RHB FIC Credit Market Update - 5/11/15

5 November 2015

Credit Market Update

           

Spreads Tightened as Treasuries Spiked; Vedanta, Hyflux Posted Weaker Earnings; Woolworth Downgraded

APAC USD CREDIT MARKETS                                                    

¨      Risk-on strengthened APAC credit market. The iTraxx AxJ IG tightened further by 3.7bps to c.125bps as investors turned bullish ‘risk-on’ in-line with the stronger performance across regional Chinese equities market on the back of the Chinese government new 5-year plan. The 2y and 5y UST climbed higher to c.0.84% and 1.64% respectively after Fed Chair Janet Yellen hawkish speech on ‘live possibility’ of a Dec rate hike. UST yields continue to rise even and after the better-than-expected Oct ADP employment at 182k (consensus: 180k), Oct Markit Services PMI at 54.8 (consensus: 54.5) and Oct ISM services print of 59.1 (consensus: 56.5). Furthermore, USD26bn 2y UST note auction received the lowest BTC of 3.01x as a rate hike remains on the cards. On the other hand, Brent oil reversed gains made in the previous session -3.9% to c.USD48.6/bbl.

¨      Average corporate credits spreads tightened 1.5bps to 148bps*. The spillover from the Chinese equities performance helped Chinese property players with spread tightening of 4-7bps for Franshion 21, Wanda 18 and CHIOLI 22, similarly Indonesian SOEs like Perusahaan Gas 24, PLN 21, Pertamina 21 also improved by 5-7bps. Vedanta surged 60-130bps as HY yields continue on its strengthening path narrowing further by 16bps to 8.64%*. Yields of Vedanta 16-23 compressed significantly after the company announced that it will halt its dividend plan. The miner has also further trim its capex guidance to USD700m from USD1bn earlier this year (more in Credit Update below).  

¨      Shandong Gold (A1/A/A) receives USD3.1bn for its USD300m 3y bond. The miner priced its USD300m 3y bond at T+162.5bps (IPT: 195bps) with a whopping BTC of 10.3x, mainly taken up by banks (58%) and fund managers (31%).

*based on RHBFIC internal indices.

SGD CREDIT MARKETS

¨      Investors see opportunity in fluctuating oil prices; Hyflux pre-tax profit results largely flat. The 2y SOR fell 1.5bps to 1.79% and 5y dipping by 1bp to 2.40%, with similar movements in the SGS, with the 2y dipping by 1.5bps (to 1.19%) while the 5y was mostly unchanged (-0.1% to 1.90%). There was better demand for O&G papers like SCISP, SWIBSP and KRISSP which was 5-10bps tighter (based on Bloomberg) after Brent touched USD50.5/bbl briefly before going back to the USD48/bbl. Meanwhile CAPLSP papers were better bid due to Capitaland’s better 3Q15 results.

Hyflux’s (NR) 3Q15 revenue rose 32% YoY to SGD133.5m largely due to its Oman water project while net profit fell 43% to SGD7.5m mainly from the absence of tax credits seen in 3Q14. Its credit profile continues to look tight, with 2Q15 EBITDA Interest Coverage at 3.8x (2Q14: 2.8x) while LTM Total Debt/ EBITDA is at 43x (2Q14: 39x), and cash/ST debt has slipped below 1.0 in this quarter to 0.97. In the primary market, Suntec REIT (Baa2) issued a SGD105m at 2.83%. 

MYR CREDIT MARKETS

¨      Financial bonds drove trading flows. Corporate market was active with MYR521m exchanged hands yesterday. Financial names were heavily transacted – Sabah Dev 17-19 on combined MYR100m trades ended in between 4.45%-4.76% (-3bps to +2bps); while Alliance Bank new subdebt 10/25c20 continue its bullish run to close 0.5bps lower at 5.244%. Elsewhere, YTLPI 8/18 inching 0.8bps lower to 4.333% as the Group secured a 3-year extension for its 1212–MW gas-fired combine cycle power plant in Paka and Pasir Gudang, after its original PPA expired on 30-Sep.

¨      Govvies ended mixed before Yellen’s testimony, Fed hike probability in Dec jumped to 58%. Govvies range bound yesterday as investors stayed cautious before Yellen’s testimony to the House Financial Services Committee last night. We saw the 3y- and 10y-MGS slipped 1bps-2bps to 3.59% and 4.14%; although 5y-MGS inched 1bps higher to 3.74%. Ringgit, meanwhile, ended the day sturdier at 4.26/USD yesterday. However, the positive momentum hurdled by hawkish signal from the Fed’s Chairman who mentioned that rate hike in the final FOMC meeting in mid-Dec could be appropriate. Subsequently, the possibility of rate normalization in Dec implied by the future market increases to 58%, while Ringgit retreats to 4.28/USD this morning. Investors to focus on MPC meeting today where we expect BNM to keep the OPR at 3.25%.

CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
Vedanta Resources Plc (Ba1/B+/NR; Neg)	Mining	India	Vedanta’s 1H3/16 results took a beating on commodities weakness. Revenue and EBITDA plunged 12% and 39% YoY respectively while losses widened to USD118m from USD4.7m a year ago. The company’s cost management initiative and debt refinancing and restructuring exercise resulted in 17% YoY drop in net debt to USD7.5bn while cash levels rose 9% YoY to USD8.9bn. However, leverage continue to deteriorate due to the drop in commodities prices as net debt/EBITDA and debt/equity increased to 2.6x and 1.5x respectively compared to 1H15’s 2.1x and 1x.	Maintain underweight on Vedanta given exposure to oil (40% of EBITDA), zinc (37%), aluminium (11%) and the remaining 12% in copper, iron ore and energy. Commodities prices are expected to remain subdued as evident by the c.12% YTD decline of oil prices and c.20% YTD drop of zinc, aluminium and copper prices. Delay of dividend distribution, capex reduction and debt refinancing and restructuring exercise are credit positives but we note that the company’s leverage remains high. Furthermore, the instrumental merger of Vedanta Ltd and Cairn India, which will pave way for the restructuring of USD1.25bn loan between the two companies, is slightly behind schedule. Vedanta 1/19 was last priced at 12.25%/11.76% at T+1065/1059bps and Z+1106/1057bps.
Woolworths Ltd (WOWAU) (Baa1; Neg/ BBB+; Neg/ NR)	Consumer	AU	Moody’s revised WOWAU’s outlook to Negative (from Stable) crucially due to declining comparable-store sales growth (CSS) despite AUD300m ‘investment’ in last 6 months to lower prices and improve services. Absence of a new CEO during Christmas sales and lack of visible strategy also weighed ratings. Downgrade triggers include: ·          CSS remaining in negative, ·          home improvement and general merchandise underperforms, ·          debt/EBITDA rising to 4x, or ·          EBITDA/interest falling towards 4x.	Maintain Marketweight. A downgrade is imminent should next financial results breach Moody’s Baa1 tolerance levels. To recap, WOWAU was placed on Negative outlook (17-Jun) and downgraded (28-Aug) by Moody’s earlier this year on weak performance. S&P had also revised WOWAU’s outlook to Neg last week (30 Oct). We opine that WOWAU operating position remains strong (36% market share, albeit declining) though moderated by weakening financials. WOWAU 9/20 (USD) currently yields 3.219%, widening 10bps since Tuesday’s close.
Tenaga Nasional Berhad (TNB) (A3; Pos/ BBB+; Sta/ BBB+; Sta) (RAM: AAA; Sta/ MARC: AAAid; Sta)	Utilities	MY	TNB had reportedly placed the lowest bid for Edra Global Energy, on news that Qatar’s Nebras Power QSC (NPQ) is looking to partner with China General Nuclear Power Corp (CGNPC) in the bidding.	Maintain Overweight. TNB conservative bid is credit positive in our view while keeping its leverage position in check. Nonetheless, TNB may still acquire Edra due to foreign ownership cap of 49%. TNB 11/25 (USD) widened 4bps to 4.267% since Tuesday’s close.