAL 25 for the former’s substantially lower price, and against PCCW 22 for BHARTI’s better credit profile. We opine that BHARTI 25 will continue to narrow given its cushy buffer against volatile USTs and satisfactory results for Apr-Jun period (1QFY3/16) released yesterday, showing potential for better earnings while keeping leverage intact following tower sales from its (less profitable) African operations.
Fundamentals	BHARTI’s healthy credit profile is underpinned by the follow key attributes: 1)   Leading market position as largest cellular service provider in India with 228m subscribers, and 3rd largest mobile operator worldwide with 303m subscribers (Apr-15); 2)   Resilient profitability and cash flow generation maintaining a 5y-average EBITDA margin of 33% despite intensifying competition and 7.7% 5y-CAGR of operating cash flows to INR242.5bn in LTM; 3)   Firm access to capital markets given its track record of successful refinancing exercises; 4)   Strategic support from SingTel which holds a c.32% stake in BHARTI 5)   Leverage rose slightly but stay manageable as reflected by  a 5.7% QoQ rise in net debt to INR591.2bn, equivalent to 1.86x of LTM EBITDA (Mar-15: 1.78x); but offset by better liquidity with cash (20.3% higher QoQ) at INR125.9bn against ST debt (10.5% lower QoQ) at INR189.1bn. *all financials as at Jun-15, unless stated otherwise.

CREDIT UPDATE

Company/ Issuer	Sector	Country	Update	RHBFIC View
Bharti Airtel Limited (BHARTI, Baa3/BBB-/BBB-)	Telcos	IN	1Q FY3/16 results: ·     EBITDA grew 6% YoY to INR82.6bn, PBT declined 13% YoY to INR25.0bn, while net income was up 40% YoY to INR15.5bn (on one-off gain INR14.3bn including sale of wireless towers in Africa); ·     EBITDA margin up 1.1% to 34.9%, lifted by India widening 2.1% to 40.4%; ·     CAPEX flat at INR39.9bn, plans mostly aimed at increasing 3G and 4G coverage; ·     India mobile service ARPU declined 2% YoY to INR198, Africa ARPU down 10% to USD4.30.	Maintain overweight on BHARTI given resilient YoY EBITDA growth in major business segments and market leadership in India as largest cellular service provider with 228.25 million subscribers as of April 2015. Credit profile remains mostly intact after notable transactions such as USD500m investment in Mauritius subsidiary, USD1.0bn 10y notes issuance, but mitigated by USD1.3bn sale of phone towers in Africa. Leverage rose during the quarter as net debt was 5.7% higher at INR591.2bn, equivalent to 1.86x of LTM EBITDA increasing from 1.78x at end of last quarter; but liquidity improved with cash up by 20.3% at INR125.9bn against 10.5% lower ST debt of INR189.1bn. BHARTI 23, 24 & 25 rallied 30bps tightening in yields to 4.062%, 4.198% and 4.187% respectively to last night’s close (though the latter has widened to 4.227% now).
CapitaLand Ltd (CAPLSP, NR)	Property	SG	Singapore’s major property developer announced today its 2Q2015 revenue increase by 17.8% to SGD1.03bn while net profit ended lower by 3.1% to SGD609m.	Marketweight on credit. CapitaLand’s credit metrics continue to be slightly strained if compared to its SGD property peers, though we saw YoY improvement in its credit metrics with 1Q2015 EBITDA Interest Coverage at 2.5x (1Q2014: 2.03x; peers: 4.1x) and Total Debt/ Assets at 35.1% (2014: 36.2%; peers: 39%). The tighter credit profile is mitigated somewhat by high amount of fixed rate debt (70%). It benefits from a strong recurring income source, with 71% of total assets comprised of investment properties. In addition, 45% of total assets are in China (followed by 39% in Singapore), with around 55% of China assets in Tier 1 cities; hence, this should insulate it somewhat from the protracted slowdown in the SG property space.