RHB FIC Credit Market Update - 2/11/15

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2 November 2015

Credit Market Update

           

Chinese PMI to Set Appetite for Credits before NFP 

APAC USD CREDIT MARKETS                                                    

¨      Chinese PMI numbers could offers respite for credits. iTraxx AxJ IG inched marginally lower to 130.5bps with regional equities markets trading relatively flat last week. USTs gained with the 10y and 30y narrowing 3bps to 2.16% and 2.93% respectively due to weaker-than-expected US economic data like personal spending and inflation. Sept consumer spending rose just 0.1% (consensus: 0.2%; prior: 0.4%), while the Sept core PCE index was up 1.3% YoY (consensus: 1.4%; prior: 1.3%). On the contrary, the Oct Chicago purchasing manager surged to 56.2 (consensus: 49.5; prior: 48.7) and the Oct consumer sentiment remains stable at 90 (consensus: 92.5).

¨      IG credit spreads and yield stayed flat at 2bps to 152bps* and 3.07%, with some gains in Chinese infrastructure names such as China State Grid 23, China Rail Resources 23 and China Railway Construction 23.  HY credits strengthening momentum continued as yields shed 2bps to 8.96%*. Outperformers were Golden Eagle 23, Shimao Property 20 and Vedanta 19-21s with yields tightening 9-21bps.  

¨      Kexim (Aa3/AA-/AA-) may price 5.5y and 10y USD bonds with IPT of 110 and 130bps respectively. On the other hand, China State Construction Engineering (A2/A/A) will be meeting investors in Asia and Europe beginning tomorrow for a potential bond issuance.

¨      China’s Oct manufacturing PMI below expectations at 49.8 (consensus: 50). The China’s Oct Caixin PMI that was released earlier today that showed a slower-than-expected contraction at 48.3 (consensus: 47.6; prior: 47.2). Investors will be eyeing the US Oct manufacturing PMI tonight expected at 54, along with the Oct ISM manufacturing that is forecasted at 50 (prior: 50.2).

*based on RHBFIC internal indices.

SGD CREDIT MARKETS

¨      NOL’s results lackluster; Flows in HY O&G were mixed after last week’s bond consent solicitation announcements and fluctuating oil prices. There was a steepening in the SOR benchmark curve, with the 5y rising by a larger 5bps (to 2.36%) while the 2y mildly rose by 1.5bps (to 1.81%). Friday saw continued interest in the property space on names such as KREIT, AREIT and MINTSP while mixed activity was seen in HY O&G space on issues like EZRASP, KRISSP and VALZSP after last week’s bond consent solicitation announcements by Pacific Radiance (NR) and Miclyn Express (NR) to allow a looser EBITDA Interest Coverage for the former and allow an early bond redemption for the latter. Brent oil prices closed at USD49.6/bbl, the highest seen last week. 

¨      Meanwhile, Neptune Orient Lines (NR) 3Q15 revenue fell 28% YoY to USD1.2bn and recorded a net loss of USD95.6m due to weak global demand and contraction in freight rates, with the Baltic Dry Index (a measure of global sea cargo transportation costs), lingering lower at c.720 (from 3y peaks of 2,340 in Dec-2013).  Overseas Education Limited (NR), a Singapore-based education provider, has issued a profit warning for its upcoming 3Q15 results, which may exert downward pressure on its OELSP 4/19 which is currently trading above par at c.103. Looking ahead, investors will be eyeing the SG Oct PMI that is to be released tomorrow (consensus: 48.9; prior: 48.6).   

MYR CREDIT MARKETS

¨      Mixed performance on improved flows. Flows improved to MYR383m mostly focusing on AAA (33%) and GG (35%). Yields on TESB 10/20 rose 40bps to 4.402%, while UMWH 2/16 dropped 32bps to 3.627% after UMW Oil & Gas secured a spot charter for its UMW Naga 7 jack-up rig from Petronas Carigali. We also note yields on CIMBI 4/21 climbed 7bps to 4.134% after weak CIMB Niaga results (net profit fell 74% YoY to IDR89bn). Utilities players we mixed as YTLPI 10/24 rose 21bps to 4.939% while SEB 6/26 inched 4bps lower to 4.859%.

¨      MGS and Ringgit little changed. MGS held firm while Ringgit weakened minutely to 4.30/USD on Friday, supported by expectations for additional liquidity as Asia voiced softer economic growth and Europe posted zero inflation rate. The CNY strengthened 0.62% (strongest day-gain in a decade) to 6.3174/USD as the PBOC announced plans for looser capital controls, while the China 5y Plans hinted softer Chinese growth of 6.5%-7% and scrapping the one-child policy. BoJ held off on more stimulus but revised its 2015 inflation target down to 0.1% (from 0.7%) and postponed reaching its 2% target to 6 months through Mar 2017.

CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
Woolworths Ltd (WOWAU) (Baa1; Sta/BBB+; Neg/NR)	Consumer	AU	S&P revised WOWAU’s outlook to Neg from Sta, warning that: ·          accelerated ‘investment’ in price reduction and service improvements could weaken financial profile; ·          Masters and Big W businesses are a drag, where exiting could increase earnings as much as 21% in FY2017.	Maintain Marketweight. Declining comparable store sales (CSS) remains a concern and could erode WOWAU’s market share (currently c.36%) as competitor Wesfarmers’ Coles’ had resilient CSS growth of 3.6% (vs WOWAU’s -1.0%). Liquidity is slightly pressured in FY6/16 given lumpy maturities of AUD1.7bn (c.70% USD-denominated), though will be sufficiently covered by AUD1.33bn of cash reserves and AUD2.3bn of undrawn facilities at Jun-15. Debt/EBITDA rose slightly to 0.96x at Jun-15 (from 0.91x a year ago) but buffered by healthy and improving EBITDA interest cover of 14.58x (from 13.56x). WOWAU 9/20 (USD) yield widened 10bps on Friday to 3.077%.
Industrial and Communication Bank of China (A1/A/A; Sta)	Banking	CN	Stagnant profitability in 3Q15 while asset quality diminishes; capitalization remains strong. Net profit only grew marginally by 0.65% YoY to CNY222.3bn while NIM is unchanged at c.2.53% from 1H15. NPL ratio rose to 1.44% in 3Q15 from 1H15’s 1.4% while NPL coverage declined to c.158% from 163%. Higher capitalization levels with CET1, T1 and CAR of 12.4%, 12.7% and 14.4% compared to 1H15’s 12.13%, 12.4% and 14.2% respectively.	Maintain marketweight as the waning profitability and deterioration of asset quality are within our expectations. We expect further pressure on both aspects moving forward following PBOC’s recent rate cut but we remain comfortable with credit given its systemic importance in China, strong balance sheet, strong government shareholding of 70% via Central Huijin and MOF, and high likelihood of involvement in major national projects. ICBCAS B3T2 9/25 was last priced at 4.71%/4.64%, T+258/250bps and Z+272/264bps.
China Construction Bank (A1/A/NR; Sta)	Banking	CN	CCB’s NIM compressed and NPL rose in 3Q15; balance sheet strengthened. Despite a 5,4% YoY increase in net interest income, net interest spread and NIM compressed 14bps and 16bps YoY to 2.47% and 2.64% respectively as a result of China’s rate cut. Loan quality continue to falter as NPL ratio rose to 1.45%, or 3bps and 25bps higher than 1H15 and FY14 respectively. NPL coverage declined accordingly to 179% from 185% in 1H15. Balance sheet is the strongest among the Big Five with CET1 of 12.7% and CAR of 15% compared to 12.4% and 14.7% in 1H15 respectively.	Maintain marketweight on CCB. The pressure on NIM and NPL are expected and may continue to deteriorate further as China continues to embark on an easing monetary policy to save its ailing economy. However, the credit of CCB remains intact given its status as one of the largest five banks in China, exceptionally strong balance sheet and expected strong parent support from the government in the event of financial distress. CCB B3T2 5/25c20 was last priced at 4.12%/3.97%, T+260/245bps.
Bank of China (A1/A/NR; Sta)	Banking	CN	Lackluster earnings, capitalization holds steady while NPL rose a tad. Profit rose marginally by 0.8% YoY to CNY137.9bn but spreads of interest income and cost of funding narrowed as NIM declined to 2.14% compared to 2.2% in 1H15. Asset quality dropped albeit marginally whereby NPL ratio and coverage were at 1.43% and 154% respectively, compared to 1H15’s NPL ratio of 1.41% and NPL coverage of 157%.  Capitalisation was stable and unchanged with CET1, T1 and CAR of 10.7%, 11.7% and 13.7% respectively.	Maintain marketweight. As in the case of other Big Five Chinese Banks, we expect further margins compression and asset quality deterioration moving forward given the slowing Chinese economy and PBOC’s expansionary monetary policy. Our marketweight call is, however, supported by BOC’s strong balance sheet and strong support from the government given 68% ownership by Central Huijin. BCHINA Senior 6/25 was last priced at 3.81%/3.72%, T+168/159bps and Z+181/172bps.
Neptune Orient Lines (NR)	Transportation	SG	Sluggish revenue on continued weaker liner outlook. NOL’s 3Q15 revenue dipped by 28% YoY (to USD1.2bn) while it recorded a net loss of USD95.6m due to continued weaker growth in its Liner business. NOL sold-off its profitable Logistics business for USD1.2bn in Feb-2015 to Kintetsu World Express.	Maintain underweight on credit.  NOL’s credit profile has improved as it has pared down total debt to USD2.9bn (Q414: USD5.3bn), though it continues to be constrained with LTM Total Debt/ EBITDA at 8.5x (FY2014: 24.3x) and EBITDA Interest Coverage at 2.63x (FY2014: 1.77x). In addition, its cash position of USD249m is insufficient to cover its short-term debt of USD527m. As it sold-off its profitable Logistics business, and the outlook for the Liner industry continues to look weak, it will continue to face headwinds in improving its financials. The Baltic Dry Index continues to linger lower at c.720, down from 3y highs of 2,340 in Dec-2013. In addition, NOLSP bonds were hit by rumours of a Temasek divestment (which currently owns 67% of NOL), that saw prices of NOLSP 11/19 fall by c.6% (from c.101.5), but has since recovered to around c.98.