Asia-Pac Credit Insights Get Ready For A Bumpy Summer

CREDIT RESEARCH
20 April 2012
ASIA-PAC CREDIT INSIGHTS Get ready for a bumpy summer

Christina Chiow, CFA +65 6308 3214 christina.chiow@barclays.com Krishna Hegde, CFA +65 6308 2979 krishna.hegde@barclays.com Lyris Koh +65 6308 3595 lyris.koh@barclays.com
Credit Strategy: Get ready for a bumpy summer................................................................. 1 For Asia credit benchmarked investors, we prefer high grade to high yield. We suggest a neutral stance towards high yield. In high grade, we suggest overweighting Korea and India credit, and underweighting China, Indonesia, Thailand and Singapore. In high yield, we suggest overweights on Philippine corporates, Chinese property developers and the Indonesia non-coal segment, but an underweight on Indonesian coal companies. Summary recommendations................................................................................................. 15 Sovereigns: Low-beta holdings to cushion bumps in the road....................................... 18 We suggest an overweight stance on Indonesia and Sri Lanka, and an underweight for Vietnam and the Philippines versus the EM Sovereign Credit benchmark. Tactically, we recommend buying Indonesian bonds, given their recent weakness, and adding to holdings of Sri Lanka via the primary market. High Grade Corporates: Supply issues continue to drive spreads ................................. 30 High grade corporates have shifted towards bond markets to redeem bank borrowings, and we expect further incremental supply to emerge, largely from China. From a valuation perspective, and given our view that credit profiles will remain broadly stable through 2012, we recommend looking for opportunistic entry points to invest in BBB rated names. High Yield Corporates: A slow recovery.............................................................................. 46 Valuations on Asian HY corporates may start to look attractive on an improving/stabilising operating backdrop. Our top picks in the Chinese corporate sector are the mass-marketoriented property developers, including Country Garden and Evergrande. Among Indonesian corporates, we prefer the industrial sector on valuations and potential credit improvement. Financial Institutions: Benign backdrop; Prefer Korean banks ....................................... 70 We find current valuations less attractive and are now broadly neutral across the Asian banks sector. The exception is Korea, where we are overweight. In our view, improved USD liquidity and Moodys upgrade of the sovereigns outlook to Positive are supportive for spreads. Issuer index, A-Z...................................................................................................................... 98
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Justin Ong +65 6308 2155 justin.ong@barclays.com Avanti Save +65 6308 3116 avanti.save@barclays.com Jit Ming Tan, CFA +65 6308 3210 jitming.tan@barclays.com Timothy Tay, CFA +65 6308 2192 timothy.tay@barclays.com Erly Witoyo +65 6308 3011 erly.witoyo@barclays.com Nicholas Yap +65 6308 3180 nicholas.yap@barclays.com www.barclays.com
Barclays | Asia-Pac Credit Insights
ASIA CREDIT STRATEGY
Get ready for a bumpy summer

Krishna Hegde, CFA +65 6308 2979 krishna.hegde@barclays.com Avanti Save +65 6308 3116 avanti.save@barclays.com

Concerns about European sovereign risk and Chinas growth outlook are likely to produce a choppy 2Q. After hitting YTD tights in mid-March, spreads have widened, and we expect return generation in the current quarter to depend primarily upon carry, with some spread widening potentially eroding those gains in higher-beta sectors. For Asia credit benchmarked investors, we prefer high grade to high yield. We suggest a neutral stance towards high yield. In high grade, we suggest overweighting Korea and India credit, and underweighting China, Indonesia, Thailand and Singapore. In high yield, we suggest overweights on Philippine corporates, Chinese property developers and the Indonesia non-coal segment, but an underweight on Indonesian coal companies. We forecast 2012 gross supply of USD-denominated bonds from Asian issuers of USD75-80bn. Net supply is expected to be substantially higher than in previous years, at USD55-60bn, which implies a 20% expansion in the size of the market. Overall, we expect credit metrics of high yield corporates to weaken. The operating outlook for Chinese corporates, especially industrials, is challenging. The outlook for Chinese property companies is more nuanced and will be based on company-specific products and geography mix. For Indonesian corporates, the outlook is mixed the coal sector is likely to see some weakness, but most industrials should enjoy an improved operating environment. For financials, we expect asset quality to deteriorate, credit costs to rise and earnings to moderate. In particular, we see increasing pressure on the credit profiles of Indian and Hong Kong banks. For sovereigns, the backdrop of weak global growth and a deteriorating external funding environment will highlight vulnerabilities and test reforms/mechanisms put in place to mitigate external risks. We also expect political headline risk to tick up.
Figure 1: Asia IG credit versus US credit (bp)

450 400 350 300 250 200 150 100 Dec-09 Avg difference: 43bp US Credit Asia IG ex sov Avg difference: 82bp Diff: 76bp
Figure 2: Asia HY credit versus US HY credit (bp)

1,800 1,600 1,400 1,200 1,000 800 600 400 Dec-09 Avg difference: 46bp Diff: 155bp US HY Asia HY ex sov Avg difference: 203bp
Jun-10
Dec-10
Jun-11
Dec-11
Jun-10
Dec-10
Jun-11
Dec-11
Source: Barclays Research
20 April 2012
Figure 3: Summary of 2Q12 Asian credit views

Comments Global themes
Worries about European sovereign debt are set to persist in 2Q12. Deleveraging by European banks has had a limited impact on Asian credit so far. While we have not seen large scale asset
sales, the loan-to-bond trend has accelerated as European banks reduce exposure. Local themes
After the 1Q GDP report and March data, market expectations of a soft landing in China have increased slightly. That said,
with growth expected to be weak in 2Q, we could see concerns rise again.
We believe the theme of corporate bond issuance in local-currencies is likely to see further momentum, driven by growing
demand for diversification by currency and geography. SGD stands out as a currency with a good demand/supply balance. Demand outlook High grade corporates and financials: Commercial banks' appetite for high grade corporate bonds is likely to diminish on tightening USD liquidity, higher secondary supply of loan assets (as European banks deleverage and dispose of assets) and increased loan/deposit ratios.
High yield corporates: Expect growing allocations from Japanese and Taiwanese accounts.
Supply outlook Sector positioning
Gross supply of USD-denominated bonds from Asian issuers of USD75-80bn. Net supply is expected to be substantially
higher than previous years at USD55-60bn expanding the market by over 20%.
Overweight: Korea and Indian HG credits. Chinese HY property. Philippines HY corporates. Underweight: China and Indonesia in HG. Indonesian coal in HY.
Positioning and forecasts

Tactical sector positioning
For Asia credit benchmarked investors, we prefer high grade to high yield. We suggest a neutral stance towards high yield.
In high grade, we suggest overweighting Korea, Indian credits and underweighting China, Indonesia, Thailand and Singapore. For India credit, even after the strong outperformance in Q1, carry remains attractive. We believe positioning in the institutional investor base remains underweight. We suggest weighting positions in shorter-dated segments. In high yield, overweight the Philippines HY corps, Chinese property and Indonesia noncoal segment while underweighting Indonesia coal. For Chinese HY industrials we turn less negative and now suggest neutral weighting (versus underweight previously). Following the Q1 GDP print we think there is scope for further policy support. Our economists expect the authorities to continue with the current policies of easing financing conditions and completing ongoing projects, especially those in the railway, water transfer and power sectors. Following the selloff in March, valuations for Chinese HY property look more attractive. Regulatory measures are becoming more bifurcated - while home purchase restrictions are likely to stay in place and investment properties will likely remain pressured, firsthome buyers are being encouraged via cheaper mortgages. Within the sector, we recommend sticking to the mass market oriented developers.
20 April 2012
Figure 4: Investment grade credit positioning

Universe Benchmark EM Asia USD IG Index Korea OAS 239 OAD Spread duration contribution Recommended positioning Comments
218
3.82
22%
overweight
USD liquidity onshore has improved following which Moody's changed ratings outlook to positive. Geopolitical risk has decreased slightly as the transition of power in North Korea looks to have gone through. We expect supply out of Hong Kong corporates/banks to be high given flush onshore liquidity conditions. Spillover from China concerns cannot be ruled out and spreads seem to adequately compensate for the supply and China risks. We revise our view to neutral from overweight. Despite significant underperformance over the last six weeks, spreads are still tight to benchmark. We believe better value can be found in high grade corporates in other countries. Political noise and supply are key headwinds. With recent China data having a softer tone and growth expected to slow further in Q2, we look for renewed concerns to translate into wider spreads. Expect supply to increase once markets stabilise. Valuations are fair. USD2.7bn of Malaysian debt matures this year and we expect net supply to be low. With some of the supply expected to be in sukuks (that attract a different buyer base), technicals for straight bonds should be supportive despite expected bond issuance from banks. Political cycle could be a source of headlines and concern. Even after the strong outperformance in Q1, carry remains attractive. Positioning in the institutional investor base remains underweight. Oil prices, a key source of risk have trended to the lower end of the range. We suggest weighting positions in shorter-dated segments. Supply should keep a lid on tightening. Sector provides lower spread than the benchmark Expect political noise to tick up in coming months. Supply potentially sovereign - could erode the scarcity value of corporate debt and result in repricing. We now recommend an underweight, from overweight previously.
Hong Kong
276
5.16
23%
neutral
Indonesia
221
7.80
20%
underweight
China
257
6.07
12%
underweight
Malaysia
185
4.84
6%
neutral
India
359
4.76
11%
overweight
Singapore Thailand
159 277
4.45 5.61
5% 3%
underweight underweight
Note: Spreads as at 10 April 2012. Source: Barclays Research
20 April 2012
Figure 5: High yield credit positioning

Market value (%) Benchmark EM Asia USD HY Index HY sovereigns 39% OAS (bp) 565 243 YTW (%) 7.20 4.47 neutral In the context of the macro risks over the next few months, we now believe a neutral weighting is appropriate (from underweight previously). Lower volatility should compensate for spread that is substantially below benchmark. Includes PSALM and old PLN bonds that are not rated by Fitch. PLN spreads to sovereign are at wides for the year. We change our view to neutral from underweight. After the selloff in March, valuations look more attractive. Regulatory measures are becoming more bifurcated - while home purchase restrictions are likely to stay in place and investment properties will likely remain pressured, first-home buyers are being encouraged via cheaper mortgages. We now recommend being overweight, from neutral previously. Within the sector, we suggest sticking to the mass market oriented developers. Most corporates are geared to investment which after surprising to the downside in Jan/Feb seems to have stabilized somewhat in March. Following 13 Aprils GDP print we think there is scope for further policy support towards these activities. Our economists expect authorities to continue with policies of easing financing conditions and completing ongoing projects, especially those in the railway, water transfer and power sectors. We turn less negative and change our view from underweight to neutral. Spread pickup in % terms of corporates vs the sovereign/quasisovereigns remains very high. Fundamentals remain strong and sentiment is positive (local stock market is close to an all-time high). Supply should be well-absorbed given domestic support. Sector dominated by Vedanta where near-term outlook will be driven by headlines around progress of the corporate restructuring. Sector has some wide spread credits where credit quality is improving and we look for the market to recognise this change. We therefore revise to overweight from neutral. Valuations are tight and potential supply could cheapen the sector. Coal prices have been trending lower. Includes HY bank capital, perpetuals and unrated Hong Kong issuers. We have revised to neutral from overweight. Recommended positioning Comments
HY Quasis
8%
273
4.36
neutral
China HY property
15%
1254
13.71
overweight
China HY industrials
10%
871
9.99
neutral
Philippines HY corps
5%
477
5.84
overweight
Indian HY
4%
813
9.15
neutral
Indonesian non-coal
4%
852
9.43
overweight
Indonesian coal Other Asian HY corps
4% 11%
630 549
7.59 6.78
underweight neutral
Note: Spreads as at 10 April 2012. Source: Barclays Research
Figure 6: Key trade ideas

Sovereigns Indonesia cash: 10s30s steepener High Grade Sell DBSSP 2.35% 17s, buy DBSSP 3.625% 22c17s Buy 3y Indian bank senior bonds Buy Korea National Oil Buy Reliance Industries High Yield Buy Bumi Resources 16s Buy Evergrande 15s
20 April 2012
Asia IG lagging US Credit

Asia investment grade continues to offer value versus Asia high yield and global/US credit 1. We also expect Asian credit to continue to benefit from crossover flows as asset managers look for incremental spread and diversification, and deploy funds to a rapidly growing asset class (the Asian credit universe has grown nearly 72% since start of 2010 versus 25-26% for US credit and US HY). Furthermore it is notable that some of the Korean investment grade credits are also a part of US Credit Index and therefore should experience a stronger crossover bid once investors shift their focus to relative valuation. Figure 7: Asia credits beta to US credit for selected periods
570 520 470 420 370 320 270 220 170 120 120 y = 1.7846x - 22.767 R = 0.9858 140 160 180 200 220
2
Asia Credit
13-Mar-12 24-Nov-11 07-Jun-10 22-Apr-10
24-Nov-11 04-Aug-11 22-Apr-10 01-Sep-09
04-Aug-11 07-Jun-10
y = 1.0644x + 170.57 y = 0.3882x + 199.33 R = 0.1272

2
R = 0.8854
y = 2.4654x - 108.28 R = 0.8107

2
y = 1.2723x + 51.347 R = 0.9264 US Credit 240

2
Source: Bloomberg, Barclays Research
Asia IG has lagged the global rally in credit

Despite a 76bp rally in Asia credit YTD, Asia investment grade credit has lagged (Figure 8), partly because Asian supply has been dominated by IG credit and the bulk of the supply has been in BBB-rated credits. Figure 8: Investment grade credit performance (OAS, bp)
400 350 300 250 200 150 100 Jan-10 US Credit Difference (RHS) 110 90 70 50 30 10 Jul-10 Jan-11 Jul-11 Jan-12 1400 1200 1000 200 800 600 400 Jan-10 100 0 -100 Jul-10 Jan-11 Jul-11 Jan-12 Asia IG ex sov 130
Figure 9: High yield credit performance (OAS, bp)

1600 US HY Difference (RHS) Asia HY ex sov 600 500 400 300
We have focused on the comparison with US credit because over the past two years, European credit performance has been driven by developments in the eurozone sovereign debt crisis.
20 April 2012
and continues to offer better risk-adjusted returns

Adjusted for risk, we think Asia investment grade credit offers better return potential than global investment grade credit. But Asia high yield credit does not sufficiently compensate investors for its high volatility compared with US high yield for instance (Figure 10). At current levels we maintain our preference for Asia investment grade credit. Broadly, Asia credits beta to US credit remains high, and data indicate that it rises during periods of risk aversion. Figure 10: Sharpe ratio for Asia credit compared with global credit
Sharpe Ratio HY Credit Asia US Europe 0.51 0.98 0.82 Asia US Europe IG Credit 0.65 0.53 0.28 Sovereign Credit Asia EM 0.59 0.61
Note: Based on Sharpe ratios for monthly excess returns since September 2009. Source: Barclays Research
Value among Asian credits rated A and BBB

Within the high grade segment, Asian credits rated A and BBB offer better value relative to their US peers (Figure 11 and Figure 12). Within the A bucket, we favour Korean names. We think Korean investors are likely to buy these bonds more aggressively once the KRW crosscurrency basis swap turns less negative. In addition, some Korean names, including KEXIM, KDB, KOFCOR and KORELE, are part of the US Credit Index. In the BBB bucket, we like the Hong Kong developers and diversified industrials, given their large, stable businesses. Although the sectors technicals may weaken, we do not expect any pressure on these companies fundamentals. Figure 11: A rated credits (OAS, bp)
330 280 230 100 180 80 130 60 'A' rated US Corps 'A' rated Asia Corps Difference (RHS) 160 140 120
Figure 12: BBB rated credits (OAS, bp)

550 500 450 400 350 300 250 200 150 Oct-10 'BBB' rated US Corps 'BBB' rated Asia Corps Difference (RHS) 230 210 190 170 150 130 110 90 70 50 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
80 40 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

20 April 2012
Figure 13: Relative valuation of Asia and comparable US high grade and high yield credit sectors
OAS (bp) Investment Grade Energy Asia 223 US 166 Amount Outstanding (USD bn) Asia 21.9 US 198.5 S&P Rating Asia A-/BBB+ US A-/ BBB+ Moody Rating Asia A2/A3 US A3/ BAA1 Comments Asian energy names have rallied and currently offer modest pick-up over US names. We like higher- spread names, such as Indian, Korean and Indonesian energy companies. Asia utilities are trading wider than US utilities even on a historical basis. For instance the ratio of Asian utilities to US utilities is currently 1.6x, compared with the historical (since August 2010) range of 1.1-1.7x. We like Korean, Chinese and Indonesian utilities, in that order.
Utilities
264
163
18.0
311.8
A-/BBB+
A-/ BBB+
A2/A3
A3/ BAA1
Banking REITS/ Construction
256 343
256 240
69.6 9.4
680.8 54.8
A/AA-/BBB+
A/ABBB+/ BBB
A2/A3 A2/A3
A1/A2 We continue to see value in the Korea policy banks. BAA1/ Broadly, we like Hong Kong developers, given BAA2 their stable fundamentals and wider spreads versus the benchmark.
OAS (bp) High Yield Metals and mining Asia 793 US 667
Amount Outstanding (USD bn) Asia 7.2 US 38.5
S&P Rating Asia BB/BBUS
Moody Rating Asia US Comments
BB-/B+ BA2/BA3 BA3/B1 Asian credits have outperformed US credits. The spread ratio stands at 1.2x versus a range of 1.0-1.8x since August 2010. The sector is largely made up of Indonesia coal producers. We suggest an underweight on the Indonesian coal and Chinese metals and mining sectors. BB-/B+ BA3/B1 B1/B2 Asian real estate companies trade wide of US peers on: 1) the weak outlook for Chinese developers versus the improving fundamentals in the US sector; and 2) expected supply from Asian developers. We have a neutral view on this sector.
Home construction
1,241 840
13.4
23.3
BB-/B+
Utilities
328
680
8.9
90.2
BB/BB-
BB-/B+
BAA3/ BA1
BA3/B1 Asian utilities trade tight compared with US high yield utilities.
Themes for the rest of 2012

European sovereigns storm clouds gather again
Investor concerns about solvency and debt sustainability of peripheral European countries has resurfaced in recent weeks. Unlike Q4 2011, peripheral yields are being driven higher by Spain, notwithstanding the fact that the country frontloaded its 2012 issuance plan. The spillover from European sovereigns to Asian credit has been limited so far. Asian credit has given up a smaller portion of its gains than US/European credit. That said, if the sell-off in Europe intensifies, we would look for Asian credit to return to its high-beta ways and underperform more significantly.
China growth to bottom in Q2 12; Easing of financing conditions underway

While the knee-jerk investor reaction to the China growth data has tended to be negative, we believe the improvement trends in March deserve more focus. Our economists expect
20 April 2012 7
the government to maintain its policy of easing financing conditions (see Postcard from Beijing, 11 April 2012), the benefits from which can be seen in Marchs above-consensus new loans of CNY1,010bn. For the full year, our economists forecast GDP growth of 8.1%. For credit markets, property sector news flow from China (discounts for mortgages for firsttime buyers, proposals to encourage price cuts to promote sales) points towards a bifurcated policy approach of keeping a lid on property prices while ensuring supportive conditions for sales and construction. We view this approach as positive for Chinese property developers bonds. Furthermore, the sharp rise in Chinas money supply in March, another focus of policy, could draw a line under the negative sentiment towards Chinese industrials.
Rest of Asia Uptick in political noise

Politics are likely to come to the forefront in several Asian countries as election/leadership transition cycles begin.
Our economists expect Malaysian elections as early as May. Ahead of the elections we expect political noise to pick up (WSJ reports that a Bersih 2.0 rally is slated for 28 April). Thailand is another candidate where headline risk could rise we suggest keeping an eye on discussions around the reconciliation bill being discussed in Parliament. Political posturing related to the Indonesian presidential election looks to have started much earlier than expected and will likely gather pace towards the latter part of 2012, when the focus will turn to potential candidates. Political noise is also building in the Philippines, with the latest headlines being about the impeachment trial of Chief Justice Corona. Although markets have so far been unaffected, we believe if the noise were to continue for another 3-4 months there is the risk of business sentiment and private investment being impacted, with a potential spill over to markets. Korean Presidential elections are expected in December while the China leadership transition will occur over September-October both these events will be significant in terms of policy stance and continuity.
Local-currency markets continue to grow - SGD outpacing CNH

Local currency corporate bond markets in Asia continue to gain scale with SGDdenominated issues picking up noticeably this year thus offering a key source of diversification for borrowers. Demand for CNH bonds, on the other hand, has diminished on reduced expectations of CNY appreciation. We believe the theme of corporate issuance in local-currency bond markets will gain further momentum, driven by growing demand for currency and geographical diversification. Investor perspective: Investor demand is strong, especially for debt in currencies viewed as safe haven or having appreciation potential. Furthermore, given the relative scarcity of paper in currencies such as SGD, investors appear willing to absorb bonds at tight levels. In most cases, Singapore- and Hong Kong-based issuers tapping the SGD market have enjoyed strong retail sponsorship. Borrower perspective: The ability to diversify the investor base is a positive. In addition borrowers are able to take advantage of the cross currency basis swap and the scarcity of local currency supply to price at levels more attractive than in USD this is especially true for names where credit spreads are wide.
20 April 2012
Figure 14: CNH and SGD issuance

6,000 5,000 4,000 3,000 2,000 1,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr 2012 YTD: USD6.8bn CNH SGD
2011: USD34bn
Demand drivers
Asia credit continues to benefit from structural EM flows (YTD inflows to EM hard currency bonds has been USD7.2bn, equivalents to 13.9% of start of year AUM) and growing allocations from Japanese and Taiwanese accounts. In line with our expectations, commercial banks demand for high grade paper has diminished (Figure 15) amid tighter USD liquidity, secondary supply of loans (as European banks deleverage and dispose assets) and increased loan/deposit ratios. In their place, private banks have picked up the slack. Liability management exercises by European banks have returned cash to retail accounts. The reinvestment of this liquidity has fuelled a hunt for yield in the region, especially by retail investors. Recent issuance data suggests that solid retail demand for HK corporate bonds. Subsequently, several European financials have tapped this demand by issuing hybrid structures targeted at private banks and accompanied with rebates. While we expect such deals to continue to see demand, we believe retail demand for Asia credit will remain especially strong for household names.
20 April 2012
Figure 15: Distribution statistics for IG bonds

60% 50% 40% 30% 20% 10% 0% Agencies Insurance companies Commercial banks Retail/pvt banks Asset Managers Others 2011 2012
Figure 16: Distribution statistics for HY bonds

70% 60% 50% 40% 30% 20% 10% 0% Insurance companies Agencies Commercial banks Retail/pvt banks Asset Managers Others
2010 20.1 3.5 8.4 2.0 NA 4.4 1.8 10
2011
2012
Primary revisions expect more supply from HK/China/Indonesia

We now forecast gross issuance 2 for 2012 of USD75-80bn, which implies USD35-40bn over the remainder of the year. In our view, the factors driving loan-to-bond migration are likely to continue. With large bond and/or loan 3 maturities over 2012-13, Hong Kong-based corporates will continue to be a source of issuance. We also expect maiden deals from Hong Kong corporates and Chinese entities. Credit availability for some Chinese corporates is likely to remain tight; therefore, these companies will look offshore to fill funding gaps. We also believe issuance from Indonesian corporates will pick up. Updated regulations and the sovereigns recent upgrade to investment grade are likely to encourage maiden issuers to tap the positive sentiment towards Indonesia assets. Furthermore, Indonesian corporates such as Indika and Cikarang have demonstrated an ability to refinance ahead of maturities via bond buybacks and exchanges a trend that is likely to continue. Figure 17: 2012 gross issuance forecast
Full year forecast USD bn High grade corporates China Hong Kong India Indonesia Korea Other 2012 30-35 3.5-5.5 12-15 3-3.5 1.5-2.0 2-3 3.5-5.5 Gross issuance 2012 YTD 19.5 3.8 10.0 1.5 NA 3.1 1.1 2011 18.6 8.9 1.9 1.0 NA 4.8 2.1
2 3
USD-denominated bond issuance in Asia ex-Japan. In this note we refer to syndicated loans as loans. Bilateral loans have been excluded (unless stated otherwise) due to limited data.
20 April 2012
Figure 17: 2012 gross issuance forecast, contd

Full year forecast USD bn High yield corporates China - Property - Others Indonesia Philippines Other Financials Hong Kong/China India Korea Singapore Others Sovereigns Total
Gross issuance 2012 YTD 5.6 3.1 1.6 1.5 1.2 0.5 0.9 11.8 0.3 0.5 5.0 3.5 2.5 5.8 42.5 2011 16.0 8.6 4.6 4.0 3.1 1.0 3.3 16.3 2.3 4.3 8.7 0.0 1.0 8.3 59.2 2010 16.2 9.5 6.7 2.8 3.1 2.5 1.2 24.3 5.5 5.6 9.8 1.5 1.9 9.9 70.6
2012 13-15 6.0-8.0 3.5-4.5 2.5-3.5 2.5-3.5 0.9-1.2 2.5-4.0 18-24 2-2.5 3.5-4.5 7.5-10.5 2.5-3.5 2.5-3 6-6.5 75-80
So far this year, high yield corporate supply has been limited despite strong performance by outstanding paper. One reason, we believe, is that issuers did not expect the sharp rally or improvement in investor sentiment. Therefore, we expect HY corporate issuance to begin in earnest in coming months, as earnings season ends (especially for China and Hong Kong corporates). Among financials, the supply mix will change with more issuance from Hong Kong, China and Indian banks, in our view. Risks to our forecast stem mainly from a sharp deterioration in the global macro picture such as renewed worries about European sovereign debts or a sharper than expected slowdown in China. If the relatively positive global backdrop changes, we expect primary market activity to decline, with only seasoned issuers being able to obtain funding.
Underlying themes for issuance remain intact

The backdrop for continued supply remains intact. The key themes driving issuance will be: 1. Loan-to-bond migration a potential source of maiden issuance 1.1. Tighter banking system liquidity: Banking system liquidity has eased but remains tight, and we do not expect liquidity to improve significantly in the medium term. Tighter banking system liquidity, coupled with demand for foreign-currency loans in Hong Kong and Singapore (and even from smaller systems such as Vietnam and Mongolia) is likely to generate spillover bond issuance as borrowers seek alternatives to bank loans. Furthermore, credit conditions in China are unlikely to see broad-based loosening, and our base case is that easing will remain selective and directed towards specific sectors.
20 April 2012
11
1.2. Deleveraging of European banks In line with our expectations, syndicated loan prices and sizes are being reset as European banks deleverage (Figure 18), and Asian and Japanese banks capture part of that market. We believe this is likely to continue to push large corporates to look at refinancing upcoming loan maturities in offshore bond markets. This technical is likely to be more prevalent in Hong Kong, where large local corporates and Chinese SOEs have previously obtained attractive pricing in the loan markets (see Figure 19 for list of Hong Kong and Chinese corporates with upcoming loan and bond maturities). 2. Local-currency bond markets capacity to offer an alternative source of funding is likely to fall short of our expectations, with less aggregate issuance across CNH, SGD, MYR, and THB. Reduced activity in the CNH market may increase supply in the USD market. 2.1. Supportive demand technicals: The single most important driver. A key technical is scarcity value, stemming from investor demand for diversification among currencies and regions. Retail support for local-currency issuance remains robust especially at yields that are comparatively more attractive to investment alternatives. 2.2. Cross-currency basis: When credit spreads in USD markets are wide or trending wider and cross-currency basis swaps have turned more positive, it is often cost effective for large, well known corporates to borrow in non-G3 currencies, since spreads in those markets tend to be only loosely correlated with the USD market. The proceeds of non-G3 issuance are then swapped into USD. 2.3. Size and tenors: The hurdle for issuers is obtaining needed sizes and tenors. Typically, SGD-denominated bond issues range up to SGD2bn; THB and MYR sizes are smaller. In the CNH market, issue sizes range up to CNY1.5bn (~USD230mn). 2.4. Older structures of sub debt: Hong Kong banks have issued SGD-denominated old-style LT2s instead of Basel III compliant LT2 bonds. Issuers are likely to take advantage of the window of opportunity to issue in such markets, in our view.
Figure 18: Asia pacific ex-Japan book runner market share by lender region (for USDdenominated syndicated loans)
25 20 53% 15 46% 10 5 0 1Q11
Source: Dealogic
(USD bn)
AP
EMEA 50% 37%
US
49%
61% 27% 20 15 26% 13 6 13% 3 4Q11
11
12 5% 1
16
12% 5
11
10% 3
2Q11
3Q11
20 April 2012
12
What are the sources for funding needs?

Our forecast revisions reflect our view that incremental supply will come from Hong Kong, China and Indonesia corporates, and from China, Hong Kong and India financials. We see borrowing needs arising from the following: 1. Debt-funded M&A: Among high grade corporates we expect the O&G sector to be acquisitive as companies look to replenish and replace reserves. PTTEP and Korea National Oil Company are currently involved in M&A negotiations. Among high yield names, we expect MIE Holdings to be acquisitive and think it would consider debt funding for transactions larger than USD100mn. 2. Refinancing needs 2.1. The bond redemption profile for 2012-13 is relatively light for Asian corporates. However, large companies, such as Hutchison Whampoa (USD3.1bn), PCCW (USD500mn), Noble (USD500mn), Korea quasi-sovereigns (USD2.3bn), Petronas (USD2bn) and Singapore Power (USD1bn) have sizeable redemptions. Also, Hong Kong corporates have significant loan redemptions, and we expect these to be refinanced in the bond market. In addition, we also expect Borneo Lumbung, an Indonesian coal producer, to refinance part of its USD1bn loan in the bond market. 2.2. Some Indonesian corporates, including Indika, Cikarang Listrindo, have actively managed liabilities through tender offers and bond exchanges. We expect this trend to continue, with companies seeking to take advantage of low all-in borrowing costs and the positive sentiment towards Indonesian assets following sovereigns upgrade to investment grade. Bonds callable/maturing during 2012-13 include the BERAUC 15c13s, GAJAH '14c12s, INDIKA '16c13s, BUMIIJ '16c13s, Chandra Asri '15c13s, STAREN '15c13s, MNC Skyvision '15c13s and Lippo Karawaci '15c13s. 2.3. In India, a total of USD5.9bn of foreign-currency convertible bonds (FCCBs) is due in 2012. The issuers are unlikely to tap the USD market, but we think portion of the FCCBS coming due will be refinanced via Indian banks borrowing in the offshore markets and on-lending to the issuer. The banks that on-lend may be willing to borrow at higher spreads as lending rates to companies redeeming FCCBs will also be higher. 3. Liquidity position/capex needs: Liquidity remains ample among high grade corporates in our universe, but the outlook among high yield names is varied. Oil and gas companies and Hong Kong property developers have large capex plans and will likely be opportunistic issuers for funding. For instance, CITIC Pacific has significant refinancing (HKD28bn) and capex funding needs (>HKD20bn), and Fosun has said it plans to borrow CNY20bn in 2012 via USD and CNY bonds. Chinese developers are maintaining a cautious stance towards capex and land acquisitions, for the time being. Some developers may seek to boost liquidity by issuing debt, fearing worse times to come, while some may do so for potential acquisition opportunities (especially land purchases). We think Franshion and Yanlord are potential issuers of offshore debt although it is hard to pinpoint the currency or form. In both cases, we think major expenses spanning land premiums, land acquisition, construction and other costs are unlikely to be funded completely by internal resources necessitating increased borrowing. Among Indonesian corporates, Gajah Tunggal and Lippo Karawaci have expansion plans and we think may also look to issue bonds. Given our view that credit availability for some Chinese corporate segments is expected to remain tight, we expect Chinese corporates to borrow in the bond market to fund
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capex and boost liquidity. In particular, SOE-related entities that have been active in loan markets are potential issuance candidates. 4. Opportunistic issuance: Given the low all-in yield environment we expect opportunistic issuance from corporates, especially in Singapore and Malaysia. We believe this will intensify if issuers believe rates could rise sooner than currently expected. Figure 19: Upcoming loan redemptions for Hong Kong-based corporates
2012 Company Cathay Pacific Airways Ltd Cheung Kong Holdings Cheung Kong Holdings (Telco) COSCO-HIT Terminals (Hong Kong) Ltd Goodman Interlink Ltd Grand Design Development Ltd Hang Lung Group Ltd Henderson Land Development Co Ltd Hongkong Electric Co Ltd Johnson Electric Holdings Ltd Kingboard Chemical Holdings Ltd MTR Corp Ltd New World Development Co Ltd Noble Group Ltd PCCW Ltd PSA (HK) Ltd Road King Infrastructure Ltd Route Three (CPS) Ltd Shougang Concord International Enterprises Co Ltd Swire Pacific Ltd Teamer International Ltd Wheelock & Co Ltd
Source: Dealogic
2013 USD mn 400 768 645 256 155 540 514 1032 639 400 514 900 886 3052 1664 451 220 216 200 1290 597 642 Company Allied Group Ltd Cheung Kong Holdings (Ports) Foxhill Investments Ltd Global King Ltd Great Eagle Holdings Ltd Hongkong & Shanghai Hotels Ltd Hongkong Land Holdings Ltd Meadville Holdings Ltd MGW Finance Ltd Noble Group Ltd PCCW Ltd Shenzhen International Holdings Ltd Shun Tak Holdings Ltd Sun Hung Kai Properties Ltd - SHKP Wheelock & Co Ltd USD mn 190 179 262 1005 314 158 967 350 548 2201 1003 172 242 1955 858
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SUMMARY RECOMMENDATIONS
Sector High Grade Corporates Overweight China Resources Land Korea Hydro & Nuclear Power (KHNP) Korea National Oil (KOROIL) Reliance Industries Market Weight China Overseas Land & Investment CNOOC GS-Caltex Corp Henderson Land HKT Trust & HKT Limited Hutchison Whampoa Hyundai Motor Korea Electric Power Corp Korea Land and Housing Corp Korean gencos PTT Exploration & Production PTT Global Chemical PTT pcl Swire Pacific Telekom Malaysia The Wharf (Holdings) Woodside Petroleum Agile Property Berau Coal Bumi Resources ('17s) Central China Real Estate China Oriental Group Cikarang Listrindo ('19s) CITIC Resources Holdings Country Garden ('18s) Franshion Properties Indika Energy ('16s) Kaisa KWG Property 12.5% (old '17s) Longfor Properties Shimao Property Holdings (16s and 18s) STATS ChipPAC Vedanta Resources ('16s, '18s and '21s) Yanlord Land ('18s) Axis Bank Bank of Baroda Bank of China HK Bank of East Asia Bank of India Canara Bank Dah Sing Bank DBS Bank Export-Import Bank of China Fubon Bank (Hong Kong) ICICI Bank Krung Thai Bank Oversea-Chinese Banking Corp Public Bank Bhd United Overseas Bank Wing Hang Bank Underweight ENN Energy Holdings (Xinao) Hongkong Land Holdings Korea Gas Corporation (KOGAS) Noble Group Petroliam Nasional (Petronas) POSCO SK Telecom Sun Hung Kai Properties Tenaga Nasional
High Yield Corporates
Bakrie Telecom Bumi Resources ('16s) Country Garden ('14s, '15s and '17s) Evergrande Real Estate Fufeng Group Gajah Tunggal KWG Property (16s) MIE Holdings MNC Sky Vision Pacnet Shimao Property Holdings (17s)
Adaro Indonesia Chandra Asri CITIC Pacific Glorious Property Hopson Development SK Hynix (formerly Hynix Semiconductor) Indika Energy ('18s) Indosat Road King Star Energy Vedanta Resources ('14s) Yanlord Land ('17s)
Banks and Financial Institutions
AmBank (M) Bhd CIMB Bank Export-Import Bank of India Export-Import Bank of Korea Hana Bank Kasikornbank Kookmin Bank Korean Development Bank Korea Exchange Bank Macquarie Group National Agricultural Cooperative Federation Shinhan Bank State Bank of India Woori Bank
Australia & New Zealand Banking Bangkok Bank CITIC Bank International Commonwealth Bank of Australia Hyundai Capital Services Inc IDBI Bank Industrial Bank of Korea National Australia Bank Westpac Banking Corp
Note: 1) Shaded areas denote change of rating or initiation of coverage since the last published Asia Credit Alpha: Sliver linings in the China clouds, 13 April 12; 2) We are currently in blackout on KWG Propertys newly issued 13.25% 2017 bonds. Source: Barclays Research
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SOVEREIGNS
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SOVEREIGNS
Low-beta holdings to cushion bumps in the road

Asia Credit Research Avanti Save +65 6308 3116 avanti.save@barclays.com Economics Research Wai Ho Leong +65 6308 3292 waiho.leong@barclays.com Prakriti Sofat +65 6308 3201 prakriti.sofat@barclays.com Rahul Bajoria +65 6308 3511 rahul.bajoria@barclays.com
Recommended positioning
We suggest an overall neutral stance on Asian sovereigns for Asia credit portfolios. We view some sovereigns, especially the Philippines, as defensive holdings. We suggest an overweight stance on Indonesia and Sri Lanka, and underweight for Vietnam and the Philippines versus the EM Sovereign Credit benchmark. Tactically, we recommend buying Indonesian bonds given their recent weakness and adding to holdings of Sri Lanka via the primary market. Existing Sri Lankan bonds offer attractive carry against the benchmark (incremental carry of 65bp to the benchmark). We are constructive on the Philippines macro outlook our underweight view is driven by valuations. For investors concerned about a potentially weaker backdrop/risk sentiment, we suggest increasing holdings of Philippines debt as we expect that sovereigns credit to outperform in such a scenario. Indonesia: Prefer the belly of the curve such as INDON 19s, 20s, 21s and 22s. We see value in quasi-sovereigns Pertamina and Perusahaan Listrik Negara (PLN) at spread of more than 1.4x and 1.6x to the sovereign, respectively. Philippines: Tactically, we like the PHILIP 21s. As a core holding, we recommend the longer-dated PHILIP 37s and 34s.
Trade idea
We suggest a 10s30s steepener for Indonesia because: 1. 10s30s curve (interpolated spread) is more inverted than the curves of its EM sovereign peers. 2. 10y Indonesia bonds have cheapened recently, and at current levels look cheap to the curve. On the other hand, the INDON 42s are fairly valued, in our view. 3. We expect political noise to rise as we head closer to the 2014 presidential elections. Therefore, we suggest using periods of strength to reduce duration in coming months. Given this backdrop, we expect the 10s30s curve to steepen in the medium term. Figure 20: Indonesia 10s30s curve slope (interpolated Treasury spread, bp)
80 60 40 20 0 -20 -40 Jan-10 bp
INDON 10s30s
Figure 21: EM sovereign credit 10s30s curve (interpolated Treasury spread, bp) vs 10y bond spread
40 30 20 Brazil 10 COLOM 0 -10 INDON -20 120 SOAF 10y bonds 10s30s Mexico PHILIP
Jul-10
Jan-11
Jul-11
Jan-12
140
160
180
200
220
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Technicals remain solid

Technicals play an important part driving credit spreads in addition to fundamentals. Some key technicals relevant for Asia sovereigns include: Onshore demand: Demand for Philippines credit is strong, driven by robust dollar inflows from remittances (2011: USD20.1bn, 2012F: USD21.5bn). Onshore banks foreign currency deposit units (FCDUs) were down about 2% y/y in December 2011 (in USD terms). At the same time, the total outstanding amount of USD-denominated Philippines bonds was also down about 2%, reflecting the buybacks in October 2011. In addition, onshore retail investors are buyers of the front end to enhance yields (as 1y USD time deposits yield only 1.25-1.50%). This backdrop creates solid demand dynamics for Philippines credit. Index bid: Following rating upgrades to IG status by Moodys and Fitch, Indonesian sovereign and quasi sovereign bonds became eligible for inclusion in the Barclays Global Aggregate index. As the sovereign trades at least 160bp wider than the index, we believe benchmarked investors are likely to add to holdings. There is one idiosyncrasy worth noting older PLN bonds (PLNIJ 16/17/19/20/37) are only rated by Moodys and S&P, and not by Fitch. This means these bonds are still rated high yield in aggregate and, therefore, do not benefit from any IG index bid. Also, if S&P upgrades its Indonesias sovereign ratings to investment grade, PLN bonds may not receive an IG rating as they are rated 2 notches below the sovereign. If the Philippines receives investment grade ratings from at least two out of the three agencies, its bonds would be eligible for inclusion in two indices Barclays Global Aggregate index (AUM of USD1.5trn tracks this index) and Barclays US Aggregate index (USD2.3trn) because Philippines bonds are SEC registered. This implies at least 5x more buying by passive benchmarked investors than for Indonesia (We estimate that passive buying of Indonesia could be USD200-400mn). On a similar note, if Indonesia were to issues bonds with SEC registration, then these would also likely see incremental demand from investors benchmarked to both these indices.
Easy money today, potential risks tomorrow?

Easy money from the liquidity injected into global financial system by central banks (Fed, ECB, BoE, BoJ) has led to lower bond yields and asset price appreciation as investors hunt for yield. The sustained rise in EM fund flows also suggests a structural asset shift towards emerging markets. A second-order effect has been robust credit growth in Asia as these funds flow through financial systems. As such, we have looked for pockets of vulnerability where credit growth has been strong accompanied by capital inflows. In Figure 22 we look at credit as a percentage of GDP versus GDP per capita, and examine source of liquidity to fund the credit growth in Figure 23. For example, credit growth in Malaysia has been driven by rising household debt (especially real estate related). At the same time, short-term external debt coverage has fallen slightly (Figure 24). It can be said that some of this credit growth has been fuelled by increased capital flows (for instance, foreign investors hold nearly 39% of local- currency government bonds). On the positive side, capital-flight risk is buffered by the current account surplus of USD34.6bn (2012F) and solid foreign exchange reserves (USD136bn). In Indonesia, credit growth has been broad based. But recently Bank Indonesia expressed concerns about credit growth in the real estate and auto sectors, and subsequently adjusted LTVs. Robust portfolio inflows suggest the offshore flow of money into Indonesia has been strong. However, strong credit and capital inflows have been accompanied by nominal GDP growth and higher consumption. Thus, mitigating potential risks of overheating.
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Figure 22: Loans as a % of GDP vs GDP per capita
Figure 23: US and European banks exposure to selected EM Asia countries (% of domestic borrowers credit at June 2011)
25 US Banks EU banks
140% 120% 100% 80% 60%
Credit/GDP Vietnam Malaysia
20 Korea Thailand 15 10 5 GDP per capita ($) 0% 0 5000 10000 15000 20000 25000 0 ID MY PH TH VN KR CN
Sri Lanka 40% Indonesia 20% Philippines
Source: CEIC, Barclays Research
Source: ADB, Barclays Research
Figure 24: Short-term external debt coverage ratio

12 10 8 6 4 2 0 VN IN ID KR LK MY PH TH 2008 Q4 Current
Source: BIS, Bloomberg, Barclays Research
In a nutshell, we would suggest investors pay attention to these trends as policy missteps and/or idiosyncrasies could become a source of tail risk in the region.
Politics likely to come to the fore

Politics are likely to come to the forefront in several Asian countries as election/leadership transition cycles begin (Figure 25). Developments in the political arena will be important to track potential candidates and their economic/political views; election campaign promises and election process/disruptions. Political posturing related to the Indonesian presidential election looks to have started much earlier than expected and will likely gather pace towards the latter part of 2012, when the focus will turn to potential candidates. The presidential election is scheduled to be in 2014, as President Yudhoyono is not allowed to run for a third term. We believe political noise could be a source of volatility for credit. Political noise is also building in the Philippines, with the latest twist being ongoing impeachment trial of Chief Justice Corona. Although markets have so far been unaffected, we
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believe if the noise continues for another three to four months, there is the risk of business sentiment and private investment being affected, with a potential spillover to markets. It is always difficult to predict credit deterioration due to political activities. Therefore, we suggest investors leg into CDS contracts closer to the events to mitigate downside risks/volatility, especially in Korea, Indonesia, Malaysia and Thailand. Figure 25: Tentative calendar of elections, leadership transition
Tentative date December 2012 September-October 2012 (est) 2014 28 April 2012 As early as end 2Q12 (May)
Event South Korea Presidential elections China leadership transition Indonesia presidential elections. Malaysia Bersih 2.0 rally Malaysia elections
Sovereigns remain exposed to external factors

We compare short-term external debt, portfolio flows, foreign reserves and current account balances to estimate relative vulnerability to external factors (Figure 26). Sovereigns such as Indonesia, Sri Lanka, India and Korea stand out as being the most potentially vulnerable. Figure 26: External vulnerability indicators (% of GDP)
80% 60% 40% 20% 0% -20% -40% -60% CN TH MY IN KR PH VN LK ID Net FDI FXR Bond (foreign holding) Net C/A surplus S/T external debt Equity (foreign holding)
Note: Short term external debt data is as at 3Q11 from the World Bank. Foreign holdings of local-currency bonds are not available for China and Vietnam. Foreign equity holdings data are not available for Sri Lanka and Vietnam; for others the data are as at end-2010. Source: CEIC, BIS, Barclays Research
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Republic of Indonesia Weight over Commentary We have a positive view on the Indonesian sovereign (BB+ Pos/Baa3 Stb/BBB- Stb) and expect its bonds to outperform other EM sovereigns in 2012. We expect S&P to upgrade the sovereign to investment grade in coming months. External position: Despite higher FX reserves (March 2012 USD110bn) and prudential measures to deter hot money inflows since the global financial crisis, the sovereigns external position remains vulnerable, especially in a risk-off environment, given still heavy offshore holdings in the bond and equity markets. The economy is also highly leveraged to commodity prices (65% of exports). Short-term external debt coverage stands at 2.2x. Politics and policy: The Presidents popularity continues to fall, partly due to a number of corruption scandals. Although we expect SBY to finish his term, his authority looks to have been eroded. Despite the Presidents strong endorsement of the proposed fuel price hike, some parties within his coalition did not vote in support of the change. At the same time, policy direction with regards to areas such as limiting foreign investment in the mining industry and a ban on the export of unprocessed raw materials from 2014 are raising concerns and could act as a dampener on investment. Our conversations with investors suggest that markets are concerned about policy and inflation, and expect weakness in INDOGBs to spillover into credit. Consequently, Indonesia CDS underperformed recently. While we acknowledge the risks of spillover, we believe pass-through into CDS will be less than in previous episodes given: (i) reduced hedging demand as most offshore investors in INDOGBs remain underweight; and (ii) INDOGB prices have already adjusted to increased inflation worries (with a roughly 100bp sell off, and our rates strategist is now neutral on Indonesian local bonds). On the policy front, our economist estimates that if fuel prices are not raised then the realised budget deficit for 2012 would be IDR170trn or 2.1% of GDP and inflation would reach 5.5% by year-end. While these are higher than previous estimates, they do not signal a loss of policy management. In addition, the recent decision on fuel hikes allows for automatic increases if the 6-month average price of fuel is more than 15% of the budget assumption of USD105/bbl. Political posturing related to the presidential election looks to have started much earlier than expected and will likely gather pace towards the latter part of 2012. The focus will then turn to potential candidates for the presidential election in 2014, as President Yudhoyono is not allowed to run for a third term. We believe political noise could be a source of volatility for credit especially towards the end of the year. Supply outlook: Parliaments approval of the revised budget confirms additional gross issuance of IDR17trn, not the IDR50trn as reported in news reports previously (total gross issuance will be IDR271.6trn vs IDR254.8trn previously). As per DMO strategy, 14-18% of the borrowing will be external, ie, USD4-5bn. We now believe the sovereign has nearly concluded external issuance for 2012 (2012F: USD4.5bn vs issuance YTD of USD4.25bn). From 2014, Indonesia has more than USD1bn of USD-denominated bonds coming due each year until 2021. We think the sovereign should consider conducting a liability management exercise like the Philippines to term out short dated/high coupon debt into longer tenor paper. Lastly, we note that supply from Indonesian state-owned entities is also on the cards. Valuations: We maintain our overweight on Indonesia within our EM Credit Portfolio and view recent weakness as a buying opportunity. At current levels we like the belly of the curve -INDON 22s/21s/20s/19s for total returns (currently INDON 21s are quoted 39bp over PHILIP 21s) and INDON 42s for excess returns. Given our view that political-related disruptions could pick up as we get closer to the 2014 elections we suggest 10s30s steepeners as a medium-term trade. The Indonesian curve is more inverted than its EM sovereign credit peers (see Figure 21in the Sovereign Overview section). Given the rally in the INDON 42s and potential risk of political noise we think the curve is likely to steepen in the medium term.
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Republic of Philippines Weight under Commentary The Philippines sovereign (BB Pos/Ba2 Stb/BB+ Stb) is a defensive investment within Asia, in our view. We believe its bond spreads reflect the countrys strong external position and improved debt management. We have an underweight within our EM Credit Portfolio on valuation grounds. We expect the sovereign to receive a one notch ratings upgrade in the next 3-6 months, catching up with Fitch. Fiscal position and structural reforms: We expect government capex to rise in 2012 given delineation of project details in the budget and cash already being allocated to line ministries. But a risk is that spending remains constrained on corruption-related fears, similar to Indonesia. Progress on the administrations Public-Private Partnership (PPP) programme was disappointingly slow in 2011, mainly due to housekeeping. For 2012, the government has 16 PPP projects in the pipeline (worth PHP191bn). While we expect momentum on PPPs to pick up this year, we believe actual realisation will be 50% given complicated nature of PPPs and lack of a strong program leader to drive progress. Progress on structural reforms is important for the medium term. Successful passage of sin tax legislation and rationalisation of fiscal incentives under review by Congress, we think, would be a clear positive for the sovereign credit profile given the structural boost to government revenue (to be discussed in the House by mid 2012). Politics: Political noise is building, with the latest twist being the ongoing impeachment trial of Chief Justice Corona. Although markets have so far been unaffected, we believe if the noise were to continue for another 3-4 months there is the risk of business sentiment and private investment being impacted, with a potential spillover to markets. Technicals: Onshore demand for Philippines credit is likely to remain strong. We see this as being driven by three factors: (1) Strong remittance inflows (2011: USD20.1bn, 2012F: USD21.5bn). Foreign currency deposit units (FCDUs) were down about 2% y/y in December 2011 (in USD terms), while at the same time the total outstanding amount of USDdenominated Philippines bonds was also down about 2% on account of buybacks in October 2011; (2) Attractive opportunity for retail investors to enhance yields (vs 1y USD time deposits that yield only 1.25-1.5%); and (3) An increasing focus from EM/developed market investors on Asia and individual markets like the Philippines. Supply outlook: Planned gross overseas debt sales are USD2.25bn for 2012, of which USD1.5bn has been issued. The governments cash position is flush, with net excess financing of PHP200bn carried over from 2011. This provides flexibility with regards to issuance amounts and the option to conduct liability management exercises (such as buybacks, swaps). We think such an exercise is possible in H2 2012, with the sovereign likely to consider buybacks of dollar bonds and/or issuance of GPNs. Furthermore, the Philippines has indicated it will issue bonds (balanced between offshore and local) and on-lend the proceeds to the Power Sector Assets And Liabilities Management Corp (PSALM) to refinance some of its PHP85bn debt maturing in 2012. We expect such issuance to amount to about USD500mn. Valuations: Tactically we like the belly of the curve (PHILIP 21s) given our expectation that onshore demand will remain robust. If global macro outlook turns weaker on worries such as European debt, we expect Philippine bonds to outperform. As a core holding we suggest long-dated bonds such as the PHILIP 38s/34s.
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Democratic Republic of Sri Lanka Weight over Commentary We suggest an overweight stance on Sri Lanka (B+ Stb/B1 Pos/BB- Stb) as we think the bonds offer attractive carry against the EM sovereign benchmark. External position: Sri Lankas balance of payments position remains vulnerable to swings in commodity prices. According to trade data, Sri Lankas petroleum import bill averaged USD384mn a month in 2011; in January 2012, the bill rose to USD483mn. The central banks foreign reserves have been depleted by the continued intervention and widening trade deficit. Reserves were USD5.8bn in January, down from a high of USD8.1bn in July 2011. The Central Bank of Sri Lanka (CBSL) has introduced three broad based measures this year to temper credit growth, curb import demand and reduce reserve depletion: (1) Policy rates have been hiked twice - the repo rate by 75bp to 7.75% and reverse repo rate by 125bp to 9.75%; (2) Domestic fuel prices were increased effective 12 February to encourage energy conservation and cut fuel imports. Import duties on motor vehicles, cigarettes and liquor were also raised on 31 March (the average monthly import bill for motor vehicles in 10M 11 was USD82mn); (3) Its intervention policy in currency markets is now driven by supply and not based on price. This change follows the 3% deprecation announced in the budget in November 2011. While the package of measures to temper import growth (oil-related in particular) looks comprehensive, we expect trade data to reflect implementation with a lag of 3-6 months. In the meantime, we would look at moves in LKR, portfolio flows (the CBSL reported inflows of USD400mn into government bonds and USD164mn into the stock market in 1Q 12) and monthly foreign reserves position (USD6.1bn on 4 April, including IMF disbursals, up from USD5.8bn in January). It is worth noting that a significant portion of the countrys FX reserves comprise borrowed funds (eurobonds, IMF disbursements and foreign holdings of treasuries). IMF Stand-by Arrangement: The Executive Board of the International Monetary Fund (IMF) completed its seventh review of Sri Lanka's Stand-By Arrangement (SBA) on 2 April. The completion of the review enables the immediate disbursement of USD426.8mn, bringing total disbursements under the SBA to about USD2.13bn. In addition, the Executive Board approved an extension of the arrangement period to 23 July 2012, to allow time for the completion of the eighth and final review. This development is in line with our expectations; we continue to believe that IMF support is positive for the credit in the near term. However, it is worth emphasising that the remaining USD400mn in the SBA facility alone may not be sufficient over the medium term, given that external position remains vulnerable. Supply outlook: We expect the sovereign to issue at least USD1bn in 2012, with the proceeds used to repay maturing debt and boost foreign reserves. Sri Lanka has USD1.4bn of external debt due in 2012, and in excess of USD1bn repayable per year over 2013-2015. The governments 2012 budget assumes LKR175.3bn (~USD1.5bn) of foreign financing (with LKR55bn (~USD0.5bn) as the foreign commercial component). Valuations: We think Sri Lanka bonds offer attractive carry against the EM sovereign benchmark. We suggest buying the SRILAN '20s/'21s. The inverted 5s10s curve also makes the SRILAN '15s attractive, in our view, though we understand these bonds are not very liquid. Given our expectation of supply, we suggest adding to holdings via the primary market. Recently issued SLDBs indicate that cost of funds for the 3-4y floating notes has widened about 111-117bp since July 2011 (when the sovereign issued the SRILAN 21s at T+332.2bp). For comparison, the longer dated SRILAN 21s are currently quoted at CT10+413/399bp (+81/67bp since issuance).
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Socialist Republic of Vietnam Weight under Commentary The Vietnam sovereign (BB- Neg/B1 Neg/B+ Stb) credit story is improving, but we suggest an underweight following the YTD rally. External position: According to the Asian Development Bank, Vietnams FX reserves rose by USD1.4bn last year to USD13.8bn. Reserve accumulation continued in Q1 2012, reaching USD16.8bn the highest level since December 2009. Short-term external debt as of Q3 2011 totalled USD10.4bn. However, it is worth noting the banking system and stateowned enterprises are also a source of contingent liabilities USD-denominated loans have risen (credit growth of 23% in 1H 11 vs 3% for VND loans) as a result of low lending rates (6-8%). Previously, we focussed on the premium implied by the unofficial dong rate. However, our economist does not expect SBV to conduct any one-off VND devaluations this year. Rather we look for a gradual 5% depreciation to support exports. We would look at three factors when analysing the sovereign: (1) the pace of policy easing (so far the SBV has cut 200bp); (2) size of banking sector liabilities and restructuring progress; and (3) SOE privatisation. Policy: Measures to tame inflation and curb credit growth are showing signs of success, which has eased concerns about potential policy slippage. Our economists believe inflation will decline over the coming months given: 1) a favourable base; 2) relatively soft credit and money growth; and 3) easing demand pressures. They expect inflation to average 12.3% in 2012, down from 18.6% last year. Plans to restructure the banking sector also look credible, in our view. Early signs are encouraging in December the First Joint-Stock Commercial Bank, Tin Nghia Joint-Stock Commercial Bank and Saigon Joint Stock Commercial Bank were merged under the central bank's supervision. The ongoing restructuring of stateowned Vinashin is a key event to watch. Banking system: Contingent banking sector liabilities weigh on Vietnams credit ratings. Tight credit conditions against a backdrop of slowing growth have meant a deterioration in bank asset quality. System-wide, the NPL ratio rose to 3.3% in November from 2% at end-2010 (based on Vietnam reporting standards). Credit growth moderated to 11% in 2011 (the governments target was 15-17%) compared with an average of more than 35% pa during 2006-10. For 2012, a policy of 4-tiered credit growth limits will be applied to banks ranging from 0% to 17%, depending on the health of a bank and its profitability. Supply outlook: We do not expect bond issuance from the sovereign this year. Foreign currency borrowing will most likely be via overseas development assistance (ODA) or multilateral/bilateral loans. Valuations: We have an underweight on Vietnams sovereign bonds within our EM Credit Portfolio on valuation grounds. Furthermore, investors should be aware that vulnerabilities from the still unresolved issue of contingent liabilities in the banking system/SOEs are likely to surface in the medium term. We expect Vietnams sovereign ratings to remain unchanged in the coming 6-12 months. Our sense is that the outlook will remain negative in the near term. Key drivers will be consolidation in the banking sector, SOE privatisation and increased transparency.
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Republic of Korea Outlook positive Commentary We have a positive view on Korea sovereign (A Stb/A1 Pos/A+ Pos) credit driven by the countrys sound and improved external position. Debt position: The total stock of gross external debt for Korea is high at USD398bn (137% of GDP). The high level of non-government short-term external debt (USD127bn or 93% of total short term external debt as at Dec 2011) has constrained credit ratings. However, measures taken (since mid-2010 as part of a policy thrust to mitigate roll-over risks in 2011) to reduce external vulnerability have lowered the proportion of short term external debt (from 43% of total external debt in June 2010 to 34% by December 2011) while rising foreign reserves have boosted the short-term debt coverage ratio. Furthermore, data from the Financial Supervisory Service (FSS) suggests reduced roll-over risks as banks have been able to convert short-term foreign currency debt into long-term borrowings (banks held 74% of short-term external debt as at December 2011). Korean entities have sizeable foreign currency debt due in 2012, so their ability to refinance is an important factor in any analysis of Koreas external position. We note that the same Korean entities that have USD15.8bn in foreign currency bonds maturing in 2012 (based on Dealogic) have also issued nearly USD9.1bn in new paper this year, in aggregate. This suggests that roll-over risk is still low. We believe the external debt position will continue to improve and pave the way for a ratings upgrade after the presidential elections in December The rise in household debt is partly associated with increased investment in the property sector (roughly 61% of household debt is property-related borrowing; total household debt to GDP c.70%). For the time being, we see comfort in the fact that most household debt is held by medium and high income households (3rd to 5th quintiles) and wages continue to grow. External vulnerability: The risk of weaker exports and rising oil prices are key vulnerabilities for Korea. Exports are particularly exposed to auto and electronics demand in the US, where high frequency indicators (ISM new orders and auto sales) indicate that momentum is picking up. As a net importer of petroleum products, Koreas sensitivity to oil and other energy commodities such as coal is high. Our economist forecasts a current account surplus for 2012 of USD19.6bn, which should provide a sufficient buffer against any adverse trends. We think most pressure is likely to be felt by Kepco, the state-owned utility, as it cannot automatically pass on higher input costs to customers (see High Grade Corporates section for more details). Politics and geopolitical risks: In April the surprise ruling party win in the National Assembly elections bodes well for policy continuity. Although it now commands a smaller majority in the National Assembly (down from 174 seats out of 300 previously), our economists think the outcome reduces the possibility of a sharp reduction in government support for larger corporates and exporters. Moreover, its stance on North Korea may also soften. Geopolitics on the peninsula remains a potential source of market pullbacks, though, short of a full-scale conflict, we would tend to view such episodes as opportunities to add. Valuations: We recommend the Korea 19s vs Indonesia and Philippines when the former trades wider. Given the lack of sovereign paper, we suggest adding exposure via the quasi sovereigns such as Korea Development Bank, Kexim, Korea Hydro & Nuclear Power, Korea National Oil (see Financials and High Grade section). Federation of Malaysia Outlook neutral Commentary Malaysia (A-/A3/A- all Stb) has a strong external liquidity position, but the sovereign is vulnerable to fluctuations in global commodity/energy prices given its dependence on oil-related revenues. Our commodity analysts expect oil prices to stay elevated (2012F for WTI at USD105/bbl and Brent at USD120/bbl), a dynamic that bodes well for Malaysia. External vulnerability: Rising oil prices are positive for Malaysia, as the country is a net exporter of petroleum products. A potential source of weakness is that nearly 39% of MGS are held by offshore investors. Similar to Indonesia, a sharp reversal in risk sentiment could see a reversal of such flows. The good news is that Malaysian domestic banks and the Employees Provident Fund (EPF) are natural buyers of this paper, which, we think, would cap any weakness from risk flares. Politics: Our economists believe elections could be called as early as May. While we do not expect any disruption around elections, sovereign CDS may come under pressure on headlines. Sukuk bond technicals: We have previously highlighted that demand for Sharia-compliant assets from Islamic banks/funds/Takaful companies is robust, driven by the strong liquidity of Islamic banks, limited availability of alternative Islamic investment products and scarcity of sukuk supply. We believe such demand dynamics are likely to remain strong. However, issuance of these instruments has picked up globally in 1Q 12, supply totalled USD11.8bn, compared with USD5.2bn in 1Q 11, according to Bloomberg. As other sovereigns/corporates have begun tapping sukuk bonds, the scarcity value is likely to diminish. In addition, Petronas has c.USD2bn of bonds coming due in May 2012. We believe refinancing may weigh on Malaysia credit. Valuations: We have a neutral view on Malaysia credit and bonds.
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Kingdom of Thailand Outlook neutral Commentary Macro fundamentals for Thailand (BBB+/Baa1/BBB all Stb) are intact and growth is expected to pick up, supported by flooding relief and reconstruction efforts. The political situation appears to be stable, with the governments focus on reviving the economy. We suggest keeping a watch on political news. The ban on some members of the Thai Rak Thai party from engaging in political activities expires in June 2012. The national reconciliation process may also generate some headlines. Supply: The Ministry of Finance has suggested that the government is considering global bonds (more than USD1bn). Given the scarcity value, we think such bonds would see good demand. The PDM Act sets a borrowing ceiling for budget financing at 20% of the annual budget; plus 80% of principal repayment expenditure. In addition, the government can borrow the equivalent of up to 10% of the annual budget to promote Economic and Social development (including borrowing in foreign currency if this involves some import content). For 2012, planned borrowing is THB31bn (~USD1bn). We understand that the government is not planning any foreign currency borrowing for budget financing. However, foreign currency borrowing under Emergency Decree cannot be ruled out. We note that historically, 80% of foreign borrowing has been in JPY. Valuations: As a tail risk hedge for Thailand, we recommend buying protection at levels inside a 30bp spread differential to Malaysia. We think discussions about reconciliation and resumption of political activities by members of Thai Rak Thai could be a source of political noise.
Note: Where indicated, weights refer to our EM Credit Portfolio. See The Emerging Markets Quarterly, page 18, March 2012.
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ASIA HIGH GRADE CORPORATES
20 April 2012
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HIGH GRADE
Supply issues continue to drive spreads

Timothy Tay, CFA +65 6308 2192 timothy.tay@barclays.com Justin Ong +65 6308 2155 justin.ong@barclays.com
This year started with a strong wave of bond issuance by Asian HG corporates. Several drivers were at play. While liquidity positions were solid in the Asian high grade corporate universe, compared with the relatively light bond redemption profile for 2012-13, some issuers, such as Hutchison Whampoa and the Korea quasi-sovereigns, face significant redemptions. Additionally, high grade corporates have shifted towards bond markets to redeem bank borrowings. A broadly low all-in yield environment has been another key catalyst. Most order books, particularly among Hong Kong issuers, enjoyed oversubscription rates of 510x, driven in part by robust demand from private banks. These trends encouraged new issuers such as China Resources Gas and Shenzhen International Holdings to tap the bond market. We expect further incremental supply to emerge, largely from China. Aside from supply, there are several other points worth highlighting. From a valuation perspective and given our view that credit profiles in the high grade universe will remain broadly stable through 2012, we recommend looking for opportunistic entry points to invest in BBB rated names. Such opportunities will, in our view, emerge in the midst of any disproportionate beta-driven spread widening in BBB rated names. In the absence of an actual severe economic downturn, we would expect most credits to recover from any excessive spread underperformance. With regards to event risks, specifically M&A, we would be cautious with the low-BBB rated names, given their general lack of ratings headroom (eg, ENN Energy). M&A developments, however, will continue to feature heavily in the oil and gas sector, though, on balance, we think the investment case for credits in this sector remains well justified by ample ratings headroom, strong liquidity positions as well as government support for many key oil and gas players.
Diversified Industries
Underweight: Posco (A3/A-, both Neg). We maintain a cautious view on Posco for FY12 given the competitive pressures within this cyclical industry, slower demand for steel, input cost headwinds and its weak metrics for its low A rating bracket. We think credit metrics will remain under pressure due to weakening operating margins, though its plans to reduce capex and sell non-core assets should help to alleviate some of that weakness.
Asian Resources
Overweight: Korea National Oil (A1/A, both Stb). KOROIL benefits from strong sovereign support as a result of its full ownership by the Korean government. The government is also planning to raise the level of equity capital in the firm to KRW13trn from the existing KRW10trn. We view valuations of KOROIL bonds as attractive, given they are trading in the low +200bp levels compared with other similarly rated A/AA rated oil and gas issuers such as CNOOC or CNPCCH, which trade about 30-60bp tighter. Overweight: Reliance Industries (Baa2/BBB, both Pos). We expect the companys credit profile to remain stable despite potentially weaker-than-expected production levels from the KG-D6 wells. We think this risk is partially offset by the sale of the 30% stake in the KGD6 wells to BP for USD7.2bn. Credit metrics remain strong, with net debt/EBITDA of 0.3x and EBITDA/interest at 11.0x. We find the RILIN bonds attractive as they trade 70-80bp behind PTTEP, which is only rated a notch higher.
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Market Weight: PTTEP (Baa1/BBB+, both Stb). We remain cautious on PTTEP bonds as a result of the companys proposed offer of 220 pence in cash for each Cove Energy share, subject to pre-conditions. With only USD1.35bn of cash on its balance sheet as of end-2011, we expect the company to require external financing to fund the transaction, if it goes through. We think a negative ratings action will be also likely if the acquisition is fully debt-funded.
20 April 2012
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China Overseas Land and Investment Ltd (COLI) Rating Market Weight Rationale
Christina Chiow
Credit view: Amid ongoing policy tightening, COLI achieved strong contracted sales of HKD87.1bn in 2011, ahead of its HKD80bn target. We believe this reflects COLIs nationwide presence and an established brand name. The company also demonstrated prudence in preserving credit quality while pursuing growth. We expect COLIs credit profile to remain strong and benefit at the expense of smaller players. COLI recorded contracted sales of HKD26.1bn in 1Q12, 33% of its full-year target. We expect debt/EBITDA and debt/capital to remain robust in 2011, at c.2.5x and 40%, respectively, and look for interest cover to remain above 10x. Cash holdings of more than HKD19bn amount to more than 10% of total assets at December 2011 and appear ample relative to short-term debt of HKD11.3bn (includes amounts due to related entities). In addition, leveraging its long operating track record and healthy financials, COLI continues to enjoy a high level of financial flexibility in the equity, loan, and bond markets. In February 2012, COLI issued USD750mn of bonds, and in April 2012, it concluded a HKD7.6bn 3y club loan. Valuation: At a spread of c.360bp to Treasuries, we view the valuation of COLIs 2017 bonds as attractive for a stateowned company with a stable credit profile. We think the longer-dated 2020 at T+340bp is less attractive. Overall, we maintain our Market Weight on COLI, as we expect its bonds to perform in line with the market. Valuations of other high grade Hong Kong paper at similar spreads, as well as other high yield Chinese real estate bonds with much higher yields, are likely to prevent a significant outperformance of the COLI complex.
China Resources Land Ltd (CRL) Rating Overweight Rationale
Christina Chiow
Credit view: The outlook for China Resources Land (CRL, Baa2/BBB both Stb) remains stable, in our view. Execution to date has been better than expected, with the company more focused on asset turnover. It made good progress in its sales in 2011, achieving CNY36bn against its full-year target of CNY30bn. In 1Q12, the company sales were CNY8.2bn, 20% of its full-year target. In addition, its investment properties continue to report robust rental growth, and the portfolio is expanding. Excluding newly opened investment properties, rental income grew 47.4% y/y; including new properties it rose 57.6%, to HKD2.8bn in 2011. CRL is one of the few Chinese developers we cover that has a sizeable and quality investment property portfolio. We expect credit metrics to be relatively stable, with debt/EBITDA of c.4.5x and debt/capital of below c.45% in 2012. Asset injections from parent China Resources Holdings (CRH) are likely to continue there was a largely equity-funded injection in 3Q11 which in our view indicates the strong relationship CRL has with CRH, a state-owned enterprise. Offsetting this is the companys appetite for growth, which has resulted in a significant increase in debt, which climbed to HKD60.7bn at end-Dec 2011 from HKD37.8bn at end-Dec 2010. CRL has a high level of short-term debt of HKD22.1bn, but we do not think refinancing is a major risk as it continues to have access to loan markets at reasonable costs. Average borrowing costs were only 3.6% in 2011. Cash remains relatively high at HKD15.4bn at Dec 11. Valuation: At c.T+340bp, we think current valuations are compelling for a Baa2/BBB state-owned developer with a high quality investment property portfolio. The bonds have a relatively short tenor compared with the bonds of other stateowned Chinese developers. We maintain our Overweight rating on CRL.
CNOOC Ltd Rating Market Weight Rationale
Timothy Tay/Justin Ong
Credit view: We continue to view CNOOC (Aa3, AA- both Stb) as a stable credit and it continues to have the strongest credit metrics within the Asian Oil and Gas sector. For 2011, CNOOC reported strong results as FY sales rose 34% to CNY214bn and its EBIT increased 27% to CNY90.6bn, thanks to higher oil and gas prices. The realised oil price for CNOOC was USD109.75/bb (+40.8%) and its realised gas price was USD5.15 (+14.7%). Management maintained its 2012 production guidance of 330-340mn boe and it expects a higher capex of USD9.3-11bn (2011: USD6.4bn), comprising development (USD6.9bn), exploration (USD1.7bn) and production (USD1.4bn). Balance sheet remained solid and its liquidity position strong, marked by a net cash position of CNY10bn and a gearing ratio of 12.6% (unchanged y/y). At FYE Dec11, CNOOC benefitted from liquid funds of around CNY48.1bn,which together with its cash generative business (cash flow from operations of CNY116bn in 2011) would be sufficient to cover its short-term borrowings (CNY19.9bn), its higher capex and its annual dividend payment (2011: CNY18.4bn, 2010: CNY15.9bn). We view CNOOC as having the flexibility to pursue further small-to-mid-sized acquisitions to grow its reserves and expand its unconventional oil and gas assets. For context, CNOOC spent around CNY57.4bn (c.USD9bn) on acquisitions in 2010 and 2011. We calculate that CNOOCs credit metrics specifically its debt/EBITDA would only increase by 0.3-0.6x if the group were to make a USD5-10bn debt-funded acquisition; this suggests CNOOC has further headroom for M&A activities within its current ratings. Valuation: The CNOOC 4.25% 21s are quoted at CT10+155. While the bonds continue to be tight, we expect CNOOC bonds to be fairly attractive to investors given the stability of its credit profile. Across its cash curve however, we have a lower preference for its longer-dated bonds, specifically CNOOC 5.75% 41s we view the spread level of CT30+156/136bp as rich.
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ENN Energy Holdings Ltd (Xinao Gas) Rating Underweight Rationale
Credit view: We have a negative view of ENNs (Baa3/BBB-, Both CW Neg) credit profile as a result of its plan to acquire China Gas. We think the impact on ENNs credit profile will largely depend on whether the general offer is accepted, on the final size of the acquisition (51%-75% of China Gas), and on the financing structure of the deal. In our base case scenario, we expect the company to acquire the requisite stakes at a higher price than the initial offered price of HKD3.50 a share and to fund that with a combination of debt/equity and cash. This would likely result in higher leverage and a deterioration in credit metrics and lead to a one-notch downgrade of the company by the rating agencies. We expect the shareholders of China Gas to demand a premium higher than the 25% that was offered by ENN. We think ENNs bonds will remain volatile as a result of the uncertainties mentioned above. The company has extended the long-stop date to May 15 from March 31, pending approval from the relevant China regulatory authorities for the acquisition. Credit metrics: FY11 credit metrics were slightly weaker y/y with Gross Debt/EBITDA of 4.2x (2010: 4.0x), Net Debt/EBITDA of 2.7x (2010: 1.6x) and EBITDA/Interest of 5.8x (2010: 5.9x). Absent a debt funded acquisition of China Gas, we expect 2012 credit metrics to improve as a result of higher revenues and EBITDA for the year. Valuation: On a relative value basis, we think risk/reward is biased slightly towards the short side at this point, given that we view the chances of a successful China Gas acquisition as a 50/50 proposition. It is still uncertain whether ENN will raise its HKD3.50/share offer price for China Gas. We note that China Gas shares trade around HKD3.80, reflecting the equity market's view of a high likelihood that the offer price will be raised. In the event that the acquisition does not go through, we think there is probably another 50bp in the ENN bonds. Conversely, if the acquisition does go through, we think 50-100bp widening is likely as a result of a likely one-notch downgrade, as we expect the bonds' fair value to be in the 7.00-7.50% range, in line with other strong BB issuers.
GS Caltex Rating Market Weight Rationale
Credit view: We view GS Caltexs (GSC, Baa2 Stbl/BBB Neg) near-term operating outlook as stable. For 2012, we expect both revenues and operating income to be flat vs. 2011 as we believe refining margins have likely peaked in 2011, thus limiting further improvement in the companys credit profile. We expect refining margins to be USD78/bbl. We expect incremental refining capacity additions in Asia to exert downward pressuring on refining margins in 2012, despite continued robust demand from emerging economies. While the capacity utilisation rates in Asia were strong during 2011, with most averaging above 80%, we think the risks are tilted to the downside in the event of a slowdown in emerging Asia due to the impact of the European sovereign debt crisis. Credit metrics: FY11 credit metrics improved compared to FY10 as a result of higher operating income, and lower capex. FY11 EBITDA/Interest 7.4x (FY10 5.7x), FY11 Total Debt/EBITDA 4.3x (FY10 5.1x). We expect credit metrics to remain stable in 2012. Valuation: At CT5+260 for the 6% 16s, we think the valuations are fair for a mid-BBB refining company with a stable credit profile.
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Henderson Land Rating Market Weight Rationale
Credit view: We hold a mildly cautious view on Henderson Lands (NR) credit profile for 2012 given its relatively higher exposure to residential property, albeit we think the current bond valuation is modestly attractive. The group reported a mixed set of FY results it delivered strong retail income growth and solid property sales, although the margin on Hong Kong property development was weaker than anticipated. The groups property pipeline for 2012 will be active, marked by a total attributable gross floor area of 2.3mn sq ft available for sale and pre-sale in 2012. Overall, management remains optimistic on the Hong Kong property market as it expects the low interest rate environment to continue a factor that will support housing demand from both mainland and local residents. With regards to Henderson Lands rental income growth, we expect this to be underpinned by its completed investment property portfolio (Hong Kong: c.9.2mn sq ft, Mainland China: c.6.5mn sq ft). The health of the housing market in China also warrants attention despite the small revenue contribution from the mainland (c.10% of FY 11 revenue). In our high-grade coverage universe, Henderson Land has the highest attributable developable gross floor area in China (151.2mn sq ft; 83% planned for residential developments). Liquidity remained strong at end-2011; supported by HKD18.85bn of cash and c.HKD30bn of credit facilities versus HKD19.7bn of short-term liabilities. Since end-2011, the liquidity and debt maturity profile has been further enhanced by new bond issues (HKD640mn 2-year bond, USD700mn 5-year bond, SGD200mn 4-year bond) and bank loan renewal (HKD4bn 3-year). Credit metrics: On our calculations, Henderson Land reported an EBIT net interest cover (including the profits less losses of associates and joint control entities) of 6.8x vs a prior year level of 5.3x. Its EBIT gross interest cover was 6x (prior year: 4x) while its net gearing ratio was 19.9% (prior year: 28.2%). Valuation: We view the HENLND 4.75% 17s as attractive at CT5+345 as it is trading far too wide relative to WHARF 4.625% 17s (CT5+285) and WHARF 6.125% 17s (CT5+290) and flat relative to Kerry (KERPRO 5% 17s, CT5+350). We recognise that Henderson Land is not rated by the credit agencies - this limits the investor base for its bonds. Despite this, we think the Henderson bonds offer good upside as we view its credit profile as commensurate with a mid BBB rating. Accordingly, we think its bond spread level should trade mid-way between Kerry (S&P: BBB- stbl) and Wharf (Fitch: AStbl).
HKT Trust & HKT Limited Rating Market Weight Rationale
Credit view: We expect HKT Trust and HKT Limiteds (Baa2/BBB both Stb) credit profile to be stable following the successful spin-off of its telecommunication businesses from PCCW into a business trust in November 2011, which also led the rating agencies to remove it from negative rating review status. The company used part of the HKD7.8bn of the net proceeds to pay down debt, which improved its credit metrics via reduced leverage ratios. However, we expect further deleveraging to be limited as the company said it would distribute all of its excess cash flows as dividends to the trust. Any improvement in credit metrics will thus be driven mainly by EBITDA growth. We expect HKTs operating outlook to be stable, with earnings growth in a low-single digit range in 2012. The companys operating performance is supported by its strong market position and enhanced by its status as the only quad-play operator in Hong Kong. However, growth in fixed line revenue should be largely stagnant given the high penetration rate, and earnings growth will mostly come from its TV & content and mobile businesses, in our view. Credit metrics: FY11 metrics improved y/y as a result of the partial debt pay-down after the spin-off of HKT, with Gross Debt/EBITDA of 3.2x (2010:4.8x), net debt/EBITDA of 2.9x (2010: 4.1x) and EBITDA/interest expense of 4.9x (2010: 4.6x). We expect credit metrics to remain stable as a result of stable cash flows and manageable capex. Valuation: Our Market Weight on HKT Trust and HKT Limited is based on the companys stable credit profile postdeleveraging. In our view, the defensive nature of its business should support the performance of its bonds in an expected volatile market in 2012.
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Hongkong Land Holdings Ltd (HKL) Rating Underweight Rationale
Credit view: We expect the credit profile of Hongkong Land (HKL, A3/A- both Stb) to be stable through 2012. FY 11 sales declined 9% to USD1.22bn while operating profit (before fair value change of investment properties) fell 5.7% the y/y contraction is expected due to completion of fewer residential projects. HKL benefited from positive rental reversion, however, specifically in 2H11, and the FY rental revenue rose 2.7%. At end-2011, the vacancy level was positively lower at 2% (prior year: 2.9%) and the average 2011 rent (office space) in Hong Kong was HKD87psf (prior year: HKD84.3psf). Unsurprisingly given the current economic uncertainty, management communicated a cautious 2012 outlook, with lower residential profits given the scheduled timing of project completions only one residential project is scheduled for completion in Singapore. In China, HKL also expects residential sales to be more challenging. Positively, in 2013, management expects a recovery in residential profits with four projects due for completion in Singapore. Its Hong Kong property portfolio will also benefit from the limited supply of new commercial space. The prevailing rentals are at HKD90100 psf, higher than the rents which are expiring in 2012 (c.HKD80) as such, even after factoring in our expectation that the rental rate will decline 10-15% in 2012, HKL is still likely to see positive rental reversion. Liquidity was solid at end2011 HKL had USD1bn in cash and USD1.9bn in available committed lines, against USD746mn in short-term debt. Credit metrics: On our calculation for FY 11, which includes the dividends from its joint ventures, HKL reported a gross debt/EBITDA of 3.7x (prior year: 3.2x), FFO/gross debt of 20.2% (prior year: 23.7%), FFO/net debt of 28.5% (prior year: 37.4%) and an EBITDA/gross interest coverage of 8.9x (prior year: 10.3x) which are in line with its current low-A ratings. Valuation: HKLAND 5.5% 14s are quoted at CT2+235 and HKLAND 4.5% 25s are at CT10+280. We view the 4.5% 25s specifically as trading too tight in light of its long maturity and lack of liquidity. For comparison, the SUNHUN 4% 20s and the SUNHUN 4.5% 22s are trading at CT10+285 and CT10+277 respectively, albeit the elevated spread was driven by the uncertainty around the outcome of the ICAC investigation on its co-chairmen and managing directors.
Hutchison Whampoa Ltd (Hutch) Rating Market Weight Rationale
Credit view: We expect Hutch (HWL, A3 Neg/A- Stb) to maintain a broadly stable credit profile in 2012, helped by its diversified business portfolio (rental properties, ports and property development, retail), its strong liquidity position, the dividends from its stake in Husky Energy and the scope for more positive contributions from its European telecommunication segment (3 Group). In 2012, its Cheung Kong infrastructure (HWLs stake: 84.85%) business will also benefit from the full-year contribution from Northumbrian Water which it acquired in Oct11. Despite the meaningful exposure to Europe (42% of revenue including associates and JCE, 31% EBITDA), this is somewhat compensated by HWLs diversified business profile (European revenue mix: Retail 47%, 3 Group 36%, Infrastructure 10%, Ports 7%). HWL prudently holds a net debt/capital target of less than 25%; yet it does not rule out potential M&A opportunities. HWLs telecommunication subsidiary in Austria (3 Austria) has made a binding agreement to acquire Orange Austria, which is conditional on the sale of the Yesss! brand and other assets to Telekom Austria. The net consideration for this acquisition deal is c.EUR900mn, which will weigh negatively on HWLs credit metrics (currently weakly positioned within Moodys A3 ratings), although we recognise that the acquisition will strengthen its competitive positioning. Liquidity position remains strong, helped by cash of HKD66.5bn and undrawn committed borrowings of HKD7.24bn (compared favourably against short-term borrowings of HKD28.8bn). Credit metrics: As of FY 11, HWL reported a total debt of HKD213bn (FY 10: HKD247.4bn) and a net debt of HKD127bn (HKD131bn). Net debt/capital was 23.8%, an improvement from the prior-year level of 26% and within managements target of a net debt/capital (below 25%). Valuation: Current spread levels are fairly valued, in our view, and we expect investors to continue to value the managements strong track record and the expectation that it will remain broadly disciplined in its expansionary plans (stated target of keeping its net debt/capital target below 25%). HUWHY 7.625% 19s are quoted at CT10+189, HUWHY 5.75% 19s at CT10+187 and HUWHY 4.625% 22s at CT10+235.
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Hyundai Motor Co Ltd (HMC) Rating Market Weight Rationale
Credit view: HMC (Baa2 Pos/BBB+ Stbl) has delivered a strong operating performance through 2011. The groups FY 11 revenue was KRW77.8trn and the operating profit was KRW8.08trn. We continue to expect a solid performance by HMC in 2012, driven by its 1) improved product mix and operational efficiency; 2) global footprint (2011 unit volume including Kia Motors: Korea 18%, China 18%, US 17%, others 47%); and 3) growing consumer awareness of its brand and quality. Additionally, we also view capital investments as having passed their peak, and believe HMC can therefore generate positive free cash flow on a consolidated basis. Risks to HMC's earnings in FY12 include the impact of a stronger KRW, a slowdown in the global economy, and increased competition from the Japanese automakers. Liquidity remains adequate, with liquid assets of KRW15.2trn as of 3Q11 versus KRW16.8trn of short-term debt. In March 2012, S&P raised Hyundais ratings from BBB to BBB+, reflecting its expectation that HMC has improved its competitive positioning in the global auto industry and that HMC will maintain its adjusted debt/EBITDA below 1.5x over the next two years. S&P also highlighted the adequate liquidity at HMC (expected cash and short-term investments of KRW16trn vs short-term debt of KRW3.6trn). Moodys also revised its Baa2 outlook on HMC from stable to positive, thanks to HMCs strong sales performance in 2011. On the whole, we hold a constructive view on HMC albeit we note that its earnings remain sensitive to currency movements (stronger KRW would be a negative; Barclays 6m forecast is 1075 KRW/USD versus spot rate of 1140) and to global macroeconomic conditions. Valuation: The HYNMTRs cash levels are fairly valued, in our view, relative to some of the Korean industrial issuers, such as POHANG, thanks to the strong technical demand from US-based investors. The HYNMTR 3.75% 16s are quoted at CT5+212 and the 4.0% 17s are quoted at CT5+247.
Korea Electric Power Corp (KEPCO) Rating Market Weight Rationale
Timothy Tay / Justin Ong
Credit view: We maintain our negative outlook on Korea Electric Power Corp (KEPCO, A1/A both Stb) in 2012, based on its inability to pass through generation costs amid elevated fuel prices and a large capex program. Despite a series of tariff adjustments in 2011, KEPCOs fuel cost recovery remains inadequate, with the cost coverage ratio after the latest hike in August at just 90.3%. With fuel prices expected to stay elevated, the lack of a transparent and automatic cost pass-through mechanism will continue to weigh on KEPCOs credit profile. Furthermore, KEPCOs plan to increase its reserve margin to 14% (1H11: 5.5%), prompted by a series of blackouts during the summer months, is expected to require KRW15-16trn of capex annually until 2014. With cash and equivalents of KRW1.4trn and short-term debt of KRW7trn at end-December 2011 and estimated annual operating cash flow of KRW4-5trn, KEPCO will likely need external funding to fund the majority of its capex. As such, we expect the companys credit profile to continue to weaken over the next 2-3 years, unless a tariff regime that allows sufficient return on investments is implemented. Offsetting this concern, however, is the companys strong access to both domestic and foreign funding, as well as strong support from the Korean government. Credit metrics: FY10 credit metrics were weaker y/y with gross debt/EBITDA of 4.8x (2009: 4.1x), net debt/EBITDA of 4.5x (2009: 3.9x) and EBITDA/interest of 5.1x (2009: 5.2x). We expect 2011/2012 credit metrics to be weaker as a result of the large capex programme. Valuation: In our view, the KORELE 14s (CT2+210) and KORELE 15s (CT2+225) are fairly valued compared to its utility peers and other Korean gencos.
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Korea Gas Corp Rating Underweight Rationale
Credit view: As with KEPCO, we have a negative outlook on Korea Gas Corp (KOGAS; A1/A Stb) in 2012 due to the uncertainty surrounding its tariff system and its large investment plan. The loss of KRW358bn reported in 3Q11, a result of the Korean governments suspension of tariff adjustment during the period, and an insufficient 5.3% tariff hike in Oct 11, served to highlight the companys earnings vulnerability to gas prices and government intervention. Furthermore, we expect the companys capex to be large in 2012. KOGAS said it would spend KRW1.2trn to expand its gas facilities and pipeline network, and more on overseas E&P projects in 2012. Although the exact amount allocated for upstream investments is unclear, we believe this could be substantial given that the company targets increasing its self-sufficiency rate to 25% (2012: 10%) and earnings from overseas projects to 60% by 2017 (2012: 40%). The companys liquidity is weak, with KRW475bn of cash and short-term investments compared to KRW2.4trn of shortterm debt at end-2Q11. However, we believe it has adequate access to external funding to make up for the shortfall. The company also enjoys government support in the form of special loans with repayment hinged on the success of its exploration, tax exemption and tax credit for overseas investments. Credit metrics: FY11 metrics were weaker y/y with Gross Debt/EBITDA of 22.6x (16.4x), net debt/EBITDA of 22.4x (2010: 16.3x) and EBITDA/interest of 2.6x (2010: 2.9x). We think leverage ratios are likely to deteriorate in 2012 as a result of continued capex expansion. Valuation: Compared to other Korean quasi-sovereigns, we think the current spreads on KORGAS 42s (CT2+230) and the KORGAS 20s (CT10+198) are tight and do not fairly compensate investors for the companys weaker credit profile and execution risks related to its E&P business. However, we recognise that the KORGAS 42s are well supported technically because of the scarcity of bonds in this maturity bucket.
Korean gencos Rating Overweight KHNP Rationale
Market Weight KEWSPO KOWEPO KOSPO KOSEPW KOMIPO
Credit view: We maintain a constructive outlook on the six Korean gencos, which include Korea Hydro and Nuclear Power (KHNP) and five thermal gencos KEWSPO, KOWEPO, KOSPO, KOSEPW and KOMIPO (all A1/A both Stb). Despite high fuel prices, we expect the thermal gencos to maintain their robust standalone credit profile, as a costbased pool system allows the gencos to largely pass on fuel cost increases to parent KEPCO. Among the six gencos, we prefer KHNP for its low fuel cost structure, which supports its strong margins and cash flows. KHNP plans to add seven nuclear plants to its current fleet of 21 by 2017, in line with the governments aim to increase nuclear powers share in the nations electricity supply mix. As such, we expect KHNP capex to be high around KRW5.5-6trn a year and its leverage to rise over the next few years. We also expect leverage of other gencos similarly to rise to fund capacity expansion. Nonetheless, we believe the gencos will maintain their sound credit profile, supported by higher sales and robust cash flows. At end-2010, the thermal gencos reported an aggregate EBITDA/interest cover of 9.9x (2009: 7.0x), gross debt/EBITDA of 2.3x (2009: 2.8x) and gross debt/capital of 39% (2009: 43%). KHNP reported consolidated 1Q11 EBITDA/interest cover of 4.9x, annualised gross debt/EBITDA of 1.7x and gross debt/capital of 22.3%. Liquidity at the gencos is generally weak but this is mitigated by their ample access to external funding, in our view. Valuation: All the gencos bonds trade broadly in line with each other and with those issued by KEPCO. Among the gencos, we continue to see more value in the KHNP 21s (CT10+212) and KOSEP 17s (CT5+217) although we think the performance of the bonds will likely be capped by the prospect of new supplies.
Korea Land and Housing Corp Rating Market Weight Rationale
Credit view: We expect Korea Land and Housing Corps (KOLAHO, A1/A both Stb) standalone credit profit to remain weak and believe the company will remain dependent on financial support from the government. Investors concerns about the companys high debt and weak credit metrics prompted the Korean government to step in with measures to reassure investors of its support. Specifically, the government will 1) purchase bonds issued by KOLAHO, 2) allow private participation in state projects, 3) help the company sell land and other assets to raise capital, 4) cover losses from its development business, and 5) extend the repayment period for debts owed to the National Housing Fund to 30 years, from 20 years. In addition, KOLAHO will reduce its annual spending, including capex, to KRW30trn, from KRW46trn. We view these measures as evidence that the government will provide extraordinary support to KOLAHO in any distress situation. At end-2010, we estimate KOLAHO had gross debt/EBITDA of 138x, EBITDA/interest cover of 0.2x and gross debt/capital at 80%. Liquidity at end-2010 was weak, with KRW4.4trn cash against KRW10.6trn short-term debt. While its high leverage may limit its ability to borrow offshore, KOLAHOs access to domestic funding and government financial support remains strong. Valuation: We view the KOLAHO 5.75% 14s (CT2+232) and 4.875% 14s (CT2+232) as rich relative to other Korean quasi-sovereigns, given the companys weaker credit profile.
20 April 2012
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Korea National Oil Corp Rating Overweight Rationale
Credit view: Korea National Oil Corps (KNOC, A1/A both Stb) credit outlook will continue to be driven by its appetite for growth and the additional debt required to finance it. Capex, excluding potential acquisitions, is expected to be KRW6-7trn for the next two years, according to the company, likely to be funded in part by a KRW1trn annual equity contribution from the government. In February 2011, KNOC paid USD1.55bn (KRW1.7trn) for a minority stake in Anadarko Petroleums Maverick Basin shale oil field and another USD515mn (KRW557bn) for a 95% stake in Kazakhstans Altius, which has total reserves of 57mn bbl. We expect the company to focus on acquiring standalone oil and gas assets rather than companies. To mitigate operational risk, the company also will seek to form JVs to operate some of these assets. Further acquisitions will be required to raise its daily production to its targeted 300,000bpd by 2012/2013. As a result, KNOCs credit metrics are likely to deteriorate, although this is offset partially by elevated oil and gas prices and higher production levels. We also expect sovereign support to remain strong, given its strategic role and full government ownership. On our calculation, FY 11 consolidated total debt/EBITDA was 3.7x (prior year: 3.2x) and EBITDA/interest cover 9.2x (10.8x). For FY12, we expect another USD1.5-2.0bn of incremental foreign debt issuance from KNOC, based on the companys guidance. As at end-June 2011, reserves were 1,340mmboe, production was c.217,000 bpd. Liquidity as of end-FY 11 was KRW1.22trn; lower than its short-term debt of KRW2trn; albeit KNOC has strong access to both domestic and international funding sources (H1 11 credit lines: KRW1.59trn). Valuation: We view the current levels for the bonds as attractive versus other A-rated oil and gas issuers in Asia, which trade around +150. The KOROIL 4% 16s are quoted at CT5+203 and the 3.125% 17s at CT5+219.
Noble Group Rating Underweight Rationale
Christina Chiow
Credit view: The near-term credit outlook for Noble Group has stabilised, although we believe it is not totally out of the woods yet. 4Q11 results improved from 3Q11, as did working capital. But 4Q11 EBITDA of USD242mn was below the companys average quarterly EBITDA prior to 3Q11 of c.USD330mn, as the company reduced risk taking. We believe Nobles low-margin trading business model leaves little room for error, and current credit metrics, including adjusted debt/capital of 47% and FFO/adjusted debt of 10%, remain on the weaker side for its ratings. However, in our view, these are partly offset by Noble's balance sheet strength, debt profile and commitment to investment grade ratings. The merger of Gloucester Coal (Nobles 64.5% subsidiary) and Yancoal Australia is on track and expected to provide cash of c.AUD412mn. The near-term credit driver will be the IPO of the agriculture business. Liquidity is sufficient, in our view. At Dec 11, Noble had cash of USD1.5bn and undrawn committed facilities of USD6.1bn, against short-term debt of USD655mn. Furthermore, the company also had readily marketable inventories of USD2.5bn. Valuation: We view the merger of Gloucester Coal and Yancoal Australia and the potential IPO of its agriculture business as credit positive for Noble Group (Baa3/BBB- both Neg). However, we believe valuations already price in a successful near-term IPO of the agriculture business. With the Noble 15s indicated at T+375bp, and given the availability of stable HG corporates in the T+350-400bp area, we expect the bonds to underperform the high grade universe as investors continue to demand higher premium given Nobles volatile businesses and maintain our Underweight rating.
Petroliam Nasional Bhd (Petronas) Rating Underweight Rationale
Credit view: We expect Petronass (A1/A-/A all Stb) credit metrics to remain solid, in line with other oil and gas companies. Over the medium-term, Petronas has substantial capex requirements (MYR300bn over 5 years), much of which will be funded by debt. The high capex program is driven by Petronas plan to replace its depleting energy reserves through deepwater offshore exploration/production and tapping unconventional energy assets. The groups shareholder returns continue to be high albeit management has proposed a lower y/y dividend of MYR28bn for FY 12 (versus previous annual levels of MYR30bn). As previously announced, the group plans to observe a dividend payout ratio of 30% from FY 13 onwards, a meaningful reduction from prior years (FY 11: 54.7%, FY 10: 74.4%, FY 09: 57.1%). This will help reduce its dividend payments to MYR15-17bn in FY13; yet the groups FCF will likely be negative over the near/ medium term given its capex program. One other development to watch is M&A. As part of the groups plans to source new energy assets, management was reported to be examining a potential acquisition of above USD5bn in Canada (source: Bloomberg, 3 April). Liquidity remained strong Petronas had MYR124bn in cash versus MYR12.8bn in short-term borrowings. Credit metrics: We expect the groups credit metrics to weaken through 2012 with further potential pressure coming from any significant acquisitions. Nonetheless, we expect the group to maintain a credit profile that is consistent with its current A1/A-/A ratings given its strong liquidity position and ratings headroom. Valuation: The cash spread levels are tight, in our view, relative to other single-A-rated Asian oil and gas issuers. The PETMK 5.25% 19s are quoted at CT10+120 and the 7.625% 22s at CT10+170. These levels offer scant upside, noting the prevailing levels of other higher rated names: Aa3/AA CNOOC21s (CT10+155) and A+/A1 CNPC21s (CT10+165).
20 April 2012
38
POSCO Rating Underweight Rationale
Credit view: We maintain a cautious view on POSCO (A3 /A- Both Neg) for FY 12 given the competitive pressure within the cyclical steel industry (Hyundai Steel and other Japanese/Chinese steelmakers), slower demand for steel, input cost headwinds and its weakly positioned metrics in the low-A rating bracket. In 2011, its operating margin was crimped by weak steel prices and the high input costs (iron ore and coking coal). For 2012, we expect the difficult trend to continue, specifically in 1H12 the profitability will still be affected by lower steel price despite the moderation in input cost. Additionally, investment plans are high KRW8.3trn to KRW9.5trn for 2012 (prior year: KRW8.1 trn). Somewhat reassuringly, management stated that it plans to retain its A3 rating through the sales of non-core assets and stakes in subsidiaries. However, POSCO announced in Jan12 that it will jointly acquire a 30% stake in the Roy Hill iron ore project in Australia (partnering with Marubeni and STX). Strategically, this is a sensible acquisition that helps to enhance its access to iron ore, although the acquisition will impair its credit metrics over the near-medium term. In April12, POSCO said it will raise a total of USD535mn from selling its stake in SK Telecom, Hana Financials and KB Financials this demonstrates managements plans to deleverage. On balance, however, we think that POSCO has to implement more deleveraging initiatives to stabilise its current credit ratings while the operating results deserve close attention through 2012. The liquidity position of POSCO has also deteriorated in recent quarters at 3Q11, it held a liquidity position of KRW8.3tr, below its short-term borrowings of KRW12.6trn (3Q11). We nonetheless recognise that POSCO can easily access the capital markets, if necessary, helped by its credit ratings and profile. Valuation: We continue to view the POHANG 5.25%21 (CT10+245) as being vulnerable to further downside risks, relative to other Korean corporates and quasi-sovereign issues, until POSCO implements more deleveraging measures to stabilise its credit ratings. For comparison, the KORELE (KHNP) 4.75% 21s are quoted at CT10+210 and we expect the spread differential between POHANG 21s and KHNP21s to remain wide at this juncture.
PTT Exploration & Production Public Company Limited Rating Market Weight Rationale
Credit view: We have a cautious outlook for PTTEPs (Baa1/BBB+ both Stb) credit profile in 2012 after the company announced it had made a proposed offer of 220 pence in cash for each Cove Energy share, subject to pre-conditions. Cove Energy is a UK-listed exploration and production company with interests in oil and gas blocks in East Africa, primarily in Kenya, Tanzania and Mozambique. We think the announced potential acquisition could be negative for the company's credit profile. With only USD1.35bn of cash on its balance sheet as of 31 December 2011, we expect the company to require external financing to fund the transaction if materialised. We would expect the rating agencies to scrutinise the transaction closely and take rating actions depending on how the company finances the potential transaction. We see a negative ratings action as a potential outcome in the event of a 100% debt-financed acquisition of Cove Energy. Aside from the issue of the potential acquisition of Cove, we expect revenue growth to be in the mid-teens, driven by supportive oil and gas prices and increased output. Despite slightly missing its 2011 production target due to Thailands flood crisis in 2H11, the company expects production volume to increase by 10% in 2012, based on planned contributions from new fields Montara (expected early 12), Bongkot South (expected early 12) and Vietnam 16-1 (started Aug 11). For 2012, the company has guided for capex before acquisition expense of THB71bn, most of which is to be spent on the development of existing fields. Based on our expectation of approximately THB100bn of operating cash flows in 2012, we believe PTTEP will be able to fund its capex with internal resources. Credit metrics: FY11 leverage metrics improved with gross debt/EBITDA of 0.5x (2010: 0.8x) and net debt/EBITDA of 0.2x (2010: 0.3x). EBITDA/interest coverage of 30.3x (2010: 38.4x) declined y/y, but remains strong. Valuation: We think the PTTEPT 15s (CT2+245) and the PTTEPT 21s (CT10+252) are fairly valued compared to other Asian HG Oil & Gas issues. However, if a debt funded acquisition does materialise, we think there could be another 3040bp of downside.
20 April 2012
39
PTT Global Chemical Company Rating Market Weight Rationale
Credit view: We have a constructive outlook on PTTGCs (Baa2/BBB both Stb) credit profile in 2012, thanks to its steady earnings growth and its strong balance sheet post-merger. Its FY 11 sales rose 33% to THB500.3bn and its EBITDA grew 56% to THB45.4bn, driven by higher olefin capacity (+53% to 2.88mn ton/year) and the high crude oil price (average Dubai of USD106.2/bbl, +36.2%). The Q4 growth, however, decelerated (Q4 EBITDA +7%) on global macroeconomic uncertainty, which curtailed petrochemical demand, and the Thailand floods. Despite the uncertain global outlook, management expects its plants to operate at full capacity with a 2012 utilization rate of 90% for olefins and derivatives, 100% for refining and 89% for aromatics. PTTCG will also benefit from its flexibility in using different feedstocks (crude oil, naphtha, gas) for its petrochemical products, which enables it to switch to lower-priced gas and gain a cost advantage over peers. Other tailwinds include the expected synergy (merger of PTT Aromatics and Refining Pubilc Company with PTT Chemical Public Co which created PTTGC) of USD80-154mn (c.THB2.4-4.6bn) in additional annual EBITDA. Additionally, the demand for the groups middle distillate is likely to be more resilient than that of gasoline and other refined products; helping to support PTTGCs plant utilisation rate. The liquidity position remained solid at end-Dec11 with cash of THB22.6bn and undrawn credit facilities of THB68.8bn versus THB22.1bn in short-term borrowings. Credit metrics: For FY11, PTTGC reported a net debt/EBITDA of 1.79x and a net debt/equity of 0.47x. Valuation: The PTTGC 15s (previously PTTCH) are quoted at CT2+340 (Z+295). The bonds, in our view, continue to be relatively attractive versus those of PTT affiliates such as PTTEPT 15 (Baa1/BBB+; CT2+245) and PTTTB 14 (Baa1/BBB+; CT2+240), as well as to RILIN 20 (CT10+310, Z+325).
PTT Public Company Limited Rating Market Weight Rationale
Credit view: We expect PTT pcls (Baa1/BBB+ both Stb) credit profile to be broadly stable in 2012. The FY 11 results were satisfactory: consolidated sales rose 27.9% to THB1,898bn while EBITDA increased 23.7% to THB210.7bn, thanks partly to the higher average selling prices of oil (average Dubai of USD106.2/bbl, +36.2%), petrochemical products and natural gas. The 4Q11 performance, however, slowed sequentially (sales down 8.2% q/q) due to the decelerating global economy and softer oil prices in late 2011. At Dec11, PTT pcls liquidity position is sufficient with THB172bn of cash (including current investments of c.THB116bn) which compared favourably against its short-term borrowings of THB70.5bn. We also expect its operating cash flow generation to remain solid in 2012 (FY 11: THB181bn), which helps to support its capex spending (THB900bn or USD20bn planned between 2012 and 2016). For 2012, management expects the Singapore GRM to be USD6-7/bbl (vs USD6.08/bbl in 2011), reflecting the tight refining capacity albeit offset by weaker demand for petroleum products. Management also said that olefin prices are declining, reflecting the oversupply and weaker demand environment. It also expects the Dubai oil price to hover between USD100-110/bbl in 2012. Credit metrics: For FY 11, PTT pcl reported a net debt/EBITDA of 1.3x (prior year: 1.4x), within its stated policy of below 2x. It also posted a net debt/equity of 0.4x , unchanged y/y (company target of < 1x). Valuation: The PTTTB 14s (CT2+240, Z+209) are fairly valued, in our view, versus the PTTEPT 15s (CT2+245, Z+201), although investors may also consider PTTGC 15s (previously PTTCH), quoted at CT2+340 (Z+295) we view the latter as more attractive versus PTTTB14s and PTTEPT15s. At the longer-end of the PTTTB curve, we think the PTTTB 35s (CT30+261, Z+309) are rather tight.
Reliance Industries Ltd Rating Overweight Rationale
Credit view: We view Reliance Industries (RIL, Baa2/BBB, both Pos) as having a high BBB credit profile, with 1H12 total debt/EBITDA of 1.8x, net debt/EBITDA of 0.3x and EBITDA/interest expense of 11.0x. Liquidity is strong, with cash of INR615bn as of end-September, versus estimated short-term debt of INR150bn. For the refining segment, we expect gross refining margins to decline to the USD6.008.00 range after having peaked in the USD1011.50 range in 2011. We expect incremental refining capacity additions as well as higher oil prices in 2012 in Asia to weigh on refining margins. In terms of refined product crack spreads, the strength in middle distillates is expected to offset weaknesses in light distillates. Refinery operating rates are also likely to remain above 100% for the balance of the year. For the chemical segment, we expect petrochemical spreads to remain soft. An ongoing supply deficit in India will support RILs petrochemical spreads, as more than 70% of its petrochemical revenues are derived domestically. For the E&P segment, we expect production numbers to decline further this year, with production at the KG-D6 block currently at about 34 mmscm/d at the end of March compared to 61.5 mmscm/d at the end of 2010. We think part of the risk stemming from weak production numbers is partially offset by the sale of the 30% stake in KG-D6 to BP for US$7.2bn. A key risk to the credit is the possibility of large-scale M&A E&P operators remain acquisitive, and we think RIL could seek to add to its energy portfolio if the opportunity arose. Credit metrics: 1H12 credit improved with gross debt/EBITDA at 1.8x (2011: 2.2x), net debt/EBITDA at 0.3x (2011: 1.1x) and EBITDA/interest at 11.0x (2010: 11.1x). Valuation: We view the RIL 20s, 22s and 40s bonds as attractive relative to Asian oil and gas peers. RIL 22s, which is rated one notch lower than PTTEP, trades about 80bp back of the PTTEP 21s. We think a fair relationship for a one notch rating differential should be about 30-50bp, taking into consideration the extra risk premium for Indian credits.
20 April 2012
40
SK Telecom Rating Underweight Rationale
Credit view: We continue to hold a somewhat negative view on SK Telecoms (SKT; A3 Neg/A- Stbl/A- Stbl) financial risk profile given the prevailing margin pressure in the highly competitive wireless business. We expect SKT to be subject to high marketing costs and elevated investment needs. In 2011, while its revenue rose 2.2%, operating income slipped 6.3%, due to marketing expenses, aggressive tariff discounts, investments and the cost of acquiring additional spectrum. Additionally, SKT will be operating at a higher leverage level following the acquisition of a 21% stake in Hynix Semiconductor for KRW3.4trn (USD3.1bn) which included KRW2.5trn of debt funding. Consequently, in Feb11, S&P downgraded SK Telecom by a notch to A- with a stable outlook. Moodys also downgraded the group from A2 to A3, albeit with a negative outlook. On our estimates, Hynix will post a debt/EBITDA level of 1.8x (+0.4x y/y) for FY 12 while the cyclicality of SKTs business profile will increase. We recognise that Hynix holds a strong market position in the semiconductor memory industry, although the inherent volatility and high capital-intensity of the memory chip business will weigh down SKTs stable cash flow. One key positive nonetheless is that we expect that SKT will maintain a leading market share of above 50% in the wireless market over the near/medium term. Valuation: We think the SKM 27s (CT30+157) are trading tight, with barely any compensation for the higher level of cyclicality following SKTs acquisition of Hynix. The high cash price and long tenor will also likely limit any further upside in the bonds, in our view.
Sun Hung Kai Properties Limited (SHKP) Rating Underweight Rationale
Credit view: While we expect Sun Hung Kais (SHKP, A+ Watch Neg/A1 Neg/A Stbl) operating performance to be firmly supported by its well-diversified property investment and property development portfolio, all eyes remain focused on the outcome of the Hong Kong Independent Commission Against Corruptions (ICAC) investigation of Thomas and Raymond Kwok (co-chairmen and managing directors.). Moodys had cut the outlook on SHKs A1 ratings to negative from stable while S&P had also placed SHKs A+ rating on creditwatch negative. Away from the ICAC-driven uncertainty and based on fundamental merits alone, SHKs 1H12 results were solid, driven by the positive rental reversions for new leases and renewals and higher contributions from new developments (ICC in Hong Kong, Shanghai IFC and Shanghai ICC). For perspective, the size of SHKs investment properties portfolio (27.9mn sq ft) is the largest in Hong Kong. The trend in its pre-sales market has been favourable SHK reported 13% growth in contracted sales to HKD24.9bn (includes more than HKD22b in Hong Kong). As of Dec11, the group reported a strong liquidity position, with cash on balance sheet of HKD9.2bn and undrawn bank facilities of around HKD30bn. This was further strengthened by a recent bond issuance in February (10-year 4.5% USD500mn). On the whole, we continue to view SHK as a strongly positioned company given the scale and quality of its investment properties, sufficient liquidity and good access to the capital market factors which will, in our view, defend its credit and financial profile over the long-term. Credit metrics: On our calculation for H1 LTM Dec 2011, SHK posted a gross debt/EBITDA of 2.4x (FY 10/11: 2.8x) and an EBITDA net interest cover of 15.4x (FY10/11: 15.3x) and a total leverage of 16.8% (FY 10/11: 17%). Valuation: The SUNHUN bonds have widened by around 50-60bp since mid-March driven by the ICAC investigation. The SUNHUN 5.375% 17s are quoted at CT5+270 and the 4.5% 22s at CT10+277. Despite the elevated spread level, we expect volatility to remain high given the overhang of the ICAC probe on the top management team a protracted investigation is an unwelcome distraction for management.
20 April 2012
41
Swire Pacific Limited Rating Market Weight Rationale
Credit view: We expect Swire Pacific (A3/A- both Stb) to retain a stable profile in 2012, driven by its diversified business portfolio and its resilient cash flow from investment properties. Swires FY results were mixed, reflecting the broadly resilient performance in its property investment business, offset by weaker results in its beverages, trading and industrial businesses as well as Cathay Pacific. We expect the 2012 results to be supported by its rental income and its long-dated lease expiry profile. Specifically, 64% of its office and retail leases expire in 2014 and beyond. Additionally, Swire is set to benefit from the growth of its investment properties in Mainland China (completed properties of 5.06mn sq ft at endDec11 vs prior-year level of 1.56mn sq ft). Due to the significant completion of investment properties in China in 2011, we expect the capex to fall by almost half to HKD4bn in 2012. For its investment properties in Hong Kong, management maintains a cautious outlook for 2012 as the demand for office space remains vulnerable to market conditions. Positively, though, the low vacancy rates and the modest supply of new office will be favourable. For Cathay Pacific, the outlook is more downbeat: both economy class yields and the cargo business will remain under pressure while fuel prices continue to be elevated. At end-Dec11, Swires cash and undrawn committed facilities were HKD3.79bn and HKD16.5bn (73% expire beyond one year), respectively. This compared favourably against its short-term borrowings of c. HKD10bn. Credit metrics: The reported gearing declined 4.3ppt to 15.4%, partly due to the sale of its stake in the Festival Walk shopping mall (HKD18.8bn). On our calculations, the group reported a FY11 gross debt/EBITDA of 4.6x (prior year: 5.9x) and EBITDA net interest coverage of 4.3x (prior year: 5x). The disposal proceeds will help fund its capex program. Valuation: The SWIRE 5.5% 19s are quoted at CT10+210 and SWIRE 4.5% 22s at CT10+232. Both are tighter than the corresponding HUWHY 5.75% 19s (CT10+187) and HUWHY 4.625% 22s (CT10+235). Given the lack of any key directional catalysts, we view the current spread levels as fair, helped in part by the improved credit metrics.
Telekom Malaysia Bhd Rating Market Weight Rationale
Credit view: Telekom Malaysias credit metrics (TM, A3 Stbl/A- Stb) will weaken in 2012, driven by its ongoing capex program and implementation of shareholder returns. TM benefits from ample headroom within its low-A ratings, however, and we expect it to maintain the stability of its credit profile despite posting weaker credit metrics. The ARPU from high speed broadband (HSBB) customers was encouraging in 2011 (> MYR184) and the deployment had reached 1.179mn premises by Feb12, close to its target of 1.3mn premises by end 2012. This helps to mitigate the declining trend in voice-based revenue. The groups capex requirement remains high over the coming years due to the ongoing HSBB investments around MYR6.5bn of outstanding capex to be spent over the next 7 years (total capex for HSBB is MYR11.3bn, of which the Malaysian government contributes MYR2.4bn). The annual capex for its underlying fixed network is also not insignificant an annual average of MYR1.2bn over 20082011. The shareholder return policy remains relatively generous. The annual dividend is around MYR700mn and in February 2012, management announced a capital repayment of MYR1.07bn. Management continues to observe a policy of returning surplus cash to shareholders (prior year capital repayment exercises: MYR1.04bn in 2010 and MYR3.5bn in 2008). Positively, at FYE Dec 2011, its strong liquidity position was supported by MYR4.21bn of cash while short-term borrowing was low at MYR7.7mn. TM also generates around MYR3bn in annual cash flow from its operating activities. Taken altogether, however, we note that the groups FCF will be negative in 2012 and 2013. For 2012, management targets a revenue growth of +5% (FY 11: +4.1%) and an EBITDA margin of 32% (FY 11: 33.5%, FY 10: 32.7%). Valuation: The TELMAL25s are quoted at CT10+230bp, tighter than TNBMK25s (CT10+275, Baa1 Stbl/BBB+ Neg), which reflect the higher rating and stable credit profile of Telekom Malaysia. This contrasts with the pressure on Tenaga Nasional due to its operational issues (related to gas supply).
20 April 2012
42
Tenaga Nasional Bhd Rating Underweight Rationale
Credit view: Tenaga Nasional (TNB; Baa1 Stb/BBB+ Neg) has delivered an improved performance in 2Q12, although we continue to view the risk-reward of its tight bond spreads as fairly unattractive on valuation grounds. The 2Q12 results were supported by the lower usage of high-priced alternative fuels (oil and distillate) as well as the stronger ringgit. This came after the 3 consecutive quarterly losses due to the shortfall in gas supply (maintenance at the Petronas LNG plants and the restoration work at the Bekok-C offshore natural gas field following the fire accident in December 2010). The supply disruption compelled TNB to resort to more expensive fuel (oil and distillate). The new Petronas LNG terminal (scheduled for completion in August/September 2012) is set to ease the supply shortage; yet over the coming months, TNB remains subject to additional input costs. In December, the Malaysian government proposed a fuel cost sharing mechanism through which TNB, Petronas and the Malaysian government will share the differential cost that had been incurred by TNB. In 2Q12, TNB received MYR2.02bn in fuel compensation from Petronas and the government a favourable development. TNBs liquidity position is sufficient it reported MYR9bn (August 2011: MYR3.9bn), thanks in part to its sukuk bond issuance (MYR4.85bn) this more than covers its short-term borrowings at 2Q12 of MYR1.65bn, MYR4.5-5bn of capex and other working capital requirements. Over the near term, gas supply will continue to be below the required level. While the fuel cost sharing mechanism helps to alleviate the cost pressure, investors attention will still hover on the operating costs of TNB given its ongoing dependence on alternative fuels. Credit metrics: On our calculation, Tenaga Nasionals FFO/net debt was 12.3% (prior year: 21.1%) and its EBITDA/gross interest cover was 3x (prior year: 4.1x). Valuation: We continue to see little upside in TNBMK 15s (CT2+275) and TNBMK 25s (CT10+275) as the group is lowerrated than KEPCO and the Korean gencos.
The Wharf (Holdings) Limited Rating Market Weight Rationale
Credit view: We expect Wharfs (NR) credit profile to remain broadly stable. FY 11 results were encouraging, helped by strong growth in recurring rental income and property sales in China. In Hong Kong, property investment revenue rose 14%, thanks to retail rental growth and positive rental reversions in office areas, specifically in Harbour City and Times Square. These two properties also accounted for 9% of Hong Kongs retail sales in 2011 (2010: 8.5%, 2009: 8%) and Harbour City alone represented 6.7%. In China, rental revenue expanded 69%, owing to the new Shanghai Wheelock Square, the Chongqing Times Square and solid rental reversions. At December 2011, the group net debt was HKD43.5bn (1H11: HKD42.5bn, FY 10: HKD32.7bn), with the higher net debt driven by investments in China. The reported net gearing was 20.6% (FY 10: 19.2%). Wharf had strong liquidity at 31 Dec 2011, with a cash balance of HKD32.5bn and undrawn bank facilities of HKD16.9bn, versus HKD8.9bn of short-term debt. Liquidity was further improved by a new bond issue in February: USD900mn 4.625% 2017 bond. Valuation: WHARF 4.625% 17s are quoted at CT5+285 and WHARF 6.125% 17s are at CT5+290, which is fair-valued, in our view, noting that HUWHY 3.5% 17s are trading at CT5+213. While the WHARF bonds are trading close to SUNHUN 5.375% 17s (CT+270), this was primarily due to the underperformance of the SUNHUN bonds on the back of the ICAC investigation on its co-chairmen and managing directors.
Woodside Petroleum Ltd Rating Market Weight Rationale
Credit view: We remain constructive on Woodside (Baa1 CW Neg/BBB+ Neg) in the near term, given that the risk of cost overruns has largely abated with the completion of the Pluto Foundation Project at the end of March 2012. We expect the rating agencies to revise the outlook to stable from negative as soon as the project achieves steady state for an extended period of time. On capital spending, we expect the company to exercise increased prudence on growth projects (Pluto expansion, Browse and Sunrise), with a renewed focus on the underlying economics of the projects. However, we remain cautious about the companys expansion strategies, as during the FY11 earnings presentation Woodside indicated that it was looking to broaden its E&P footprint globally, outside of Australia. No further details are available from the company at this point, and we expect more clarity on its overseas plans over the course of the year. For FY12, we expect higher revenues and earnings driven mainly by higher production levels. The FY12 production guidance of 7381 mmboe comprises 5660 mmboe for the underlying business and 1721 mmboe for Pluto Train 1. Capex guidance of USD2.3bn for FY12 is 45% is lower than FY11, largely due to the completion of the Pluto LNG Foundation Project in FY12. Credit metrics: FY11 credit metrics were largely unchanged with debt/EBITDA 1.5x (2010: 1.5x) and EBITDAX/gross interest 14.1x (2010: 13.4x). We expect the company to generate free cash flow in FY12, resulting in improved credit metrics in the absence of any incremental capex requirements. Valuation: We view its bonds as fairly priced at current levels, reflecting the companys constructive fundamentals despite the Negative Outlook at all three agencies.
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ASIA HIGH YIELD CORPORATES
20 April 2012
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HIGH YIELD
A slow recovery
Erly Witoyo +65 6308 3011 erly.witoyo@barclays.com Christina Chiow +65 6308 3214 christina.chiow@barclays.com Jit Ming Tan +65 6308 3210 jitming.tan@barclays.com
Valuations on Asian HY corporates may start to look attractive on an improving/stabilising operating backdrop. Policy tightening by the Chinese government in 2011 has weighed on bonds from Chinese industrials and property developers. Signs of policy easing, however, are likely to improve sentiment towards these sectors in the near term, which should support some spread tightening. Our top picks in the Chinese corporate sector are the mass-marketoriented property developers, including Country Garden and Evergrande. This group continues to draw support from the government's housing policies. Although we have moved to a neutral stance on Chinese industrials (from underweight), we expect construction-related companies to lag behind the recovery in the broader economy. The operating outlook is likely to remain weak through 2Q12, and for now, we continue to prefer non-construction-related credits, specifically, MIE Holdings and Fufeng. Among Indonesian corporates, we prefer the industrial sector on valuations and potential credit improvement. We are underweight coalrelated bonds as weak industry trends could hurt sentiment towards the sector, especially given that most bonds now trade tight to other Asian HY paper. Overall, technicals for Asian HY corporates remain constructive. We have seen evidence of increased EM fund flows to the sector, and new supply remains limited. Overweight Bumi Resources 16s: We expect a near-term improvement in Bumis credit profile. The company is focused on reducing debt and financing costs, which we believe it can achieve in 2012. It intends to use cash received from the repayment of loans to and short-term investments in related parties (USD355mn) and the potential stake sale in a noncoal subsidiary to repay debt. In addition, Bumi will look to refinance the second tranche of its high-cost loans from China Investment Corp in 2H12. We think the Bumi 16s offer attractive carry with a 12% coupon. The bonds also continue to trade at a discount to Indonesian coal peers, which, we think, provides potential upside in the near term given the likely credit improvement. Overweight Evergrande 15s: We expect Evergrandes credit profile to improve gradually as it continues to record steady sales. Evergrande's execution risk has eased, and the company slowed land acquisitions considerably in 2H11. Assuming a slower pace of land acquisitions continues, we believe Moodys could raise Evergrandes rating outlook to Stable from Negative this year. We believe Evergrandes liquidity is adequate, despite a high level of land premiums outstanding. The Evergrande 15s offer yield pick-up of more than 350bp versus the Country Garden 15s and 100bp versus the Central China 15s. Overweight Fufeng 16s: We expect Fufengs credit profile to deteriorate in 1H12 before recovering by year end. We estimate 1H12 EBITDA will only increase 5% y/y due to stillelevated corn prices. We project a 24% y/y rise in full-year EBITDA on higher volume from the companys new northeastern plant. However, we expect net debt to rise 8% y/y, as cash flow lags behind capital spending. The company is in the process of refinancing its CNY1.0bn convertible note. We believe a successful refinancing would provide a near-term catalyst for improved bond valuations.
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Adaro Indonesia Rating Underweight Rationale Coupon 7.625% Description Snr unsecured Maturity 22 Oct 19c14 Principal (USD mn) 800
Erly Witoyo Ratings (Moodys/S&P/Fitch) Ba1/--/BB+
Credit view: We expect a slight deterioration in Adaros credit profile in 2012 on higher debt. Increased capex in 2012 will likely result in additional indebtedness, although in our view, its credit profile will remain in-line with a high-BB rating. Adaro has budgeted capex of USD700mn for 2012. While we think the company could cover this largely through internal resources, there could be additional spending related to the companys coking coal and power plant ventures. In addition, we expect the company to remain acquisitive in the near term as it seeks to diversify its coal business. We expect 2012 earnings to be relatively flat y/y. Adaro targets an increase in coal production to 50-53mt from 48mt in 2011. The impact of the higher production on earnings, however, is likely to be offset by higher cash costs arising from elevated fuel prices and a higher stripping ratio (6.4x versus 5.9x in 2011). Its average selling price will most likely be flat y/y, although there is risk that it could be lower than 2011 if the downtrend in global coal prices continues. About one-third of Adaros targeted coal sales in 2012 will be based on index-linked prices. We expect debt leverage to increase slightly to 1.7x from 1.5x in 2011. EBITDA/interest should fall to 10x from 12x. We think these metrics are still robust for the companys high-BB ratings, which are capped mainly by the companys lack of mine diversification. Aside from industry-related issues (adverse weather and coal prices), we see the companys growth ambitions as a key credit risk. The company is likely to remain opportunistic in acquiring coal-related assets. Recent asset purchases, however, show that its expansion is relatively controlled; it has focused in buying greenfield mines, which are significantly cheaper than operating mines. Liquidity position: Strong Adaro had cash of USD559mn compared with short-term debt of USD138mn at end-2011. Its liquidity position is strengthened by USD600mn of undrawn, committed credit facilities. Management has budgeted capex of USD700mn for 2012. We believe this can be funded through internal resources, although further asset purchases and financing for the companys coking coal and power plant ventures will likely require additional debt. Valuation: Our Underweight recommendation on the Adaro 19s largely reflects their tight valuation. The bonds are among the lowest yielding in the Asian HY corporate sector. Despite strong technicals, we see limited upside and expect the bonds to underperform the Barclays Asian HY corporate index over the next six months. Agile Property Holdings Ltd Rating Market Weight Market Weight Market Weight Rationale Credit view: We maintain our stable view on Agile. We believe its credit profile could weaken moderately in 2012 given a less than rosy sales outlook, higher land acquisition costs and an increase in debt. But we expect its credit metrics to remain strong for its credit ratings and the company continues to have one of the strongest credit profiles among high yield Chinese developers. At Dec 2011, debt/LTM EBITDA was 2.1x and EBITDA/gross interest cover 6.1x. Pro-forma for USD700mn of bonds issued in March 2012, we estimate debt/EBITDA at 2.5x and EBITDA/gross interest at c.5x. We expect these ratios to be c.3x and 5x respectively by end-2012. Management is guiding conservatively for sales in 2012, using GFA terms rather than value. It expects flat GFA sales growth to 3.1mn sqm. Assuming its ASP declines by 10% to c.CNY9,130/sqm in 2012, this implies contracted sales of c.CNY28bn, unchanged from 2011. Agile has a relatively high exposure to the Hainan Clearwater Bay project in Lingshui County, which accounted for c.25% of contracted sales in 2011. We believe the differentiated regulatory policies towards firsttime home buyers mean it will be harder for tourism-related projects to outperform more mass-market end-user focus projects. Further, Agile has a CNY5bn land acquisition budget in 2012 (up from CNY1.6bn spent in 2011), which includes potential partial land cost in Yunnan. Based on the companys expected property delivery of 2.63mn sqm in 2012, revenue could come in c.CNY27-28bn, which would represent growth of c.20% y/y. But we expect gross profit margin to decline to 40-45% in 2012, from the high of 54% in 2011. This is due to a lower contribution from the highermargin Hainan project (49.5% of total recognised sales and 25% of recognised GFA in 2011). Liquidity: Agiles liquidity looks adequate, especially since the USD700mn bond issue. According to the company, major obligations in 2012 include trust loans due of CNY2.6bn, construction capex of CNY16bn, committed land premiums of CNY191mn, a land acquisition budget of CNY5bn and other expenses of c.CNY10.7bn. We expect these will largely be met by Agiles current cash and contracted sales, and an increase in debt. Valuation: Among the tightest in the high yield real estate sector, we view Agiles bonds as fairly priced. We prefer mass-market developers, which we think will perform better in the current market. Of the three Agile bonds, we prefer the new March17s given the yield pickup vs the old April 17s and Nov 16s, for the small maturity difference. Coupon 10.00% 8.875% 9.875% Description Snr unsecured Snr unsecured Snr unsecured Maturity 14 Nov 16c13 28 Apr 17c14 20 Mar 17 Principal (USD mn) 300 650 700 Christina Chiow Ratings (Moodys/S&P/Fitch) Ba2/BB/-Ba2/BB/-Ba2/BB/--
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Alliance Global Group Inc. (AGI) Rating Not Rated Rationale Coupon 6.5% Description Snr unsecured Maturity 18 Aug 17 Principal (USD mn) 500
Christina Chiow Ratings (Moodys/S&P/Fitch) Not rated
Credit update: 9M 11 operating results were strong, with EBITDA growth of 63% y/y and net income growth of 84% y/y. The gains were driven by strong growth in its real estate (which includes subsidiary Megaworld, joint venture Travellers International) and food and beverage businesses, as well as the consolidation of various subsidiaries such as Global-Estate Resorts Inc. (GERI, formerly Fil-Estate Land Inc.), Suntrust Properties and Empire East Landholdings. We expect the strong momentum to continue into 2012, supported by its diverse range of interests including Megaworld (real estate), Travellers/GERI (tourism) and food and beverage (distilled spirits). Megaworld reported a 36% y/y increase in net income in 9M 11, driven by strong residential sales and BPO office rental, which surpassed the performance for full year 2010. Travellers net income reached PHP4.2bn in 9M 11, and was on track to meet the companys projection of c.PHP6bn for 2011, on higher traffic and expansion. Nevertheless, AGI has aggressive plans to expand its real estate and tourism businesses, which will likely entail a rise in capital expenditure. Together with other AGI subsidiaries, GERI will invest PHP20bn in two integrated tourism estate projects in Boracay Newcoast and Twin Lakes at Tagaytay. At the same time, Travellers International intends to spend an estimated USD1.1bn on a second integrated tourism resort (Resorts World Bayshore). We expect the company to have some financial flexibility to fund these plans, given its net cash position and relatively low financial leverage of 26% (debt/capital). Liquidity: AGI's liquidity looks robust, with net cash of PHP8.5bn at end-September 2011. Its cash flow generation also remains strong, with FFO amounting to PHP10bn for LTM September 2011, covering 24% of debt. Valuation: In comparison with other Philippines corporate bonds, current valuations look attractive for what we think is a stable credit story. Bakrie Telecom Rating Overweight Rationale Credit view: We have a negative view of BTELs operating profile. Although 4Q11 earnings rose following its tariff hike in September 2011, we are not convinced that the improvement will be sustained. As a result, we forecast 2012 EBITDA to fall 11% to IDR1.0trn, driven by declines in ARPM and minutes of usage. The companys guided capex of USD20-30mn (IDR180-270bn) can be internally funded, although we believe actual spending may be more than guidance, especially if additional funds become available. While our cautious operating outlook suggests that credit metrics will weaken considerably, we believe BTELs fund-raising plans could provide some near-term support to its credit profile. Assuming a successful exercise, we estimate end-2012 EBITDA/interest cover of 1.3x (2011: 1.5x), gross debt/EBITDA of 6.2x (2011: 6.0x) and gross debt/capital of 62% (2011: 61%). But longer-term, we continue to have serious concerns over the companys viability. Liquidity: BTEL's near-term liquidity position remains weak although its plans to raise USD120mn through equity and debt could provide the necessary breathing room if successfully implemented. At end-2011, BTEL had unrestricted cash and short-term investments of IDR162bn and short-term debt of IDR2.1trn, comprising of IDR1.1trn of vendor payables, IDR402bn of finance leases and IDR649bn of domestic bonds. A successful fund-raising exercise, which the company expects to complete in June, will enable BTEL to redeem the domestic bonds, service its finance lease and pay the coupon for its USD bond for at least a year, we estimate. In addition, we believe the company has some flexibility in delaying payments to its vendors, if necessary. Valuation: Our Overweight rating reflects our view that BTELs fund-raising plans have a reasonable probability of success, which we think will translate into upside in its bond price. However, we retain our concerns over the companys longer-term outlook, and may look to review our views once the fund-raising milestones are met or if bond yields tighten materially in the interim. Coupon 11.5% Description Snr unsecured Maturity 7 May 15c13 Principal (USD mn) 380 Jit Ming Tan Ratings (Moodys/S&P/Fitch) --/CCC+/CCC
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Berau Coal Rating Market Weight Market Weight Rationale Coupon 12.50% 7.25% Description Snr secured Snr secured Maturity 8 July 15c13 13 March 17c15 Principal (USD mn) 450 500
Erly Witoyo Ratings (Moodys/S&P/Fitch) B1/BB-/-B1/BB-/--
Credit view: We are neutral on Beraus near-term credit outlook. Higher debt arising from the issuance of the 2017 bond will likely result in a slight weakening of its debt metrics, although we believe they will remain robust for Beraus B1/BB- ratings. We expect 2012 earnings to be flat y/y. The company is targeting to raise coal production to 23mt from 20mt in 2011, but this will likely be offset by a lower average selling price and higher cash costs. Based on its signed coal contracts, management is guiding for an ASP of USD79/ton versus USD81/ton last year. Its cash production cost is expected to increase to USD51/ton from USD47/ton on increased fuel prices and a higher stripping ratio. Assuming a gross debt increase of USD170mn, we expect Beraus debt/EBITDA to rise to 1.8x from 1.4x in 2011, while EBITDA/interest could fall to 4.7x from 5x. Although weaker, we believe these metrics remain robust for current ratings and could result in Moodys upgrading the rating in the near term. The rating agency indicated that Beraus rating could face upward pressure if it can maintain debt/EBITDA below 2x. The news that parent Bumi Plc may merge Berau and Bumi Resources is not too worrying at this time, in our view. It is still preliminary. If realised, we believe the financial profile of the merged entity could be weaker than Beraus on a standalone basis. The business profile of the merged entity, however, would be stronger, given the diversification in assets and the fact that Bumi Resources is a significantly larger company with better coal assets. Assuming the merger is done at the intermediate holding company level, we think the impact on Berau would be even less. Liquidity position: Strong the company had cash and equivalents of USD520mn at end-2011. Following the refinancing of its syndicated loan with proceeds from the 2017 bonds issued in March, it should no longer have any short-term debt. We believe the companys budgeted capex of USD280mn for 2012 can be funded largely through its operating cash flow. Given the companys growing cash balance, we would not be surprised if it raises its dividend in the near term. Valuation: We think the Berau 15s are likely to be called in mid-2013. Given expected maturity of slightly more than one year, we think the current yield is fair. The yield spread between the 17s and the 15s looks relatively tight for the average life difference. However, we believe this is supported by the lower cash price and better liquidity of the 17s. Bumi Resources Rating Overweight Market Weight Rationale Credit view: We are constructive on Bumi Resources near-term credit outlook, as we expect the company to focus on reducing debt. Earnings should improve slightly as higher coal production is likely to more than offset a decline in the average selling price (ASP). The company is targeting a coal production of 75mt versus 66mt in 2011. It has also guided for an ASP of USD90/ton (USD93/ton in 2011), although there is risk of this being lower if coal price continue their downtrend. Production cash costs will likely be stable as higher oil prices are likely to be offset by a lower stripping ratio (10.5x versus 11.5x in 2011). Our forecast for EBITDA in 2012 is USD1.34bn, up 9% y/y. We could see some debt reduction in the near term assuming the USD355mn of proceeds from a loan repayment by related parties (Recapital and Bukit Mutiara) are utilised for debt repayment, as intended. Furthermore, the company is considering the sale of a minority stake in subsidiary Bumi Resources Minerals to fund debt repayment. Management targets to raise approximately USD450mn from the stake sale. Apart from debt reduction, we also expect credit improvement from lower financing costs. We believe debt reduction this year will be prioritised for the prepayment of the second tranche (USD600mn) of the high-cost (19% IRR) loan from China Investment Corp. The first tranche of USD600mn was prepaid in 2011 via bridging loans, which were subsequently refinanced through a 4y term loan at Libor+6.7%. Based on our projection, the companys debt/EBITDA is likely to fall to 2.7x from 3.4x in 2011, with EBITDA/interest increasing to 3x from 2.7x. Liquidity position: Adequate the company had cash and equivalents of USD311mn versus short-term debt of USD774mn at end-2011. USD600mn of its short-term debt should have been repaid using proceeds from a term loan of similar amount provided by the Bank of China and China Development Bank in February. We expect Bumi to remain free cash flow negative in the near term, owing to its large capex budget of USD360mn in 2012. However, the cash flow deficit should be relatively small, given the expected improvement in cash flow generation. Valuation: We see the Bumi 16s as an attractive carry play given the 12% coupon. There could also be some yield tightening in the near term on credit profile improvement. We could see some convergence to the Berau Coal bonds, assuming the merger with Berau is realised. The Bumi bonds should continue to trade wide to Beraus given their slightly weaker covenants and structure, however. Coupon 12.00% 10.75% Description Snr secured Snr secured Maturity 10 Nov 16c13 6 Oct 17c14 Principal (USD mn) 300 700 Erly Witoyo Ratings (Moodys/S&P/Fitch) Ba3/BB/-Ba3/BB/--
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Central China Real Estate (CCRE) Rating Market Weight Rationale Coupon 12.25% Description Snr unsecured Maturity 20 Oct 15c13 Principal (USD mn) 300
Christina Chiow Ratings (Moodys/S&P/Fitch) B1/B+/--
Credit view: In our view, CCREs stable credit profile reflects its focus on Henan province (where it has increased its market share from 3.3% in 2010 to 3.7% in 2011) and prudent growth strategy. Other than Zhengzhou, cities in Henan are not subject to home purchase restrictions as they are predominantly end-user driven markets. Hence, the province reported healthy transaction volume growth of 15.6% y/y to 63.0mn sqm and price growth of 14.8% to CNY3,492/sqm in 2011. As a result, CCRE was one of the few property companies we cover to achieve its 2011 sales target before year-end. In 1Q 12, CCRE achieved sales of CNY2.4bn, 28% of its full year target. Unlike many other high yield Chinese real estate developers, CCRE has shown a willingness to tap the equity market, undertaking a HKD718mn rights issue in 2Q 11. We believe management is relatively prudent in its overall approach. This is despite the companys growth ambitions and increasing debt amid a tightening macro environment. While debt could increase in 2012, with strong contracted sales growth in recent years (2010: 53% y/y, 2011: 44% y/y), we expect credit metrics to remain relatively stable with debt/EBITDA of c.3.0-3.5x (Dec 11: 2.5x) and EBITDA/interest cover of 3.5-4.0x (Dec 11: 4.3x) at the end of 2012, as these sales are recognised. Liquidity: CCREs liquidity looks adequate. At Dec 2011, CCRE had unrestricted cash of CNY3.3bn, against adjusted short-term debt of CNY2.9bn including a HKD765mn convertible bond puttable in August 2012. We estimate major cash items in 2012 include land premiums payable of CNY650mn, construction expenses of CNY5-6bn and other costs of c.CNY2.5bn. Post the balance sheet date, the company further bolstered its liquidity by SGD150mn from the issuance of 4-year bonds. This issue has a limited negative impact on its credit profile, as the bulk of the proceeds will be used to refinance existing debt. Valuation: We like the stability that CCREs focus on Henan province provides, but believe the 2015 bonds yield already reflects this it is the tightest among single-B rated developers and even tighter than bonds of 15x larger Evergrande (by market capitalisation). We see limited risk of significant downside, given a core investor following and having Capitaland as the second largest shareholder with a 27% stake. We maintain a Market Weight on the bond. Chandra Asri Rating Underweight Rationale Credit view: We remain cautious on Chandra Asris near-term outlook. Ethylene margins are likely to remain tight, in our view, which should prevent any significant earnings improvement in the near term. We believe Chandra Asri and other naphtha-based producers could face a double whammy low prices and high raw materials costs. Pricing pressure will likely come from US producers, which are benefiting from a rapid decline in gas prices. Chandra Asri, which uses oil-based naphtha as a feedstock do not benefit from this. In fact, the current high oil price is likely to squeeze its margin. Moreover, given the ongoing economic slowdown in China, we could continue to see weakened regional demand for petrochemical, which could limit any price increases, at least in 1H12. Without a significant improvement in earnings, we expect further deterioration in Chandra Asris credit metrics. Its debt leverage weakened to 3.3x from 1.5x in 2010, and interest coverage fell to 1.8x from 3.2x. We think the company will need to take on debt to fund most of its USD90mn capex budget in 2012, especially given its declining cash balance. Assuming no earnings growth and additional debt of USD90mn, its debt leverage would rise to about 4.5x. Unfortunately, most of the capex is not deferrable USD80mn will be for a butadiene plant, on which it started construction in 2H11. The remaining USD10mn will be for required maintenance. The company is considering further expansion of its ethylene cracker and downstream business, but assuming business conditions do not improve materially in the near term, we think this plan is likely to be postponed. Liquidity position: Adequate the company had cash and equivalents of USD55mn and short-term debt of USD25mn at end-2011. The companys ability to reverse its cash decline will come into focus in the near term. It is currently close to the minimum cash requirement of USD35mn as required under the covenants of the 2015 bonds. With a budgeted capex of USD90mn and likely weak cash flow generation in 2012, we think further cash burn is likely in the near term. Valuation: We see downside risk for the bonds, as Chandra Asris credit profile will likely weaken in the near term. The companys buybacks from the market have offered some technical support for the bonds. However, given the companys declining cash balance, we think its ability to continue the bond repurchases will be limited. Note: * Outstanding amount as at 19 April 2012. Coupon 12.875% Description Snr secured Maturity 10 Feb 15c13 Principal (USD mn) 193* Erly Witoyo Ratings (Moodys/S&P/Fitch) B2/B+/--
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China Oriental Group Co Ltd Rating Market Weight Market Weight Rationale Coupon 8.00% 7.00% Description Snr unsecured Snr unsecured Maturity 18 Aug 15 17 Nov 17c14 Principal (USD mn) 550 300
Jit Ming Tan Ratings (Moodys/S&P/Fitch) Ba1/--/BB+ Ba1/--/BB+
Credit view: We have a negative view of China Orientals credit fundamentals, given our expectation that weak steel demand and still-elevated iron ore costs will weigh on 2012 earnings. We project a 25% y/y decline in 2012 EBITDA to CNY2.26bn, with an EBITDA margin of 6.1% (2011: 7.8%). 1H12 EBITDA is estimated at CNY951mn (-57% y/y), with a gross margin of 4.0% (1H11: 10.1%). Further deterioration in its credit metrics are likely, and we project end-2012 EBITDA/interest cover of 4.3x (2011: 5.5x), gross debt/EBITDA of 3.3x (2011: 2.6x) and gross debt/capital of 42% (2011: 45%). Management indicated that 1Q12 was better than 4Q11 and it expects a marginal recovery in 2H12. However, the company is maintaining a very cautious operating outlook. As a result, we expect Moodys to downgrade its ratings to Ba2. We also believe Fitch may reassess its ratings if our expectation of a weak 1H12 comes to pass. Separately, concerns have been raised over ArcelorMittals support for China Oriental given the formers disposal of assets in Turkey to maintain its investment grade rating. We believe the risk of ArcelorMittal exiting from the company is low although officially ArcelorMittal has only a 29.6% stake in CHOGRP, it wrote put options for another 17.4% interest in CHOGRP to ING and Deutsche Bank, which give it a potential 47% interest. Also, as the largest steel producer globally, we think it is unlikely that ArcelorMittal will want to exit China, which is the worlds largest steel market. Liquidity: We expect China Orientals liquidity profile to remain adequate. Its end-2011 cash and cash equivalent balance was CNY965mn, compared with short-term debt of CNY2.38bn. That said, the company also had CNY891mn of restricted cash pledged to secure some short-term debt, CNY3.8bn of bankers acceptance notes that can be discounted for additional liquidity and CNY4.6bn of unutilised banking facilities. The company guided for CNY1.1bn of capex in 2012, which we believe can be internally funded. Valuation: Our Market Weight recommendations on its two bonds reflect our view the yields adequately compensate investors for the risk to its earnings, credit profile and ratings. While we do not expect prices to appreciate, we believe the carry provides a fair return. Cikarang Listrindo Rating Market Weight Rationale Credit view: Cikarangs credit profile has weakened following its recent issuance of the 2019 bonds, although we continue to view the company as a mid-BB credit. Its annualised debt/LTM EBITDA rose to 3.7x in 1Q12 from 2.3x in FY11 on net additional debt of USD220mn (USD280mn of the 2019 bond proceeds was used to tender for its 2015 bonds). We believe its debt metrics will improve in the near term as cash flow strengthens. Electricity demand from industrial customers should rise, given our expectation of strong GDP growth in Indonesia continuing in 2012. In the medium term, the planned construction of a coal-fired power plant could pose significant execution risk for the company. It does not have experience building or operating coal-fried plants. Nonetheless, we think this risk may be mitigated by the company hiring two power consultants to assist in the design and construction of the plant. The company has also built in sufficient buffers to address potential concerns about construction delays and cost overruns. We believe the four-year of construction time earmarked for the project is longer than normally required for the construction of a 280MW coal-fired plant. The budget of USD450mn for the plant is also in the higher-end of the spectrum for a power plant of similar size, in our view. Liquidity position: Strong the company had cash and equivalents of IDR3.1trn (USD341mn) at end-1Q12 with no short-term debt. Its cash position could decline in the near term, as it starts spending for the construction of a coal-fired power plant. Outside the new plant, committed capex is approximately USD25mn and may be funded through operating cash flow, we believe. The committed capex comprises the retention payment for the 125MW power plant completed in 1Q11, partial payment for the completion of a peaking unit in 1Q12 and maintenance capex of around USD7mn. Valuation: We initiate on the Cikarang 19s with a Market Weight rating. We see the bonds as fairly valued after having gained 2-3 points following issuance in February. While they are among the tightest bonds in Asian HY, we think this reflects the companys relatively defensive nature. We discontinue our coverage on the Cikarang 15s following the bond tender in February. Only USD20mn of the 15s remains outstanding. Coupon 6.950% Description Snr unsecured Maturity 21 Feb 19c16 Principal (USD mn) 500 Erly Witoyo Ratings (Moodys/S&P/Fitch) Ba2/BB-/--
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CITIC Pacific Rating Underweight Underweight Underweight Rationale Coupon 6.875% 6.625% 7.875% Description Snr unsecured Snr unsecured Subordinated Maturity 21 Jan 18 15 Apr 21 Perpetual Principal (USD mn) 1,100 500 750
Jit Ming Tan Ratings (Moodys/S&P/Fitch) Ba1/BB+/-Ba1/BB+/-Not rated
Credit view: Credit metrics are very weak for its ratings, in our view, and we expect no change this year. End-2011 EBITDA/interest cover was 2.1x, gross debt/EBITDA 12.4x and gross debt/capital 56%. We expect credit metrics to be broadly stable in 1H12 before improving marginally in 2H12 if the expected improvement in Chinas macro conditions materialises. The company guided for a cautious 2012 with improvements in its specialty steel business from April. We are not convinced that such a turnaround is imminent. Rather, we expect only a marginal recovery towards the latter half of 2012. At the same time, CITPAC has a large capex plan, which we estimate to be in excess of HKD20bn. Execution risk for its iron ore project also remains elevated. Although CITPAC is confident of meeting its August 2012 production targets, we note that project commissioning is a complex and challenging undertaking. We also believe construction costs for the projects subsequent production lines could rise further. External funding, likely debt, will be required as we expect the company to generate only HKD6bn of operating cash flow for the year. That said, we think CITIC Pacific may alternatively seek an equity injection from its parent, CITIC Group, or dispose of non-core assets to the parent, to fund its investment plans. Support from its parent is expected to be strong and will remain a key credit driver for the company, in our view. Liquidity: Although we expect CITPAC will require additional funds to support its large capex plan, its liquidity looks adequate. End-2011 cash balance was HKD31bn. It had another HKD15bn of unutilised committed facilities, HKD8.3bn of unutilised uncommitted facilities and in March 2012 it raised USD1.1bn (HKD8.5bn) from a bond issue and a subsequent re-tap. In comparison, short-term debt is HKD28bn. Valuation: Valuations are anchored by investors expectations of support from parent CITIC Group. We estimate that the CITPAC bonds are valued almost 500bp inside other Chinese corporates with equivalent ratings. However, CITPACs Ba1/BB+ ratings already incorporate a two- to threenotch uplift for the parental support. As such, we believe the 500bp premium is too large and would look for a smaller premium of not more than 200-300bp. CITIC Resources Holdings Ltd Rating Market Weight Rationale Credit view: We expect higher crude production in 2012 on the ramp-up at its Yuedong oilfield and steady production at its Kazakhstan fields. Oil prices should rise marginally our commodity analysts expect Brent to average USD120/bbl in 2012, compared with USD108.77/bbl in 2011. As such, we expect crude oil revenue growth to outpace our mid-single digit volume growth estimate, with a smaller increase in earnings due to rising operating costs. Contributions from other businesses should be fairly minimal following the sale of stakes in its manganese operation and Macarthur Coal, as well as likely weak operating conditions for its aluminium smelting operations. While EBITDA should rise, CITIC Resources will likely remain free cash flow negative in 2012 as cash flow generation likely will not keep pace with spending. We expect gross credit metrics to remain stable as a result. At end-2011, EBITDA/gross interest was 2.9x, gross debt/LTM EBITDA 5.1x, while gross debt/capital was 45%. Liquidity: Liquidity is strong following the rights offering and stake disposals. At end-2011, the company had cash of HKD10.8bn. We expect operating cash flow this year to add another HKD2.0-2.5bn. In comparison, short-term debt totalled HKD2.4bn and the company has guided for 2012 capex of HKD2bn. We think the company has more than sufficient internal funds to finance its maturing debt and capex, as well as for potential acquisitions. Valuation: The CITIC 14s are the richest Chinese high yield bond and among the richest in the Asian HY market, despite its mid- to low-BB rating. That said, the bond benefits from strong technical support and hold up relatively well in a defensive environment. Indeed, the CITIC 14s have historically outperformed the Asian HY index during periods of risk aversion. Coupon 6.75% Description Snr unsecured Maturity 15 May 14 Principal (USD mn) 1000 Jit Ming Tan Ratings (Moodys/S&P/Fitch) Ba3/BB/--
20 April 2012
52
Country Garden Holdings (Cogard) Rating Overweight Overweight Overweight Market Weight Rationale Coupon 11.75% 10.50% 11.25% 11.125% Description Snr unsecured Snr unsecured Snr unsecured Snr unsecured Maturity 10 Sep 14 11 Aug 15 22 Apr 17 c14 23 Feb 18 c15 Principal (USD mn) 375 400 550 900
Christina Chiow Ratings (Moodys/S&P/Fitch) Ba3/BB-/-Ba3/BB-/-Ba3/BB-/-Ba3/BB-/--
Credit view: We expect Country Gardens credit fundamentals to remain stable. The company has a relatively prudent financial management policy as seen from its recent USD270mn share placement to reduce gearing and improve liquidity. Given the companys position as a mass-market developer offering affordable average selling prices in lower tier cities, we think it is less vulnerable to regulatory measures. The company achieved steady contracted sales of CNY43.2bn in 2011, and is guiding for flat sales in 2012. Sales were slow in 1Q 12 at CNY6.1bn as launches are likely to pickup only from 2Q 12. Based on flat GFA delivery of 5.9mn sqm in 2012, we estimate that full-year revenue is likely to reach CNY39bn in 2012, or growth of 12%. We expect gross margins to stay around 35% in 2012. Credit metrics such as debt/EBITDA and EBITDA/gross interest cover should remain stable at 3.0x (Dec 2011: 2.9x) and 4.0x (4.0x) respectively, reflecting an increase in earnings and a moderate increase in debt. Liquidity: Liquidity is comfortable. At Dec 2011, Country Garden had CNY10.6bn of unrestricted cash and cash for construction (June 2011: CNY10.1bn) against short-term debt of CNY6.5bn. Further, the company received net proceeds of c.USD270mn following the share placement in March. According to the company, major cash outflows in 2012 include construction capex of CNY22bn, outstanding land premiums of CNY2.7bn and other expenses of c.CNY11.6bn. We expect these to be funded through sales and existing internal resources. Valuation: Our ratings on Cogards bonds reflect our comfort with the companys defensive business model. Technicals also seem strong for this credit, given its mass-market position and track record of prudent financial management. The slope of the yield curve between the 14s and 15s is steep, at c.100bp, looks relatively fair between the 15s and 17s and is relatively flat between the 17s and 18s. Hence, we think the sweet spot is in the Cogard 15s. We expect the shorter-dated bonds (14s-s17s) to outperform the Asia high yield index. Energy Development Corp. Rating Not Rated Rationale Credit update: Further delays in the commissioning of the Bacman plant are likely to prevent a significant improvement in EDCs credit profile in the near term. Having identified defects during the commissioning period, EDC said the completion of the plant rehabilitation would be delayed to September 2012 from the target of end-2011. The Bacman plant commissioning at end-2011 would have been a boost to EDCs 2012 earnings; Bacman accounts for approximately 13% of EDCs generating capacity. The companys EBITDA fell 8%, to PHP12.7bn, in 2011, largely due to the Bacman maintenance. With higher debt from the USD bond issue, debt/EBITDA rose to 4.1x from 3x in 2010, and EBITDA/interest fell to 2.8x from 3.7x. We expect debt metrics to be stable or slightly improving in 2012, as gross debt will largely remain unchanged. EDC should be able to cover near-term capex through operating cash flow. In addition, the companys cash balance strengthened to PHP13.1bn at end-2011, following the USD bond issue earlier in the year. The company intends to raise its generating capacity to 1,500MW from the current 1,130MW. It expects the expansion to cost USD1bn (PHP43bn) over the next five years. The key risk for EDC seems to be potential expansion outside of the Philippines. At end-2011, it entered into four joint-venture geothermal projects in Chile and Peru. It also has plans to acquire geothermal concessions in Indonesia. We expect the companys move into new sectors and markets to increase execution risks, especially if the company takes on new debt to fund these projects. Liquidity position: Strong the company had cash and equivalents of PHP13.2bn compared with short-term debt of PHP2.2bn at end-2011. Its debt maturities over the next few years are manageable, in our view the next large repayment is in 2015 when PHP8.5bn of notes mature. Valuation: We view the EDC 21s as fairly valued relative to Philippine corporate peers. Without a significant credit improvement in the near term, we think the potential upside on the bonds is limited. Coupon 6.50% Description Snr unsecured Maturity 20 Jan 21 Principal (USD mn) 300 Erly Witoyo Ratings (Moodys/S&P/Fitch) Not Rated
20 April 2012
53
Evergrande Real Estate Group Rating Overweight Rationale Coupon 13.00% Description Snr unsecured Maturity 27 Jan 15 Principal (USD mn) 1,350
Christina Chiow Ratings (Moodys/S&P/Fitch) B2/BB-/BB
Credit view: We expect Evergrandes credit profile to gradually improve as it continues to achieve good sales progress. Concerns over Evergrande's execution risk have eased, as shown by its contracted sales performance, and property completions and deliveries in the past 18-24 months. The company also slowed land acquisitions considerably in 2H11. Its land reserves of 137mn sqm are enough for at least 10 years of development based on the 1.2mn sqm of GFA sold in 2011. Evergrande reiterated during the 2011 results briefing that it will only acquire new land for replenishment, not for expansion, of its land bank. It has budgeted CNY6bn for new land acquisitions in 2012 (2011: CNY27bn across 75 projects with GFA of 40.8mn sqm). Assuming its slower pace of land acquisitions continues, we believe this will lead to a rating outlook reversal to Stable by Moodys this year. We believe the company will continue to record steady growth, albeit at a slower growth pace than in prior years. Evergrandes solid contracted sales growth achieved in the past few years (2011: CNY80.4bn, 2010: CNY50.4bn, 2009: CNY30.3bn) will be recognised gradually over the coming years. At December 2011, unbooked sales amounted to CNY45bn, of which CNY40.5bn will be booked this year. We estimate debt/EBITDA of c.3.3x (Dec 2011: 3.4x) and EBITDA/interest cover of 4.0x (3.8x) in 2012. Offsetting these positives is Evergrandes rapid land acquisitions in the past, which have resulted in significant land premiums outstanding, large capex requirements and high debt levels. Liquidity: Evergrandes liquidity looks adequate, despite the high level of land premiums outstanding. At Dec 2011, Evergrande had total cash of CNY28.2bn, of which CNY20.1bn was unrestricted. The company targets sales of CNY80bn in 2012 (flat from 2011), skewed toward the second half of the year. This is based on sellable GFA of 24mn sqm from 121 existing projects and 60-80 new projects. The most important project will be the one in Qidong, which is scheduled for launch in June. Besides short-term debt of CNY10.2bn, the company said other major cash obligations in 2012 include land premiums payable of CNY11.0bn, new land acquisitions of CNY6bn, construction capex of CNY41bn, and other expenses of c.CNY21bn. Valuation: The Evergrande 15 bond is one of our top picks in the high yield Chinese real estate universe. We believe size matters in a tough operating environment. As one of the largest Chinese developers focused on the lower tier cities, Evergrande is better placed than most other developers, which should support the outperformance of its bonds, in our view. Further, the bonds still offer yield pick-up of close to 400bp versus Country Garden 15s and over 100bp versus Central China 15s. We maintain our Overweight on the Evergrande 15s. First Pacific Company Limited Rating Not Rated Not Rated Rationale Credit update: First Pacifics credit profile will likely remain broadly stable in 2012, albeit with the potential for a negative bias. We like the companys operating profile for its stable, utility-like businesses with recurring earnings from telecoms (42% of recurring income), consumer staples (35%), infrastructure (13%) and natural resources (10%). That said, earnings may come under pressure due to increased competition for PLDT, its telecommunications associate, while we think contributions from its other businesses will likely remain stable. The company has also guided that it will continue to evaluate complementary investment opportunities throughout the region. Specifically, MPIC, its infrastructure subsidiary, intends to expand its toll road portfolio and secure further power generation investments. Philex, its natural resources associate, has expressed interest in acquiring stakes in mining operations and expanding its agriculture portfolio via acquisitions. Depending on the size of its investments, First Pacific could record negative free cash flow for the year. We estimate that 2011 EBITDA/interest cover was 4.3x (assuming USD22mn of capitalised interest), gross debt/EBITDA 3.1x and gross debt/capital 35%. While not rated by any of the agencies, based on international rating scales, we think First Pacific could be viewed like a mid BB credit, with low BB ratings for its bonds due to structural subordination. Liquidity: Liquidity is robust, with an end-2011 cash balance of USD1.88bn against maturing debt of USD1.12n. The company generates approximately USD1bn of annual operating cash flow, spends USD500-600mn on capex and another USD200-250mn on dividends. While the potential size of any acquisitions is not known, we believe First Pacific would be able to access external funding if it did not have sufficient internal resources to finance such investments. Valuation: We continue to see value in the bonds within the context of the Philippines corporate bond universe. In addition to the companys broadly stable credit profile, the bonds benefit from some protection from the structural subordination, given that they are secured by shares in MPIC (FIRPAC 17s) and PLDT (FIRPAC 20s). The longer-dated bond is c.60bp wide of the FIRPAC 17s, which we believe does not fully compensate for the three-year difference in maturity. We prefer the shorter-dated credit. Coupon 7.375% 6.375% Description Snr secured Snr secured Maturity 24 Jul 17 28 Sep 20 Principal (USD mn) 300 400 Jit Ming Tan Ratings (Moodys/S&P/Fitch) Not rated Not rated
20 April 2012
54
Franshion Properties (China) Ltd Rating Market Weight Rationale Coupon 6.75% Description Snr unsecured Maturity 15 Apr 21 Principal (USD mn) 500
Christina Chiow Ratings (Moodys/S&P/Fitch) Ba1/BB/BBB-
Credit view: The relative small scale of Franshion means contracted sales and deliveries tend to be volatile, and the company has to continue to acquire land to grow. Offsetting these negatives is the companys good sales performance in 2011, which included the successful sale of CNY2.67bn of land in Changsha. Further, as more investment properties and hotels are scheduled for completion in 2013, we expect Franshions credit metrics to gradually improve over 2012 we estimate debt/EBITDA of 5.3x (Dec 2011: 6.7x) and EBITDA/gross interest cover of 3.3x (2.8x). Based on the completion schedule, we expect the company to record c.HKD8bn from development sales (largely from Beijing Jin Mao Palace), HKD3.0-3.5bn of income from its investment properties and hotels, and another CNY2.67bn from primary land sales in China. Liquidity: Franshions liquidity looks adequate. It had a high level of unrestricted cash of HKD12.2bn at the end of December 2011, against shortterm debt of HKD6.0bn. According to the company, it has CNY3.7bn of land premiums payable and a land acquisition budget of CNY5bn in 2012. We estimate construction costs of CNY3.7bn and other costs of CNY3.7bn in 2012. While we think Franshions liquidity is adequate and depending on contracted sales and construction progress, we think Franshion may have to partly fund these payments through increased borrowing. Valuation: We maintain our Market Weight on the Franshion 2021s. We believe the yield is attractive and sufficiently compensates investors for the companys credit profile (including a balanced development/investment property business model and parental support). However, weak technicals and still aggressive growth are likely to prevent outperformance in the near term, especially as the bonds of other high-yield non-state owned developers offer much higher yields. We prefer the shorter-dated bonds of state-owned China Resources Land and China Overseas Land in this risk-averse environment. Fufeng Group Limited Rating Overweight Rationale Credit view: We expect Fufengs credit profile to deteriorate in 1H12 before recovering marginally by year-end. We project a 5% y/y increase in 1H12 EBITDA to CNY632mn, with full year EBITDA at CNY1.28bn (+24%). The expected earnings improvement is driven by increases in MSG sales volumes (1H12: +54% y/y, 2012: +34% y/y) as phase 1 of its northeastern plant commenced operation in 4Q11, with phase 2 expected to become fully operational by April 2012. Margins will remain under pressure in 1H12 due to still-elevated corn prices, and we project gross margins of 17% for both 1H12 and 2012 (1H11: 21.7%, 2011: 18.1%). The company has guided for full year capex of CNY700-800mn, with minimal scope for any increase. We believe cash flow generation will just about be sufficient to fund its investments. As a result, we look for 1H12 EBITDA/interest cover of 5.5x (2H11: 3.4x), gross debt/LTM EBITDA of 4.2x (2H11: 3.4x) and gross debt/capital of 55% (2H11: 51%). Our end-2012 estimates are 5.8x, 3.5x and 54%, respectively. Key risks to our view are the potential for continued weak margins due to elevated corn prices or an inability to raise selling prices. We believe rating pressure could emerge if Fufengs margins and profitability do not improve in 2012. Liquidity: At end-2011, Fufeng had cash of CNY614mn and bankers acceptance notes of CNY1.15bn, compared with short-term debt of CNY704mn. In addition, management says it is in discussions with a state-owned bank to increase its working capital facility to CNY2.5bn from CNY1.5bn and expects to sign an agreement in the near term. We also expect a reduction in working capital to improve its cash balance. Lastly, Fufeng is planning to issue a CNY800mn domestic bond to refinance its CNY1.0bn convertible note, which is puttable in April 2013. We believe Fufengs liquidity profile is adequate. Valuation: The FUFENG 16s marginally outperformed the EM Asia USD Corporate High Yield index over the past one and six months, but underperformed over the past three months. We believe a successful refinancing of its domestic convertible note would provide a short-term positive catalyst. Beyond 1H12, we expect potential margin improvements in 2H12 to drive bond outperformance. Coupon 7.625% Description Snr unsecured Maturity 13 Apr 16c14 Principal (USD mn) 300 Jit Ming Tan Ratings (Moodys/S&P/Fitch) -/BB/BB
20 April 2012
55
Gajah Tunggal Rating Overweight Rationale Coupon 6.00%* Description Snr unsecured Maturity 21 Jul 14c09 Principal (USD mn) 424**
Erly Witoyo Ratings (Moodys/S&P/Fitch) B3/B/--
Credit view: We are positive on Gajahs 2012 credit outlook. The decline in rubber prices and continued strong demand for its products should support stronger earnings in 2012, in our view. Furthermore, low near-term capex needs should result in a positive free cash flow. The pressure on profit margins seen in 2011 is likely to ease as rubber prices have significantly declined from their mid-2011 high. The implementation of price increases in 2H11 should also support improved profitability. We expect its gross margin to increase to 16% in 2012 from the 11% in 2011. Moreover, tyre demand in Indonesia is expected to remain robust, given the strong growth in vehicle sales seen over the past few years and our expectation of continued strong economic growth in the near term. With a slight decline in debt likely in 2012, we expect debt/EBITDA to fall to 2.2x from 2.7x in 2011 and EBITDA/interest to rise to 4.7x from 4.1x. We see these metrics as robust for the B3/B ratings and could result in a positive rating action in the next 6-12 months. Limits on the companys ability to raise new funding for future expansion could result in Gajah refinancing its USD bonds earlier than the 2014 maturity date, in our view. We see a likelihood of the bonds being called in the near term. The company needs to consider the construction of a new plant by end-2012/early 2013 to avoid possible capacity constraints on tyre production by 2014-15. It is considering its options to raise financing for the debt redemption and future expansion, which will likely involve some debt and equity raising. The decision is expected to be announced in 2H12. Liquidity position: Strong at end-2011, the company had cash and equivalents of IDR1.06trn (USD117mn) versus short-term debt of IDR110bn. Its liquidity is likely to strengthen in the near term given that we expect the company to be free cash flow positive. Management is guiding for total capex to fall to USD50mn in 2012 as the company is nearing the completion of its tyre plant expansion. We believe this can be fully funded through operating cash flow, which we estimate will be close to USD100mn. Valuation: Our Overweight recommendation on the Gajah 14s reflects the bonds discount to similarly rated peers and our expectation of further improvement in Gajahs credit profile in the near term. We also see a likelihood of the company redeeming the bonds by year-end, which could provide additional upside if realised. Note: * The Gajah 14s have a step-up coupon 5% in years 1 and 2, 6% in year 3, 8% in year 4, and 10.25% in year 5. ** Amount outstanding as at 19 April 2012. Glorious Property Rating Underweight Rationale Credit view: We remain negative on Glorious Property, given its high debt leverage and tight liquidity. Glorious reported improved credit metrics at December 2011, but they remain weak. EBITDA/gross interest cover improved to 2.5x (LTM Jun 11: 1.7x) and debt/EBITDA was 4.7x (6.3x). We expect EBITDA/gross interest cover of c.1.5x-2.0x and debt/EBITDA of 5x in 2012. Glorious has a short-dated debt maturity profile and high shortterm debt of CNY9.3bn, which accounted for 62.5% of its total debt. The company reduced total debt by CNY1.8bn in 2H11, although cash fell CNY1.2bn, to CNY1.0bn at Dec 11, a low level in our view. On the positive side, the company reported solid sales in 2011, which we believe reflects the companys increasing presence in lower-tier cities (eg, in the Yangtze River Delta and northeast China). Liquidity: Glorious liquidity is tight, largely due to low cash of CNY1.0bn and elevated short-term debt of CNY9.3bn. Even if the company achieves its CNY13bn sales target in 2012, we expect the company to have to raise funds to finance its cash flow gaps and bolster its liquidity. According to the company, construction expenses are expected to be c.CNY3.5bn and it has land premiums payable of CNY1bn in 2012. We estimate other costs of c.CNY4bn this year. Valuation: Given our view of its leverage and tight liquidity position, we believe the Glorious 15s will underperform the broader market, and we maintain our Underweight rating on the bonds. We believe there is limited appetite for single-B rated Chinese developers such as Glorious, given current elevated risk aversion among investors in the sector. Coupon 13.00% Description Snr unsecured Maturity 25 Oct 15c13 Principal (USD mn) 300 Christina Chiow Ratings (Moodys/S&P/Fitch) Caa1/B-/--
20 April 2012
56
Guangzhou R&F Properties Co. Ltd Rating Not Rated Rationale Coupon 10.875% Description Snr unsecured Maturity 29 Apr 16 Principal (USD mn) 150
Christina Chiow Ratings (Moodys/S&P/Fitch) Not rated
Credit update: We maintain our stable view of Guangzhou R&F and believe its credit profile could continue to improve in 2012. The company reported steady results and strong credit metrics in 2011. We expect credit metrics to remain robust, with debt/EBITDA below 3x (Dec 11: 2.9x) and EBITDA/gross interest cover of c.5.5x (Dec 11: 5.1x), comparable with rated peers such as Agile (Ba2/BB) and Longfor (Ba3/BB). Guangzhou R&Fs land acquisition policy is often more conservative than its peers and at times is undertaken on a joint-venture basis. As a result, increases in debt have been gradual and minimal over the years. However, the company has a relatively high gearing level (although this has declined over the years) which we believe is due to its limited ability to raise new capital as a company incorporated in China. Although the company has previously applied to list its A shares, there is no timeline for their listing. We do not expect a domestic listing by Guangzhou R&F in the near-term given the governments current control over the sector. If the shares are listed, we think it would be positive for the company in terms of funding alternatives and could help lower its gearing. In 2012, the company targets sales of CNY32bn from saleable resources of CNY65bn, and it has achieved CNY6.6bn (21% of full-year target) in 3M 12. Liquidity: Liquidity looks adequate. The company had unrestricted and restricted cash of c.CNY9.0bn (Jun 11: CNY12.4bn) against short-term debt of CNY10.1bn. Included in the short-term debt is a CNY5.5bn domestic bond puttable in Oct 12. In a worst-case scenario (ie, it has to redeem the bonds) we think the company should still be able to cover its major cash requirements from existing cash and sales. The company is in talks with major bondholders about the possibility of an extension. According to the company, major cash outflows in 2012 include construction costs of CNY9.6bn, committed land premiums of CNY4.4bn and other costs of CNY7bn. Valuation: We continue to see value in the Guangzhou R&F 16s, although they have compressed against peer group bonds, such as the Cogard 15s and 17s and the Shimao 16s in the past few months. The bonds offer yield pick-up of more than 100bp against Shimao 16s, which we view as a weakening credit. The small issue size of the Guangzhou R&F 16s and the lack of credit agency ratings are negatives, but we believe investors who are able to invest in unrated bonds are well compensated by the above-average yield of the 16s relative to bonds from larger and more established Chinese developers. Hidili Coking Coal Rating Not Rated Rationale Credit update: We are constructive on Hidilis near-term operating outlook, although we note that the company faces significant operating and execution risks. Increased production and improving demand should support higher sales in FY12. Based on strong 1Q raw coal production (up 19% y/y), we think the company can achieve its full-year production target of 5mt barring the kind of disruption to operations that was seen in 2Q11. We estimate Hidilis EBITDA would rise by 10-15% in 2012 assuming a slight decline in its average selling price. This is likely to result in a further improvement in debt leverage to close to 4x from 4.5x in 2011. While steel demand has been relatively weak YTD, we expect a recovery in the near term on signs of faster growth in money supply and potentially increased investments in China. Our economists expect Chinas economic growth to turn around in 2H12. Not all looks positive, however. We continue to see a high business risk for Hidili, given its underground operations and the regulatory uncertainty in China. The company also faces execution risk as it undertakes the completion of 19 coal mines, which were purchased a few years ago. Liquidity position: Adequate at end-2011, the company had cash and equivalents of CNY662mn versus short-term debt of CNY1.6bn. Its liquidity is supported by current undrawn, committed bank facilities of around CNY3bn. Part of the bank facilities is intended to also refinance the CNY1.7bn of convertible bonds due in 2015, which are puttable in January 2013. Valuation: We see the Hidili 15s as fairly priced relative to Asian HY peers. The bonds trade relatively wide, although we think this reflects the companys still-high debt leverage and elevated business risks. There could be some near-term potential upside on the bonds on a recovery in Chinas economy and successful execution of the companys expansion plans. Coupon 8.625% Description Snr unsecured Maturity 4 Nov 15 Principal (USD mn) 400 Erly Witoyo Ratings (Moodys/S&P/Fitch) B1/B+/--
20 April 2012
57
Hopson Development Holdings Limited Rating Underweight Underweight Rationale Coupon 8.125% 11.75% Description Snr unsecured Snr unsecured Maturity 9 Nov 12c10 21 Jan 16c 14 Principal (USD mn) 350 300
Christina Chiow Ratings (Moodys/S&P/Fitch) Caa1/B-/-Caa1/B-/--
Credit view: We remain negative on Hopsons credit fundamentals. Weak full-year 2011 results support our view. The company reported a significant contraction in EBITDA and an increase in debt in 2011. Also, the company faces tight liquidity, due to lacklustre contracted sales in 2010 and 2011, and a high level of short-term debt, including its USD350mn bonds due in November 2012. We believe the companys focus on Tier 1 cities and high-end markets is the key reason for its weak sales and the situation is unlikely to improve soon as the government remains firm about keeping property prices under control. At the same time, aggressive expansion and construction have increased debt, which stood at HKD35.3bn at December 2011, up from HKD23.7bn at June 2011. As a result, credit metrics weakened, with debt/EBITDA of 15.0x (June 2011: 6.8x) and EBITDA/gross interest cover of 1.0x (Jun 2011: 2.8x). Liquidity: Hopsons cash fell in 2H 11 and liquidity is tight. At Dec 2011, Hopson had cash of HKD2.6bn (Jun 2011: HKD4.2bn) against short-term debt of HKD13.6bn. It has c.HKD3bn of trust loans due in 2012 and a USD350mn (HKD2.7bn) bond due in November 2012. Based on the company's track record of contracted sales in recent years, we think meeting its full-year sales target of CNY15bn (+50% y/y) could be a challenge. Even if the company meets this sales target, we think it will probably only be just enough to cover its expenses, and in our view, Hopson will have to either take on more debt or sell assets to fund its short-term debt. The company recently sold some of its (85.5mn) BBMG A shares for CNY742mn. Further liquidations of its residual stake could raise up to USD118mn, which, we think, would reduce concerns over the redemption of its November 2012 bonds. Valuation: While we retain our Underweight ratings on Hopsons bonds for its weak credit profile, we think small positions in the November 2012 bonds may be attractive for some given the alleviated redemption risks after the BBMG share sale and a yield in excess of 20%. If the company redeems the 12s in November or we get further clarity on its refinancing plans, the 16s may also benefit from a positive knee-jerk response, though we would expect to be short-lived. Indika Energy Rating Market Weight Underweight Rationale Credit view: We are neutral on Indikas near-term credit outlook. We expect stronger earnings in 2012 although the companys acquisitive strategy could result in higher net debt in the near term. Contributions from the coal, engineering and logistics businesses are expected to rise this year. Coal associate Kideco declared final dividends of USD161mn to Indika in 2012 (USD113mn in 2011) after net profits rose 44% in 2011, to USD456mn. Earnings growth from the subsidiaries will be driven by new contract signings and the full-year contribution from logistics subsidiary Mitrabahtera Segara, which was acquired in mid-2011. The companys gross debt should be largely stable the expected repayment of USD265mn of shortterm debt should offset the likely additional debt taken on to fund capex and acquisition. However, the company intends to utilise a significant portion of cash for expansion, which should result in higher net debt. We expect Indikas net debt leverage to rise to 2.1x from 1.6x in 2011. The companys appetite for acquisitions is the biggest risk in the near term, in our view. Following the planned purchase of coal mining company PT Multi Tambangjaya Utama in May, however, we expect the company to be less aggressive in seeking acquisition targets. The earnings impact from MTU will be minimal in 2012. By 2013, Indika expects the coal subsidiary to produce approximately 2mt of thermal and coking coal. Liquidity position: Strong it had cash and equivalents of USD500mn versus short-term debt of USD265mn at end-2011. Liquidity should have been boosted by the partial refloat of shares in subsidiary Petrosea in February, which raised USD116mn. Nonetheless, we expect Indikas liquidity to be weaker at end-2012, as the company will need to utilise some cash for capex, acquisitions, and debt repayment. It has budgeted capex of USD256mn in 2012, of which 70% will be for the expansion of Petrosea. Valuation: We believe the Indika 16s are fairly valued for the credit risk. The 18s, however, look rich, given their tight yield to the 16s. Among Indonesian coal bonds, we think Indikas have some of the weakest structures. They do not contain a guarantee from the issuers largest cash flow contributor, Kideco. Coupon 9.75% 7.00% Description Snr unsecured Snr unsecured Maturity 5 Nov 16c13 7 May 18c15 Principal (USD mn) 230 300 Erly Witoyo Ratings (Moodys/S&P/Fitch) B1/--/B+ B1/--/B+
20 April 2012
58
Indosat Tbk, PT Rating Underweight Rationale Coupon 7.375% Description Snr unsecured Maturity 29 Jul 20c15 Principal (USD mn) 650
Jit Ming Tan Ratings (Moodys/S&P/Fitch) Ba1/BB/BBB-
Credit view: Similar to 4Q11, the operating performance in 1Q12 may disappoint as the company addresses network quality issues and attempts to recapture lost billings from the suspension of premium SMS services. Indosat added only 146,000 subscribers in 4Q11, the lowest level since 3Q09. We estimate that 1Q12 earnings were marginally lower q/q, although we still believe low- to mid-single digit EBITDA growth is achievable in 2012. Notwithstanding the cautious operating outlook, we expect Indosats credit profile to improve in 2012. We expect the company to report positive free cash flow of approximately IDR1trn in 2012 on likely stable capex. Indosat will also receive USD406mn (IDR3.7trn) in 1H12 from the sale and leaseback of 2,500 towers. Management has said that part of these sale proceeds will be used to deleverage; however, the amount has yet to be determined. In any case, we do not expect a corresponding decline in Indosats lease-adjusted debt from the transaction once operating leases are taken into account. That said, we think S&P will raise its rating by one-notch once the tower sale transaction is completed due to likely improvements in liquidity. Overall, we expect a marginal improvement in the companys lease-adjusted credit metrics, reflecting our expectation of positive free cash flow this year. Indosat reported 2011 EBITDA/interest cover of 5.3x, gross debt/EBITDA of 2.9x and gross debt/capital of 59%. Liquidity: End-2011 liquidity remained weak, with cash of IDR2.2trn versus short-term debt of IDR4.8trn and procurement payables of another IDR3.4trn. We believe a successful sale-and-leaseback transaction of its towers would significantly strengthen the liquidity profile. Our expectation that Indosat will be free cash flow positive in 2012 could also provide room for further improvement. We also think Indosat has good access to external funding from banks and capital markets. Valuation: Priced to call in 2015, the ISATIJ 20s are among the tightest bonds in the Asian HY universe and underperformed the index over the past one, three and six months. Our Underweight recommendation reflects our view that the underperformance will persist. That said, we acknowledge the strong technicals supporting the ISATIJ 20s due to the defensive nature of Indosats business and its exposure to Indonesia's economy. International Container Terminal Services Inc. Rating Not Rated Rationale Credit update: ICTSIs aggressive expansion plan in 2012 is likely to weaken its credit profile, in our view. The company has budgeted capex of USD550mn in 2012, more than double last years outlays, of which a portion will be funded by new debt. Even with the likely improvement in the companys earnings, we expect to see further deterioration in its debt metrics. Assuming debt increases USD250mn, we could see debt leverage rising to about 4x from 3.6x in 2011 and 3.3x in 2010. This assumes improvement in earnings owing to the expansion of existing ports and the start-up of new ones in 2012. New projects that will contribute to earnings in 2012 include the 600,000 TEU Berth 6 in Manila port, the 100,000 TEU Subic Container Terminal 2, and the 1.2mn-TEU port in Tamil Nadu, India. Moreover, ICTSIs earnings should benefit from a governmentapproved tariff increase at its Manila International Container Terminal (6% in Oct 11 and a further 5% in the following six months). Apart from potential financial weakness, we expect higher business risk in the near term. The company is increasingly focused on entering higher-risk markets. It recently signed a purchase agreement for a 35% stake in Pakistans largest port. It is also looking at investing in African ports. The companys greenfield projects in Argentina and Mexico also pose execution risk. Liquidity position: Strong the company had cash and equivalents of USD458mn at end-2011, compared with short-term debt of USD83mn. We expect the companys liquidity position to weaken in the near term, as it uses some of its cash to fund its large 2012 capex budget of USD550mn. The company has comfortable debt maturity profile in the medium term, with less than USD100mn of annual debt repayments for the USD bond maturing in 2020. Valuation: Based on the current yield and our expectation that the companys credit profile is likely to deteriorate, we view the ICTSI 20s as rich relative to Philippines corporate peers. We see better value in the ICTSI perps as the high coupon provides an attractive carry. Coupon 7.375% Description Snr unsecured Maturity 17 Mar 20 Principal (USD mn) 450mn Erly Witoyo Ratings (Moodys/S&P/Fitch) Not Rated
20 April 2012
59
Kaisa Property Group Rating Market Weight Rationale Coupon 13.5% Description Snr unsecured Maturity 28 Apr 15c13 Principal (USD mn) 650
Christina Chiow Ratings (Moodys/S&P/Fitch) B2/B+/--
Credit view: Kaisas 2011 results came in below expectations as margins were weaker than expected. Gross profit margin dropped to 29.8% (2010: 38.8%) and EBITDA margin to 21.2% (2010: 31.4%). Its credit profile was also negatively affected by its aggressive land acquisitions in 2010 and 1H 11, which led to an increase in debt over 2011. Total debt increased to CNY13.6bn from CNY7.9bn at Dec 2010. As a result, credit metrics weakened, with debt/EBITDA of 5.9x (2010: 3.3x) and EBITDA/gross interest cover of 1.8x (4.7x). In 2012, we expect a small increase in debt and better earnings, which could result in slightly better metrics. We expect debt/EBITDA of c.5.1x and EBITDA/gross interest cover of 2.1x by end2012. Given the company's weak credit metrics, we see limited headroom for further debt issuance (fixed charge coverage ratio of not less than 3.5x for debt incurrence under existing bond indentures). The company has previously indicated that it is open to the possibility of equity financing. Further offsetting the negativity of Kaisas weak credit metrics is the companys successful execution of its strategy of moving into lower tier cities and adequate liquidity. The company achieved sales of CNY2.7bn in 3M 12, or around 16% of its full year target of CNY16.5bn. Liquidity: Kaisas liquidity looks adequate, as the company has unrestricted cash of CNY3.9bn against short-term debt of CNY2.1bn. We believe this reflects a combination of aggressive debt issuance in 2011 as well as Kaisa achieving CNY15.3bn of contracted sales in 2011, against its target of CNY15bn. We estimate that the company will just about breakeven on an operating cash flow basis in 2012. According to the company, major cash outflows include land premiums outstanding of CNY2.5bn and construction costs of c.CNY7-8bn. We also estimate other expenses of CNY5bn. Valuation: Despite Kaisas full year results coming in below expectations, we maintain our Market Weight rating on the 15s bonds. We expect them to perform in line with the broader Asia high yield index over the next six months, given their relatively high coupon and the company's adequate liquidity in the near term. We believe its business model of diversification into lower tier cities should continue to benefit from the current differentiated home policies towards first-home buyers. KWG Property Holding Ltd Rating Overweight Market Weight Rationale Credit view: We expect KWGs credit profile to remain stable and commensurate with a high single-B bond rating. Despite strong EBITDA growth of 51% y/y to CNY3.7bn in 2011, the company managed to keep its debt level relatively stable at c.CNY13.8bn (Jun 2011: CNY13.9bn, Dec 2010: CNY12.3bn). We believe this reflects KWG's better liquidity compared with other developers of similar size and credit ratings. While still sufficient, the company worked down unrestricted cash to CNY4bn from CNY5.1bn at Jun 2011 and CNY5.3bn at Dec 2010. Debt/EBITDA of 3.7x and EBITDA/gross interest cover of 3.2x remain appropriate for its ratings, in our view. We expect these two ratios to remain c.3.5x in 2012, on slightly better earnings. Despite KWGs high concentration in cities with home purchase restrictions, we believe its relatively high proportion of commercial properties (an area not subject to restrictions) reduces the potential for a sales decline in 2012. Commercial properties will account for c.40% of its sellable resources of 1.8mn sqm in 2012 and it is guiding for a modest sales growth target of 4.3% y/y to CNY12bn. In 1Q 12, KWG achieved sales of CNY2.0bn, 17% of its full year target. Liquidity: KWGs liquidity profile is one of the strongest among its peers, in our view. At Dec 2011, the company reported unrestricted cash of CNY4bn and restricted cash for construction of CNY1.3bn, against short term debt of CNY3.4bn. It went on to raise USD400mn through a USD bond issue in March 2012. This, and cash generated this year, should sufficiently cover its major expenses in 2012. The company said it had outstanding land premiums of CNY1bn, and expects to incur construction costs of c.CNY3.3bn and other costs of c.CNY3.8bn in 2012. Valuation: Compared with developers with good fundamentals and similar ratings, the KWG bonds offer a lower cash price and a higher yield than Central China (B1/B+). We prefer the 16s over the 12.5% 2017s given the curve is flat and for their slightly better liquidity. Note: We are currently in blackout on the newly issued 13.25% 2017 bonds. Coupon 12.75% 12.50% Description Snr unsecured Snr unsecured Maturity 30 Mar 16c14 18 Aug 17c14 Principal (USD mn) 350 250 Christina Chiow Ratings (Moodys/S&P/Fitch) B1/B+/-B1/B+/--
20 April 2012
60
Longfor Properties Rating Market Weight Rationale Coupon 9.5% Description Snr unsecured Maturity 7 Apr 16c14 Principal (USD mn) 750
Christina Chiow Ratings (Moodys/S&P/Fitch) Ba3/BB/--
Credit view: There were no negative surprises in Longfors full-year results, with EBITDA rising 94% y/y to CNY8.4bn and debt up 38% y/y to CNY24.0bn. As a result, credit metrics remained healthy, with debt/EBITDA of 2.8x and EBITDA/gross interest of 5.5x. Longfor displayed strong resilience in its operating performance, which we believe reflects its wide array of products, strong branding and conservative financial management. With strong execution capability, ample liquidity and robust credit metrics, we view Longfors overall credit quality as slightly better than Agile (Ba2/BB). The company is targeting sales of CNY39bn in 2012, broadly flat to last years CNY38.3bn, against saleable resources of CNY78bn. We think a 50% sell-through rate is reasonable compared with the 65% achieved in 2011. Based on this, we believe the company is likely to be operating cash flow positive in 2012 and, hence, credit metrics are likely to further strengthen. We expect debt/EBITDA of c.2.5x and EBITDA/gross interest cover of 5.56.0x. Liquidity: Longfor's balance sheet liquidity is one of the best in the sector, with an exceptionally high level of unrestricted cash (CNY14.1bn) at endDecember 2011 (Agile: CNY4.7bn, Country Garden: CNY7.7bn), against short-term debt of just CNY3.6bn. We believe this reflects the company's conservative financial management, high pre-sales cash collection of 93% in 2011 and good execution to date, even in new markets. And this was achieved despite a marginal underperformance against its 2011 sales target (actual: CNY38.3bn; target: CNY40bn). Major expenses in 2012 include construction costs of CNY16bn, committed land premiums of CNY7bn and other expenses of c.CNY9bn, according to the company. Valuation: We remain comfortable with Longfor and maintain our Market Weight on the 16 bonds. We see the bonds as fairly priced and see little room for further outperformance. The Longfor 16s are already indicated more than 100bp inside of Agile 16s. MIE Holdings Rating Overweight Rationale Credit view: We have a positive credit view on MIE Holdings following its successful acquisition of Emir-Oil in November 2011. We expect 2012 EBITDA to rise by more than 20% on higher production volumes and a marginally higher realised oil price. Management has guided for net production of 13,700-16,700bpd in 2012, which translates into 5.0-6.1mmbbls (+21-47%) for the year. Our estimate assumes production levels at the low-end of the companys guidance. Capex was guided for USD303mn (CNY1.9bn), and we believe MIE will be able to internally fund most of its spending needs. Offsetting the positive operating outlook, we view M&A risk as elevated, given that MIE has indicated a desire to grow its asset base. We believe a material debt-funded acquisition could prompt S&P to reassess its rating. In addition, we think S&P may downgrade MIE if it reports negative free operating cash flow in 2012. Fitchs negative rating triggers are FFO-adjusted net leverage exceeding 3.0x and FFO/interest cover of less than 4.5x on a sustained basis. We believe MIE will be able to meet Fitchs benchmarks. In the absence of a material acquisition, we expect 2012 EBITDA/interest of 7.0x, gross debt/EBITDA of 1.2x and gross debt/capital of 40%. Liquidity: MIE had end-2011 cash balance of CNY533mn and no short-term debt. For 2012, we believe the company will be able to fund most of its capex from operating cash flow, although its cash balance could deteriorate. We do not think access to domestic funding is a problem, especially if secured against the companys production assets. Valuation: We think the MIEHOL 16s are cheap compared with its emerging market peers but fairly valued versus its Chinese industrial peers. We believe bond valuations will be well-supported by fund managers with broad emerging market mandates. We also believe that MIEs defensive earnings profile, which is largely driven by global oil prices and production volumes, will lend further support to the bonds and help to fuel outperformance versus the Asia HY Index. Coupon 9.75% Description Snr unsecured Maturity 12 May 16c14 Principal (USD mn) 400 Jit Ming Tan Ratings (Moodys/S&P/Fitch) --/B+/B
20 April 2012
61
MNC Sky Vision Rating Overweight Rationale Coupon 12.75% Description Snr secured Maturity 16 Nov 15 Principal (USD mn) 165
Erly Witoyo Ratings (Moodys/S&P/Fitch) B2/B/--
Credit view: Our near-term credit outlook for MNC Sky Vision (MNCSV) is positive. We expect stronger earnings to lower debt leverage to 1.7x in 2012 from 2.2x in 2011 and increase interest coverage to about 4x from 3.4x. The growth prospects for the pay-TV sector in Indonesia remain robust given the low penetration rate and the countrys fast-growing middle class. Although ARPU could remain under pressure on rising competition and higher take-up of the companys lower-end (Top TV) pay-TV package, we expect these factors to be largely offset by a further decline in program cost per subscriber. Indeed, the companys gross margin improved to 40% in 2011 from 36% in 2010, despite a decline in ARPU. We believe the company is unlikely to significantly increase debt in the near term. Until an IPO is completed, capex needs are limited to buying set-top boxes, which can be normally paid for over 12 months. The plan for an IPO in 1Q12 was postponed due to the volatility in capital markets. However, the company remains intent on raising capital through a share sale in the near term. According to stock exchange announcement by parent Global Mediacom in early-April, MNCSV has already filed for an IPO hearing with Bapepam, Indonesias capital markets regulator. A successful IPO would address concerns about the companys weak liquidity position, in our view. Liquidity position: Weak the company had cash of IDR35bn at end-2011 compared with short-term debt of IDR77bn. Despite its tight liquidity position, we believe MNCSV has low near-term default risk, given the high likelihood of financial support from its parent, if required. The support was increasingly evident in 2011. Parent Global Mediacom (GM) guaranteed and provided collateral for USD68mn of bank loans taken out by MNCSV. In addition, the parent continued to provide the company with working capital loan, which had an outstanding amount of IDR84bn at end-2011. We see GM as a significantly stronger credit than MNCSV. GM had a debt/EBITDA of 1x and cash and equivalents of USD249mn at end-2011. Valuation: The bonds are trading wide to Indonesian HY peers owing mainly to the companys weak liquidity, in our view. Given the parents track record of providing financial support to MNCSV, we think near-term refinancing concerns should ease. Moreover, if the companys plan to sell shares through an IPO later this year proceeds, we think there could be a multi-point rally on the bonds. Pacnet Limited Rating Overweight Rationale Credit view: We expect Pacnets credit metrics to be broadly stable in 2012 as increased EBITDA is offset by higher net debt. Another challenging year is in prospect for the company as continued price erosion will likely offset traffic growth. Incremental revenue from its new Hong Kong data centre, which will start accruing revenue in May, is likely to contribute only USD2-6mn to the top line in 2012. We expect earnings growth to come from the absence of one-off expenses, as was the case in 2011 due to the 2011 Japan earthquake, and 3% growth in revenue. We project 2012 EBITDA to grow 13% y/y to USD88mn; assuming similar levels of ESOP expenses for the year, adjusted EBITDA is estimated at USD94mn. Our projected net operating cash flow of USD51mn is short of the USD80mn guided capex, which implies negative free cash flow of USD29mn. While we expect EBITDA/interest cover to rise to 2.9x (2011: 2.7x) and net debt/EBITDA to improve to 3.9x (2011: 4.2x), we think net debt/capital will deteriorate significantly to 111% (2011: 70%) as continued net losses are likely to push shareholder equity into negative territory. As a result, rating risk is elevated. Moodys has a negative trigger of EBITDA less than USD90-100mn while Fitch may downgrade its rating if FFO/interest falls below 2.75x or if FFO-adjusted leverage rises above 5x. We think Pacnet may struggle to exceed Moodys EBITDA target and may miss Fitchs triggers if earnings disappoint. Liquidity: Pacnet has adequate liquidity, with an end-2011 cash balance of USD100mn against an estimated USD5mn of short-term debt. It also has USD50mn of unutilised bank facilities. We believe our negative free cash flow projection of USD29mn can be funded by these facilities. Valuation: We think valuations are weighed down by the companys challenging operating outlook, lack of visibility for industry trends, and a perceived lack of transparency due to its private status. As a result, we think Pacnet bonds are undervalued relative to its industry peers despite offering a better security package and corporate governance compared with similarly valued Asian high yield bonds. Asset valuations point to a high potential recovery in any distressed scenario our enterprise value estimates based on transacted industry EV/EBITDA multiples point to asset valuation in excess of USD600mn. We believe the high potential recovery is supportive of the bonds valuation. Coupon 9.25% Description Snr secured Maturity 9 Nov 15c13 Principal (USD mn) 300 Jit Ming Tan Ratings (Moodys/S&P/Fitch) B1/NR/BB+
20 April 2012
62
Powerlong Real Estate Holdings Ltd Rating Not Rated Rationale Coupon 13.75% Description Snr unsecured Maturity 16 Sep 15c13 Principal (USD mn) 200
Christina Chiow Ratings (Moodys/S&P/Fitch) Caa1/B-/--
Credit update: Powerlong is experiencing increasing leverage and tight liquidity. Debt rose by 50% y/y to CNY9.4bn at Dec 2011, while gross profit and EBITDA contracted in 2011. In September 2011, HKD1bn of bonds were issued to China Life Trustees that were pledged by 30.2% (originally 19.7%) of the controlling shareholders stake in Powerlong. As a result, debt/EBITDA weakened to 5.6x and EBITDA/gross interest cover fell to 2.1x. Contracted sales disappointed in 2011 with a decline to CNY5.2bn, while completed properties for sale rose to CNY2.2bn from CNY1.4bn at June 2011. We think Powerlongs sales are likely to remain challenged in 2012 and margins could come under pressure if the company tries to increase turnover and reduce inventories. The company is targeting sales of CNY6bn in 2012; it achieved sales of CNY0.9bn in 1Q 12. Liquidity: Powerlongs liquidity looks tight. At Dec 2011, it had cash of CNY1.4bn against short-term debt of CNY2.4bn. Further, even if the company achieves its 2012 sales target of CNY6bn, they would not cover major expected costs of CNY3.5bn for construction, CNY800mn for land premiums outstanding and CNY2.4bn for other expenses. Hence, we think the company may have to refinance its short-term debt and its leverage is unlikely to improve in the near term. In light of its tight liquidity, the companys share buybacks in 2011 of HKD17.5mn and final dividend declared of CNY243mn look somewhat aggressive. Valuation: Although the 2015 bonds offer a high yield, we think they will underperform the bonds of peers such as Cenchi 15s, Evergrande 15s and Kaisa 15s, reflecting Powerlongs tight liquidity situation and high leverage. Credit metrics are also likely to remain weak given an increase in debt. Road King Infrastructure Ltd Rating Underweight Underweight Rationale Credit view: Our credit view of Road King remains slightly negative despite 2H 11 results that were in line with our expectations. We do not see any near-term positive credit drivers and credit metrics remain modest for its agency ratings. We believe its position as a small developer with belowaverage execution will challenge its operating performance given the current regulatory backdrop. Gross profit margins remain generally low at c.30%, similar to those of the mass market developers such as Country Garden and Evergrande, although Road King lacks the scale of these two companies. We expect credit metrics to remain weak in 2012, with EBITDA/interest cover (including cash flow from toll roads) of c.3x and debt/EBITDA of 5.6x. Offsetting the weak property performance is Road Kings stable toll roads business, which we estimate on a cash contribution basis will continue to cover c.1x interest expense in 2012. Liquidity: The company raised net new borrowings of HKD1.29bn in 2011 but we think its liquidity is still relatively weak. Road Kings debt maturity profile remains very short-dated. At Dec 2011, Road King had of HKD3.2bn of cash against short-term debt of HKD3.5bn. Of the latter, USD149mn is due in May 2012. As the company raised new loans in 2011 for the redemption of the 2012 FRN bonds and given its cash level, we expect the bonds to be redeemed in May. Outside of short-term debt, construction expenses and other expenses could come to CNY3.9bn and CNY2.5bn respectively, according to the company. The company does not have any land premiums outstanding. These expenses should be covered by sales proceeds, even if they surprise to the downside. The company is targeting sales of CNY7.9bn in 2012, which looks challenging, in our view. Valuation: In an uncertain operating environment, we expect the bonds of the smaller developers such as Road King to underperform their larger peers. We prefer the similarly rated Country Garden 15s (Overweight, Ba3/BB- both Stb), as we view that companys credit trajectory as stable, and the lower-rated Evergrande '15s (Overweight, B2 Neg/BB- Stb) for its improving credit profile and the yield pick-up. Coupon 7.625% 9.5% Description Snr unsecured Snr unsecured Maturity 14 May 14 c11 21 Sep 15 c13 Principal (USD mn) 200 350 Christina Chiow Ratings (Moodys/S&P/Fitch) Ba3/BB-/BB--/BB-/BB-
20 April 2012
63
Shimao Property Holdings Limited Rating Market Weight Overweight Market Weight Rationale Coupon 8.00% 9.65% 11.00% Description Snr unsecured Snr unsecured Snr unsecured Maturity 1 Dec 16c11 3 Aug 17c14 8 Mar 18c15 Principal (USD mn) 350 500 350
Christina Chiow Ratings (Moodys/S&P/Fitch) B1/BB-/BB+ B1/BB-/BB+ B1/BB-/BB+
Credit view: In our view, Shimaos credit profile remains relatively weak, despite the company slowing land acquisitions and construction in 2H 11. Full-year 2011 results were slightly weaker than expected and its liquidity weakened over 2H 11. We believe this was due to its aggressive growth appetite in the past, which has weakened its credit metrics and makes its liquidity position vulnerable to contracted sales performance. At end2011, debt/EBITDA was 5.3x and EBITDA/gross interest cover declined to 2.6x* (LTM Jun 2011: 3.2x). While the company and S&P said Shimao is still compliant with the covenant requirements as per its loan terms, we believe the headroom is limited. The company is conscious of its high leverage (Dec 2011: 82%) and is aiming to reduce net gearing to c.70% by Dec 2012. However, Shimao failed to achieve its previous de-leveraging targets that were set earlier in August 2011 (net gearing of 60% by Dec 2011 and 50% by Dec 2012), so, it remains to be seen if the company can deliver on this front this time. Given that Shimao has breached the downgrade rating thresholds for some time now, we expect it to face rating pressures from both agencies. We expect debt/EBITDA to remain above 5x and EBITDA/interest cover c.3x in 2012. Liquidity: Liquidity looks adequate but is sensitive to contracted sales performance. At Dec 2011, Shimao had cash of CNY14bn (of which CNY12.3bn is unrestricted cash) versus short-term debt of CNY15.0bn. However, assuming contracted sales of CNY30-33bn, this should still cover major expenses and the refinancing of some short-term debt. According to the company, it expects construction expenses of CNY12.5bn, committed land premiums of CNY5.9bn and other costs of CNY7.6bn. In 1Q 12, the company achieved sales of CNY7.3bn, 22% of its full year target. Valuation: During March and post the FY12 results, Shimao's bonds have drifted wider versus peers. We think further downside is limited. Among the Shimao bond complex, we see the 2017 bonds as the sweet spot and rate these as Overweight, given attractive valuations and potential positive sales momentum. We have Market Weights on the 2016s and 2018s. The 2016-2017 curve is relatively steep at c.90bp differential, while the 20172018 curve is relatively flat at c.50bp. Note: *This is our estimate based on preliminary financials, so may not use the same data as per the bond covenant terms. SK Hynix (formerly Hynix Semiconductor) Rating Underweight Rationale Credit view: We have a positive credit view of Hynix due to the KRW2.3trn capital injection by SK Telecom, which was completed in February 2012. We estimate pro forma net debt/capital of 19% (4Q11: 38%), net debt/LTM EBITDA of 0.7x (4Q11: 1.3x) and EBITDA/net interest cover of 15x (4Q11: 10x). All three rating agencies upgraded their ratings following the capital increase. Moodys also maintained a Positive Outlook following its upgrade, although we do not believe another upward rating action is imminent. From an operating perspective, we expect 2012 to be a challenging year for Hynix. The company had previously guided for a cautious 2012, with slow demand conditions in 1H12 due to seasonality and hard disk drive constraints. DRAM prices are expected to bottom in 2Q12, although the surprise bankruptcy of Elpida may accelerate this process, especially if DRAM capacity is removed as a result. Hynix is more constructive on NAND and it estimates industry bit growth of 70-80% in 2012, with demand supported by new mobile models and increasing use of solid state drives (SSD). We expect the company to report 2012 EBITDA of KRW3.5trn (-7% y/y) on revenue of approximately KRW10trn (-4% y/y). Liquidity: Cash on hand will likely exceed KRW4trn following the rights issue while end-2011 short-term debt was KRW2.8trn. We estimate that Hynix will generate another KRW3.5trn in operating cash flow in 2012. This implies that the company should have no difficulty funding its KRW4.2trn capex plan, with sufficient funds remaining to deleverage. Valuation: The HYUELE 17c12s are just below the June 2012 call price of 103.938. We believe the potential for a near-term call will cause the bond to underperform the broader market. Coupon 7.875% Description Snr unsecured Maturity 27 Jun 17c12 Principal (USD mn) 500 Jit Ming Tan Ratings (Moodys/S&P/Fitch) Ba3/BB-/BB
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SM Investments Rating Not Rated Not Rated Not Rated Rationale Coupon 6.75% 6.00% 5.50% Description Snr unsecured Snr unsecured Snr unsecured Maturity 18 Jul 13* 22 Sep 14 13 Oct 17 Principal (USD mn) 274* 379 400
Erly Witoyo Ratings (Moodys/S&P/Fitch) Not Rated Not Rated Not Rated
Credit update: Although we are constructive on SM Investments Corps (SMIC) operating outlook, we believe the companys aggressive expansion plans could limit improvement in its credit metrics in 2012. Management estimates capex of PHP56.8bn in 2012, compared with actual spending of PHP26bn in 2011. We think the company will need to raise additional funding, part of which may be through debt, to finance its capex budget. Average annual operating cash flow was only PHP18bn during 2009-11. We expect robust earnings growth in 2012 to partly offset the likely debt increase. The companys various businesses should benefit from strong economic expansion in the Philippines (our analysts expect GDP growth of 4.2% in 2012, compared with 3.8% in 2011). Moreover, we expect an additional contribution from project completions in 2012, which include a 200-room hotel in Davao, a 150,000-sqm mall in China and a 102,704-sqm office tower in Manila. At end-2011, annualised debt/EBITDA fell to 4.6x from 5.3x in FY10, while gross interest cover rose to 3.8x from 3.3x. Further improvements in the near-term will be limited, in our view. Liquidity position: Strong At end-2011 SMIC had cash and equivalents of PHP59bn compared with short-term debt of PHP34bn. Although cash could decline owing to large investments, we believe the company has strong financial flexibility, given its position as one of the largest conglomerates in the Philippines, its ownership of two banks and its listing on the Philippines Stock Exchange. Valuation: We view the SMIC bonds as rich relative to other Philippine corporate paper. In the SMIC bond complex, we see better value in the shorter-dated 2013 and 2014 bonds. Note: * Outstanding amount as at 19 April 2012. Star Energy Rating Underweight Rationale Credit view: Star Energys plans for the construction of its new power plant (Unit 3) remain uncertain. The company has not yet committed to the size of the new plant, although we believe it is leaning towards building a smaller facility than originally envisaged. If true, this would be creditpositive as it would reduce the companys financial burden and allow for earlier completion. Management intends to announce the plan for Unit 3 in 1H12, after finishing feasibility studies on the construction. The companys original plan was for the construction of a 125MW plant with a completion target at end-2013. Delays in obtaining exploration approvals, however, have pushed back construction, and completion is expected at end-2014. The original plan would have required Star Energy to raise USD75-100mn of additional debt financing. The other option is to construct a smaller (60-70MW) power plant, which management believes can be financed internally. In addition, the smaller size and the use of excess steam from existing fields would allow the project to be completed sooner than 2H14. Owing to timing and financial constraints, as well as the continued uncertainty about obtaining drilling permits for new fields, we think the company will opt for a smaller plant. Apart from its expansion, Star Energy has a very stable business arising from its take-or-pay contract with PLN. We expect credit metrics to remain largely unchanged in the near term, with debt/EBITDA of about 5x and EBITDA/interest of 2x. If the company proceeds with its original plan for Unit 3 and takes on additional debt, we estimate debt leverage would rise to around 6x. Liquidity position: Strong the company had cash of USD123mn and no short-term debt at end-3Q11. We expect to see some weakening in Star Energys liquidity position in the near term as the company increases spending for the construction of Unit 3. Valuation: We see little value in the bonds given the tight yield (mid) of below 6% for B-rated paper. The bonds are currently priced to call. Assuming it does not get called, we see high downside risk. Coupon 11.50% Description Snr secured Maturity 12 Feb 15c13 Principal (USD mn) 350 Erly Witoyo Ratings (Moodys/S&P/Fitch) B2/--/B+
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STATS ChipPAC Rating Market Weight Market Weight Rationale Coupon 7.50% 5.375% Description Snr unsecured Snr unsecured Maturity 12 Aug 15c13 31 Mar 16c14 Principal (USD mn) 600 200
Jit Ming Tan Ratings (Moodys/S&P/Fitch) Ba1/BB+/-Ba1/BB+/--
Credit view: Operating conditions remain sluggish for STATS ChipPAC, as highlighted by the company lowering its 1Q12 revenue guidance to a 911% q/q decline, from its initial estimate of a mid-single digit fall. We estimate EBITDA fell 16% q/q in 1Q, with a marginal deterioration in its credit metrics. We look for 1Q12 EBIT/interest cover of 0.8x (4Q11: 1.9x), gross debt/LTM EBITDA of 2.0x (4Q11: 1.9x) and gross debt/capital of 45% (4Q11: 45%). Although we expect its EBIT/interest ratio to remain below Moodys negative trigger of 2.0x, we believe the agency will act only if the credit weakness is: 1) sustained over a long period; or 2) causes the debt/EBITDA ratio to consistently exceed 2.5-3.0x. This is not our base case scenario. Instead, we expect a recovery in 2H12 when the industrys hard disk drive situation normalises, assuming a benign macro environment. Should the global economic outlook remain challenging, we expect STATS ChipPAC to be disciplined by reducing capex and conserving cash, as it did in 2009. Liquidity: End-2011 cash balance was USD223mn, compared with short-term debt of USD20mn. STATS ChipPAC has historically maintained a high cash balance and carried minimal short-term debt. We expect this trend to continue. Valuation: The STATSP bonds are among the tightest in the Asia high yield market, reflecting the companys strong credit profile, steady stewardship, and low corporate governance risk. This has resulted in strong sponsorship from investors, especially in times of risk aversion. Our Market Weight recommendations reflect our view that the risk/reward proposition for holding the STATSP bonds remains appropriate. Vedanta Resources Rating Underweight Market Weight Market Weight Market Weight Rationale Credit view: The near-term focus on Vedanta will be on its ability to increase cash upstreaming from its subsidiaries. Following the acquisition of Cairn India in 2011, which was mainly debt-funded, the parent now faces USD1bn of debt maturities and an estimated USD550mn of financing costs in FY13 (ending 31 March). In the near-term, group earnings are likely to be boosted by contributions from the new oil and gas business even if base metals prices weaken. Moving the cash up to the parent, however, could be a challenge. Vedantas proposed corporate restructuring would be credit positive if realised. It would transfer a significant portion of the parent debt to operating subsidiaries. A successful restructuring, however, could take time. It requires approvals from shareholders of several subsidiaries, and in its current form, we do not believe it will satisfy all shareholders. Until a restructuring is finalised, we think Vedanta will have to prove it can increase cash upstreaming within the group given the parents high debt burden in the near term. We continue to see a low risk of default for Vedanta, despite the debt-cash mismatch at the group level. The company has robust financial flexibility, in our view. It has strong banking relationships, significant unencumbered assets, and access to debt and equity capital markets. Apart from refinancing and industry concerns, the key risk to Vedanta stems from the companys aggressive expansion. It continues to be opportunistic in acquiring assets, in our view. We are not concerned about the companys plan to purchase the minority stakes in subsidiaries Hindustan Zinc and Bharat Aluminium, however. This would be credit positive as it would give Vedanta full control over the strong cash flow and cash balances at these subsidiaries, which it could utilise to repay its debt. At end-1H FY12, Hindustan Zinc had approximately USD3.4bn of cash. Liquidity position: Weak the group had cash and equivalents of USD5.9bn and short-term debt of USD3.7bn as at 30 Sep 2011. However, as at 31 Dec 2011, there was only USD50mn of cash at the parent level. About USD1bn of parent debt will mature in FY13. We expect the cash shortfall to be covered by increased dividend payments from subsidiaries and potentially new debt. Valuation: Until the company finalises the planned restructuring, we expect Vedantas bond to be rangebound. The bonds have outperformed the overall Asian HY corporate market YTD, which is likely to limit potential yield tightening. We have an Underweight rating on the Vedanta 14s as we believe the bonds trade too tight in comparison with the other bonds in the complex. Coupon 8.75% 6.75% 9.50% 8.25% Description Snr unsecured Snr unsecured Snr unsecured Snr unsecured Maturity 15 Jan 14 7 Jun 16 18 Jul 18 7 Jun 21 Principal (USD mn) 500 750 750 900 Erly Witoyo Ratings (Moodys/S&P/Fitch) Ba3/BB/BB Ba3/BB/BB Ba3/BB/BB Ba3/BB/BB
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Winsway Coking Coal Rating Not Rated Rationale Coupon 8.500% Description Snr unsecured Maturity 8 Apr 2016 Principal (USD mn) 500
Erly Witoyo Ratings (Moodys/S&P/Fitch) B1/B+/BB
Credit update: Winsways business model is in question after the company admitted that it faces railway capacity shortages in China and increasing competition. These issues were highlighted after the company reported weak 2H11 results, with EBITDA falling 75% h/h. The inability to transport coal due to the railway limitations (the government prioritised capacity for thermal coal transport) also contributed to high inventory levels at year end. We expect the transportation issue to persist in the near term as investment in Chinas railway sector has slowed. Furthermore, competition could intensify, as Mongolian coal producers increasingly are selling their products directly to Chinese customers, side-stepping middlemen such as Winsway. The companys role has diminished, but we still expect it to play an important role as one of biggest transporter of coal from Mongolia to China. However, sales volume and earnings from coal trading will likely be lower. We forecast debt leverage of 4.5x in 2012 (after consolidating Canadian coking coal producer Grande Cache (GCC)) versus 3.1x in 2011. The companys 60% acquisition of GCC is a doubleedged sword, in our view. It provides the company with access to an upstream business. However, the purchase resulted in a large cash outflow (USD414mn) from Winsway with no cash flow contribution expected from the subsidiary for the next few years. Winsways management expects GCCs operating cash flow to be targeted for capex. Liquidity position: Strong the company had cash and equivalents of HKD3.1bn versus short-term debt of HKD661mn at end-2011. Approximately HKD2.4bn of cash should have been utilised in February to acquire a 60% stake in GCC. Following the purchase, the cash balance was about USD170mn (HKD1.3bn), according to management. The companys liquidity position is strengthened by HKD8.2bn of available credit lines, which are mainly for working capital needs. Valuation: In light of increased concerns over the companys business model and our expectation of a weaker credit profile in the near term, we expect the Winsway 16s to continue to underperform its Asian HY peers in the near term. Yanlord Land Group Rating Underweight Market Weight Rationale Credit view: Yanlords high-end niche positioning and small scale are seen as negatives in the current difficult operating environment. Unlike the mass-market developers, Yanlord has less flexibility to cut prices given its positioning and small sales volume. As a result, contracted sales of CNY8.7bn were behind target in 2011. Yanlord is guiding for sales of c.CNY12.5bn in 2012, versus available-for-sales resources of CNY25bn. This compares with CNY8.7bn and CNY15bn in 2011 respectively. While an expected sell-through rate of 50% seems reasonable and it achieved sales of CNY2.1bn in 1Q 12, we are cautious given Yanlord's exposure to Chinese cities with home purchase restrictions, which could lead to further underperformance in 2012. Further, the company reported disappointing 4Q results, with pressures on its margins (2011 gross profit margin of 34% versus 55% in 2010). We expect its margins to improve moderately to 35-40% in 2012, but to remain below the minimum of 45% achieved in each of the five years preceding 2011. Credit metrics such as debt/EBITDA and EBITDA/gross interest cover are likely to remain high as debt is likely to increase. Liquidity: At Dec 2011, Yanlords liquidity was tight, with cash of CNY4.3bn against short-term debt of CNY4.7bn (including a SGD375mn CB puttable in July 2012). Even so, we believe the company retains decent financial flexibility in terms of its capital raising ability and its access to the loan market. Based on the company's guidance, we estimate that it would be unable to fund all of its major expenses from internal resources and hence debt is likely to increase. Major expenses include land premiums outstanding of CNY2.3bn, construction costs of CNY7.6bn and other costs of CNY3.7bn. Valuation: Despite the disappointing 4Q results and credit rating downgrades by both agencies following the results, Yanlords bonds have held up relatively well compared with the other Chinese real estate bonds. Given the weakening credit trajectory, we think current valuations are rich to fair. We rate the 17s Underweight and 18s Market Weight. The Yanlord 17s-18s curve is steep at c.80bp, compared with c.10bp for the Cogard 17s18s curve and c.50bp for the Shimao 17s-18s curve. Coupon 9.5% 10.625% Description Snr unsecured Snr unsecured Maturity 4 May 2017 c14 29 Mar 2018 c15 Principal (USD mn) 300 400 Christina Chiow Ratings (Moodys/S&P/Fitch) B1/B+/NR B1/B+/NR
Coverage discontinued:
Berlian Laju Tanker 14s: Due to lack of company information in the public domain following the companys default. Our last rating on the notes was Underweight. Cikarang Listrindo 15s: Only USD20mn of notes remains outstanding following the tender in February. Our last rating on the notes was Market Weight.
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ASIA-PACIFIC FINANCIAL INSTITUTIONS PROFILES
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FINANCIAL INSTITUTIONS
Benign backdrop; Prefer Korean banks

Krishna Hegde +65 6308 2979 krishna.hegde@barclays.com Lyris Koh +65 6308 3595 lyris.koh@barclays.com Nicholas Yap +65 6308 3180 nicholas.yap@barclays.com
Broadly neutral Asian banks, prefer Korean banks

Following the outperformance of various Asia bank sectors in 1Q12, we find current valuations less attractive. We are now broadly neutral across the Asian banks sector. The exception is Korea, where we are Overweight. In our view, improved USD liquidity and Moodys outlook change on the sovereign to Positive are supportive for spreads. Notwithstanding the intermittent North Korea-related headlines, we also believe that overall geopolitical risk has decreased slightly as the transition of power in North Korea appears to have gone through. We remain cautious on the fundamentals of the Indian banks but think the still sizeable carry on their bonds justifies a Market Weight position. In particular, we prefer the 3y part of the Indian banks curve given the potential for spread compression as bonds roll into the three-year bucket. In addition, we continue to prefer the larger benchmark issuers (eg, Bank of India, State Bank India, ICICI) to the smaller banks (eg, Syndicate, Indian Overseas Bank) due to the slightly better bond liquidity and disclosure standards of the former. We also have a Market Weight on Hong Kong banks. Following the sectors underperformance last year, we believe these bonds have priced in some level of concern about a China slowdown as well as expectations of a gradual decline in credit metrics. In Australia, the weakening in the economy from a China slowdown may eventually weigh on spreads of the banks in our view. We think current valuations of the banks senior bonds do not provide much buffer against spread widening and therefore affirm our Underweight ratings on the big four banks.
Trade ideas

Sell DBSSP 2.35% 17s, buy DBSSP 3.625% 22c17s Buy 3y Indian bank senior bonds Buy Macquarie Bank senior bonds
M&A noise to increase

We expect M&A headlines to pick up over coming months driven by the following factors:

Increased clarity on regulatory capital requirements Increased pressures on banks in mature markets in Asia to find new revenue growth drivers in an environment of lower economic growth. However, we believe banks are more likely to undertake bolt-on rather than transformational deals given the need to conserve capital ahead of Basel III implementation and the ongoing uncertainties posed by the global economy. Increased foreign-currency deposit-gathering efforts at the Korean banks, as indicated by comments from regulators and banks. We expect the commercial banks to seek to acquire small banks overseas in a bid to improve their foreign-currency deposit base. For example, Hana Financial Group was in talks to acquire a 51% stake in US-based Saehan Bancorp, although the deal ultimately fell through. Closer to home, Korea Development Bank (KDB) is likely to intensify efforts to grow its deposits in anticipation of its privatisation, in our view.
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Slowing credit growth will help the tight liquidity situation in several systems
In line with our expectations at the start of the year, we have begun to see some moderation in credit growth in several banking systems. In particular, Hong Kong has seen a decline in HKD loan growth and the HKD loan-to-deposit (LDR) ratio has eased to c.81% from the high of c.87% reached last year. Loan growth in Singapore has also declined slightly and we note that the ACU (Asian Currency Unit) LDR has decreased to c.103%. We expect this trend to continue and for LDRs in these systems to gradually stabilise (albeit at higher levels than that seen a couple of years ago). Figure 27: Loan growth is moderating (y/y)
35% 30% 25% 20% 15% 10% 5% 0% -5% Jan-10 Hong Kong Singapore Malaysia Thailand
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Source: Central banks, Barclays Research
Mixed trends in asset quality across Asian banks

We expect asset quality to show divergent trends across systems. In India, banks are still in the early stages of a downturn in asset quality, in our opinion, and we expect NPLs/ restructured loans to continue trending up. Although NPLs at the Hong Kong and Singaporean banks are also likely to creep up, albeit from low levels, the increase is largely due to cyclical rather than both cyclical and structural factors as in the case of the Indian banks. Unlike most banks in the region, we expect Korean banks asset quality to remain broadly stable. In our view, balance sheet cleanups conducted over the past couple of years have left banks in relatively good shape. Steady economic growth conditions should also be supportive of asset quality. That said, we do not rule out regulatory-induced spikes in NPLs and acknowledge that high consumer indebtedness poses downside risks.
Basel III preparation efforts to intensify

We expect Basel III preparations to intensify as the implementation date (1 January 2013) approaches. Several regulators across Asia-Pacific have released their Basel III proposals and we expect Asian banks in general to be able to comfortably meet the higher capital requirements. Please refer to Basel III drafts - Mildly positive for bank capital for more details. To date, investor focus has largely been on the capital guidelines but we think the market will eventually turn its attention to the liquidity guidelines over the course of the year.
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Figure 28: Status of Basel III adoption (as at end March 2012)
Country Australia Implementation plans Draft rules for capital requirements issued on 30 March 2012. Draft rules to implement liquidity requirements issued in November 2011 for public consultation until 17 February 2012. Draft regulation combines BII, B2.5 and BIII. Public consultation ended in 2011. Final rule expected to come into force in 3Q12. Will be applied to all banking institutions. Bill passed by the Legislative Council on 29 February 2012 and published for the purpose of creating rule-making powers for the implementation of Basel III. Industry consultation underway on policy proposals for inclusion in rules. Consultation on draft text of rules scheduled for second half of 2012. Draft regulation released for comments on 30 December 2011. Draft regulation to be published in the first half of 2012. Public consultation on draft ended in February 2012. Final rule is expected to be published in mid-2012.
China Hong Kong
India Korea Singapore

Source: BIS
Figure 29: Summary table of sector views on non-Japan Asia banks

Earnings Australia Given the subdued outlook for credit growth and potential pressure on margins from higher wholesale funding costs, we expect banks to focus on containing (if not reducing) operating expenses. Credit costs could also increase as economic conditions in Australia soften. Earnings expected to be lacklustre due to moderation in loan growth and uptick in credit costs. Margin pressure may be partly alleviated by upward repricing of loans. Liquidity/Funding As we expected, the Australian banks have been active issuers of covered bonds. Relatively subdued credit growth coupled with healthy deposit growth has resulted in further improvement in the banking systems loan-to-deposit ratio (c.115% at end February 2012). Slowdown in loan growth should help ease the tight liquidity situation. Banks HKD loan-to-deposit ratios should therefore moderate although they are still likely to remain at elevated levels. Liquidity conditions to remain tight. We expect benchmark issuers such as SBI and ICICI to tap the USD bond market when spreads tighten. Capital APRA has accelerated the deadline for meeting the minimum 7% CET1 CAR including the capital conservation buffer to 1 January 2016 (from January 2019 under Basel III). But we still expect the banks to be able to meet these requirements comfortably. Asset quality We believe delinquencies will experience a slight pickup as a result of the subdued economic environment. Valuation We have Underweight ratings on the big four Australian banks. This reflects the tight valuations of their senior bonds relative to their benchmarks and our expectations that the weakening in the Australian economy from a China slowdown may eventually weigh on spreads of the banks. Market Weight Hong Kong banks. Following the underperformance last year, we believe the bonds have priced in some level of concerns regarding the China slowdown and expected weakening in credit metrics. We remain cautious on the fundamentals of the Indian banks and see potential for the bonds to give up some of their gains following the sharp outperformance to date. That said, the bonds still offer sizeable carry and we therefore believe a Market Weight rating on the sector is justified.
Hong Kong
Capital positions expected to remain stable. We expect banks to be conscious of the need to conserve capital to meet Basel III guidelines.
Gross impaired loans are likely to increase slightly as economic growth in China and Hong Kong moderates.
India
Earnings to remain pressured by credit costs. Depending on the timing of the implementation of the RBIs proposed dynamic provisioning guidelines, banks with low coverage ratios could see greater pressure on their bottom lines. The decline in demand for loans due to high interest rates and the uncertain regulatory environment will also weigh on earnings.
Capital injections from the Indian government have boosted the capital positions of state-owned banks. However, we expect banks capital positions to weaken again due to asset quality declines, weaker earnings and double-digit loan growth.
We expect asset quality to continue to deteriorate as high interest rates and slowing economic growth pressure borrowers repayment abilities, although RBI easing should reduce pressure on this front, albeit with a lag. Gross NPLs and restructured loans, however, could continue to trend higher due to idiosyncratic stresses in various parts of loan portfolios (eg, power and telecom).
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Figure 29: Summary table of sector views on non-Japan Asia banks, contd
Earnings Korea We look for preprovision profit to be stable. In 2012, we see limited scope for one-off gains from stake sales. Further regulatory pressure to clean up balance sheets could add to credit costs. Liquidity/Funding We believe banks have substantially built up their USD liquidity buffers over the past 3-6 months. Therefore, given the view that tail risks in Europe have decreased significantly, we expect the pace of senior issuance to slow. Banks are likely to increase their efforts to build their USD deposit base and could therefore seek acquisitions of small overseas banks. Capital Korean banks have bolstered their capital positions over the past two years. We expect this to continue, especially given the nudges in this area from regulators. Asset quality Valuation
We expect Korean Overweight Korean banks asset quality to banks sector. remain broadly stable. In our view, balance sheet cleanups conducted over the past couple of years have left banks in relatively good shape. Steady economic conditions should also be supportive of asset quality. That said, we do not rule out regulatoryinduced spikes in NPLs and acknowledge that high consumer indebtedness poses downside risks. NPLs are likely to creep up in 2012 as a result of subdued global economic growth. Following the rally in the Malaysian banks senior bonds, we think the banks Tier 1s are attractive, and we have Overweight ratings on AmBank and CIMB Bank.
Malaysia
Earnings growth to ease due to slower loan growth and continued intense competition. Over the medium term, Malaysian banks will likely have to consolidate or look to overseas expansion to boost earnings growth. Earnings to moderate as loan growth slows and credit costs register an uptick. Over the medium term, we expect the banks to redouble their efforts to grow their overseas business to boost earnings. DBSs recent plans to acquire Danamon further reinforce this view. 1Q12 earnings should rebound q/q as credit costs should decline following the preemptive provisioning done in the previous quarter. Healthy loan growth due to the reconstruction efforts should also boost earnings.
We expect Malaysian banks to opportunistically tap the USD senior bond market.
Banks capital positions likely to remain stable.
Singapore
Our expectations of senior bond issuance from the Singaporean banks have materialised. We expect the banks to further diversify their wholesale funding sources with covered bond issuance once formal guidelines are in place.
Capital positions to remain solid although the strong loan growth over the past year has resulted in a decline in capital ratios. Singaporean banks will be able to meet the MAS revised capital adequacy guidelines with organic capital generation, in our view.
We expect NPLs to register a slight increase as a result of the economic slowdown in Singapore.
Market Weight on Singaporean banks. We prefer moving down their capital structure to pick up spread.
Thailand
Capital positions to Liquidity is tight as reflected in the elevated remain stable. system loan-to-deposit ratio of c.106%. We expect tightened guidelines on the issuance of bills of exchange to increase competition for deposits.
Gross NPLs expected to increase due to the impact of recent flooding. However, economic NPLs are likely to be higher than reported NPLs due to regulatory forbearance.
Upside on BBLTB bonds looks limited given tight spreads and potential political risk.
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AmBank (M) Bhd (AmBank) Rating Overweight Rationale
Lyris Koh
AmBank (Baa2 Stb/BBB+ Stb/BBB Stb) is a wholly-owned subsidiary of AMMB Holdings Bhd (AHB), which in turn is c.12.5% owned by the Employees Provident Fund (EPF) and 23.8% owned by ANZ Bank. Since its strategic partnership with ANZ began in mid-2007, AmBanks fundamentals have improved, with both its asset quality and funding profile strengthening. That said, the banks overall credit profile remains slightly weaker than its peers, in our view. Also, AmBanks plans to rebalance its loan portfolio towards variable-rate loans and increase the proportion of corporate loans should be positive for its credit profile, but we expect it to take time for the benefits of this strategy to be seen. Partnership with ANZ: There was speculation early last year that ANZ would increase its stake in AHB after Malaysian Prime Minister Najib Razak said he would consider allowing ANZ to raise its stake in AHB to 49% if the central bank approved. We would view such a deal as positive for AmBanks credit profile, as the likelihood of support from higherrated ANZ would rise if its stake in AHB increased. We note that Malaysias Financial Sector Blueprint 2011-2020 contains a recommendation to accord more flexible foreign equity participation in financial institutions. Earnings: 3QFY12 (end Dec 2011) results were uneventful. Earnings were weaker q/q but this was not a surprise to the market given that AHB had earlier guided for a weaker 2HFY12. Net interest income was stable q/q as relatively weak loan growth was balanced against an improvement in NIM. We believe the lacklustre loan growth over the quarter is a positive reflection of the banks strategy of focusing on risk-adjusted returns and its decision not to compete aggressively in segments where it views the pricing as uneconomic. We expect Bank Negara Malaysias tightened guidelines with respect to the calculation of debt service ratios for loan approvals to further weigh on AmBanks loan growth this year. Funding: Due to its finance company background, AmBanks funding profile is slightly weaker than its peers, with a greater reliance on wholesale funding. We view the trends in AmBanks funding profile as slightly mixed over 3QFY12. Although AmBank improved its low-cost deposit ratio (c.14.3%), its gross loan-to-deposit ratio (LDR) increased to c.100% as total deposits declined q/q. We would view negatively a further increase in the banks gross LDR from current levels. Asset quality: After the surprise jump in new NPLs in 2Q, AmBanks new NPL formation declined sharply over the previous quarter. The banks gross NPLs therefore fell c.2% q/q and its gross NPL ratio dropped c.9bp to c.3%. AmBanks coverage ratio also increased by c.7pp to c.94% at end-2011. Capital: AmBanks capital ratios remained healthy, with an estimated core T1 CAR of c.8% at end 2011. Valuations: We raise our rating on AmBank to Overweight from Market Weight. We view the carry on the banks Tier 1 bonds as attractive. Following the rally in the Malaysian banks senior bonds, the back-end coupon is also wider than levels at which AmBank could issue a 5y senior bond.
20 April 2012
74
Australia and New Zealand Banking Corp (ANZ) Rating Underweight Rationale
Krishna Hegde
ANZ (Aa2/AA-/AA- all Stb) continues to execute on its super-regional strategy it plans to source 25-30% of group profit from APEA (Asia-Pacific/Europe/Americas) by 2017 and recently received approval to offer local-currency products and services to Chinese customers. We believe ANZ is particularly well placed to win market share from the deleveraging European banks in areas such as trade finance. The Australia economy continues to weaken (the terms of trade have peaked), but fears of a hard landing in China having a knock-on impact on Australia (from lower commodity prices) have eased, with China reporting better-than-expected March activity data, suggesting that the governments stance of policy easing has started taking effect. However, tight valuations limit the scope for outperformance of ANZs senior bonds in the near term. As such, we retain our Underweight rating on ANZ. Asset quality: Total impaired assets declined AUD65mn over 1Q FY12, to AUD5,516mn, reflecting continued asset quality improvement. Arrears declined 3.6%, driven by a decline in mortgage arrears, which were down 7.1%. However, management stated that that stress remains in the SME segment. Its collective provision overlay was reduced AUD70mn q/q, to AUD440mn, owing to the resolution of a securities lending exposure, exchange rate movements and releases from flood and earthquake allowances. Collective provisions as a percentage of credit-risk-weighted-assets remain at a relatively healthy level despite declining 5bp q/q to 1.23%. Funding and liquidity: Along with its peers, ANZ continues to benefit from access to diversified funding sources. Deposit growth (+3.6% q/q) outstripped loan growth (+2.1% q/q) during 1Q FY12, perhaps more due to general risk aversion than anything else. That said, management also took steps to lengthen the maturity profile of deposits. The bank has also been successful in tapping the recently opened covered bond market as a funding source, issuing c.AUD6.6bn of covered bonds (in USD, EUR, NOK, CHF and AUD) since legislation took effect. Given that ANZ targets an estimated 25% of its total AUD18-20bn funding will be via covered bonds (with the remainder by senior unsecured bonds), we believe ANZ has more or less completed its covered bond issuance for this year. Earnings: ANZ reported 1Q FY12 cash earnings of AUD1.48bn, an increase of 4.6% q/q. This was driven mainly by income from Global Markets, which normalised to c.AUD400mn after volatile market conditions caused it to fall sharply in 4Q FY11. Sales income continued to grow (driven primarily by FX sales), while trading income rebounded from almost nothing in 4Q FY11. ANZs group margins, while dipping 3bp, to 2.42%, actually outperformed those of its big four peers, who saw margins decline by 9-10bp. Capital position: With a Tier 1 CAR of 11.03% as of 1Q FY12 (+9bp q/q), ANZ remains the best capitalised among the big four banks. On a harmonised Basel III basis, the bank estimates that its common equity ratio would have been c.9.4%. We believe ANZs preference to hold more capital relative to its peers stems from its super-regional expansion strategy. However, capital levels could drop assuming management follows through with its stated intention to acquire a lender in Hong Kong, although we do not believe it will be a major cause for concern. Valuations: ANZs senior bonds are tight Senior bonds of the big four banks with tenors of 4-7 years traded at an average OAS of 140bp as of 18 April 2012, roughly 136-137bp inside the c.277bp and c.276bp average for US banks senior bonds and Asia ex-Japan banks senior bonds respectively, for similar tenors. The carry is not attractive, and headwinds from Australias slowing economy/declining home prices, lead us to expect underperformance versus the benchmark. We retain our Underweight rating on ANZ.
20 April 2012
75
Axis Bank (Axis) Rating Market Weight Rationale
Lyris Koh
Axis Bank (Baa2 Stb/BBB- Stb/BBB- Stb) is the third-largest private-sector bank in India. However, the government has a large indirect stake in the bank, via state-owned UTI Asset Management (c.23.5%) and Life Insurance Corporation of India (c.9.8%). The bank has grown rapidly: its assets have increased at a CAGR of c.31% over the past four years. The banks nonconsolidated assets totalled c.USD52bn at end-December 2011. Axis has a leading market position in debt syndication and underwriting, and has obtained in-principle approval from the Reserve Bank of India to acquire the investment banking and equities business of Enam Securities. The bank recently said it intends to grow the proportion of its retail loans to c.30% from 21%. Earnings: Overall, Axiss profitability metrics are healthy (9MFY 12 ROE: c.20%) and supported by healthy revenue growth. Its 3QFY12 fee income increased c.9% q/q, driven by the large corporate segment. Revenues were also supported by healthy net interest income growth, as loans expanded c.6% q/q (c.20% y/y). Its NIM was broadly stable at c.3.75% in 3QFY12. However, we note that 3QFY12 revenues were boosted by volatile trading income. Credit costs were elevated and accounted for about c.19% of 3QFY12 pre-provision profit. Although we expect the generally positive trends in profitability to have continued into 4QFY12, earnings momentum is likely to have slowed slightly. In particular, we believe Axiss NIM is likely to moderate given the rise in costs of CDs during the quarter. Funding: Axis has a generally sound funding profile, with a loan-to-deposit ratio of about c.72% at end-December 2011. At about 42%, its low-cost deposit ratio is also among the highest of the Indian banks under our coverage. However, on a slightly more negative note, the bank has a higher depositor concentration relative to peers. Asset Quality: Axiss gross NPL ratio of c.1.3% is relatively healthy, especially in comparison with state-owned banks. That said, in absolute terms, new NPL formation in 3QFY12 increased to c.INR5.4bn from c.INR3.3bn a year earlier, contributing to a c.29% y/y increase in NPLs. Although the volume of loans restructured in 3QFY12 appears to have declined sequentially, we note that most of loans restructured in the previous quarter were microfinance loans, which implies that corporate loan restructuring has actually increased. Given the ongoing challenges in the operating environment and above-average growth over the past few years, we expect Axiss asset quality metrics to continue to weaken over the coming quarters. Moreover, the banks relatively sizeable exposure to the power sector could fuel NPLs over the medium term given the problems facing that sector. At end-December 2011, lending to the power sector accounted for c.10% of the banks total loans. Capital: Although Axiss T1 CAR improved c.25bp q/q to c.9.6% at end-2011, it has declined about 61bp on a y/y basis. Given the turn in the credit cycle and the banks extremely robust growth over the past few years, we would be more comfortable with Axiss credit profile if it bolstered its capital position. Valuations: We raise our rating on Axis Bank to Market Weight on valuation grounds. While we expect the operating environment to stay challenging and fundamentals to remain pressured, the relatively large carry differential between Axiss bonds and the EM Asia HG Credit Index warrants a Market Weight rating, in our view.
Bangkok Bank (BBL) Rating Underweight Rationale
Lyris Koh
BBL (Baa1 Stb/BBB+ Stb/BBB+ Stb) is the largest bank in Thailand, with total assets of THB2107bn (USD68bn) and c.20% of system-wide loans at end-December 2011. BBL also has the largest international presence among Thai banks, with foreign loans accounting for 17% of total loans. The bank operates in Malaysia and China via its wholly-owned subsidiaries Bangkok Bank Berhad and Bangkok Bank (China). Earnings: BBL reported a c.22% q/q decline in its 4Q11 net profit. Pre-provision profit declined c.19% q/q as operating income decreased and expenses increased. Despite the healthy growth in loans (c.5% q/q), net interest income was stable as BBLs net interest margin declined c.7bp q/q to c.2.8%. The bank also reported a sharp jump in its credit costs from c.THB1.7bn a quarter earlier to c.THB7bn as it prudently boosted its provisions. Funding: BBLs group gross loan-to-deposit ratio (LDR) increased c.1.3pp q/q to c.93% as its loan growth outpaced deposit growth. While its LDR is relatively elevated, it is lower than the system LDR of c.103%. Indeed, its THB LDR is also more comfortable at c.79%. Asset quality: BBLs asset quality was relatively stable q/q, with its gross NPLs increasing by a marginal c.1.3% q/q. At end 2011, the banks gross NPL ratio was c.2.7%. Due to the lagged impact of the floods on NPLs, we think NPLs may creep up over coming quarters. We therefore view positively BBLs decision to boost its provisions the banks coverage ratio consequently increased from c.184% a quarter earlier to c.199%. Capital: BBLs T1 CAR was a healthy c.13.2% at end 2011 and we expect it to be able to comfortably meet the capital requirements under Basel III. Valuations: We retain our Underweight rating on BBL. At current spread levels, we think risks are biased to the downside given the potential for some weakening in asset quality and lower NIMs. Political noise could also drive spreads wider, in our view.
20 April 2012
76
Bank of Baroda (BOB) Rating Market Weight Rationale
Lyris Koh
Bank of Baroda (Baa2 Stb/NR/BBB- Stb) was c.57% owned by the Indian government and had total non-consolidated assets of c.USD80bn at end-December 2011. We have long viewed BOBs fundamentals more positively than the other Indian banks, given its slightly better credit metrics and steadier performance. However, the bank is not immune to macro headwinds, and its recent results have shown weak trends. We are also a bit more cautious about the banks strategy of growing faster than the industry given the challenging operating environment BOB reported loan growth of c.26% y/y versus the system-level growth of c.16% at end 2011. In addition, management changes are in store in 2012, as CEO M.D. Mallya will be retiring. Earnings: We view the quality of 3QFY12 earnings as weak. Although BOB reported a c.11% q/q increase in its net profit, this was largely due to a one-off INR3bn gain from the sale of liquid mutual funds. Core earnings were stable q/q, with robust loan growth (c.9%) balanced against a weaker NIM (c.2.99%). Notably, the decline in group NIM was driven by a c.16bp fall in domestic NIM. BOBs overseas NIM improved about c.22bp q/q to c.1.64%. Credit costs spiked during the quarter 3QFY12 annualised credit costs were c.96bp versus c.58bp a quarter earlier. We see little catalyst for improved performance in BOBs 4QFY12 results and believe credit costs could continue to surprise to the upside. Funding: BOB has a relatively healthy funding profile, with a gross loan-to-deposit ratio of c.75%. Notably, the bank has sufficient overseas deposits to fund its overseas loans, reducing the need for BOB to tap the wholesale markets relative to its peers. Overseas deposits accounted for c.27% of BOBs total deposits at end 2011. On a domestic basis, BOBs low-cost deposit ratio is also relatively sound at c.34%. Asset quality: Although BOBs asset quality has generally been more resilient than its peers, it is clearly on a declining trend. Gross NPLs increased c.14% q/q and new NPL formation spiked c.64% q/q, increasing the gross NPL ratio to c.1.48%. The bank attributed the increase in NPLs to aviation and wholesale lending. Restructuring was also elevated during the quarter at c.INR21bn (INR6.6bn in 2QFY12), mostly due to the telecom and infrastructure sectors. We do not expect any respite for BOB on the asset quality front over the coming quarters. We note that BOBs coverage ratio has also been declining over the past year and was c.66% at end 3QFY12. Depending on the timing of RBIs introduction of its proposed dynamic provisioning scheme, BOBs credit costs are likely to increase further. In its dynamic provisioning discussion paper, the RBI said that specific provisions at the time of implementation of the programme should be at least 70% of NPLs. Capital: Tier 1 CAR improved c.111bp q/q to c.10.9%. The bank attributed the improvement in its capital ratios to: 1) more efficient utilisation of capital via rating exercises for its exposures; and 2) reduction in mutual funds that carry higher risk weights. BOBs capital ratios should improve further in 4QFY12 due to the INR24bn equity injection from the government and LIC. Valuations: We maintain our Market Weight rating on BOB, given the large difference in carry between its bonds and its benchmark. In particular, we prefer the BOBIN 15s given the potential for positive technicals as the bond rolls into the 3y bucket and attracts a broader set of investors.
Bank of China (BOC) Rating Not Rated Rationale
Krishna Hegde
BOC (A1 Stb/A Stb/A Stb) is the fourth-largest commercial bank in China and is c.67.63% owned by the Chinese government via Central Huijin Investment Ltd. It had total assets of CNY11.8trn (USD1.88trn) at end-Dec 2011. As a legacy of its foreign exchange bank roots, BOC has the widest overseas presence among Chinese commercial banks. As at end-Dec 2011, foreign-currency-denominated loans accounted for c.24.7% of its total loan portfolio at the group level. Earnings: In line with our economists forecast of a soft landing in China (2012 GDP growth of 8.1%), we expect BOCs earnings growth to moderate. Credit costs will rise, in our view, although the extent of the increase will likely depend on potential regulatory forbearance. Funding: BOC has a weaker domestic deposit franchise than its peers. Its loan-to-deposit ratio at the group level at endDec 2011 was c68.8% (versus 71.7% at end-Dec 2010). Its foreign-currency loan-to-deposit ratio improved as foreigncurrency deposit growth, at 14.05%, outstripped foreign-currency loan growth, at 9.04%. With less pressure on the foreign-currency LDR, BOCs need for USD bond issuance has decreased somewhat. That said, we expect the stable funding provided by bonds to be attractive, and we look for BOC to issue opportunistically. Asset quality: BOCs NPL ratio declined 10bp y/y, to 1.0%, though the proportion special-mention loans increased to 3.03% (+41bp y/y). The banks coverage ratio improved to c.221% at end-2011. The banks total exposure to European debt securities was CNY78bn (c.0.65% of total assets), with c.96% of this related to UK, Germany, Netherlands, France and Switzerland. The bank also disclosed that it owned no Portuguese, Irish, Greek, Italian or Spanish debt at end-Dec 11. Capital: BOCs Core CAR fell c.2bp q/q, to c.10.07%, at end-Dec 2011. The payout ratio was reduced to ~35% in 2011 (from 39% in 2010 and 44% and 2009). With the inclusion of BOC in the list of global systemically important financial institutions (SIFI), BOCs minimum capital requirements under Basel III will likely include a SIFI buffer of 1.0-2.5% of riskweighted assets.
20 April 2012
77
Bank of China (Hong Kong) (BOCHK) Rating Market Weight Rationale
Lyris Koh
BOCHK (Aa3 Stb/A+ Stb/A Stb) is the second-largest banking group in Hong Kong (total assets of USD217bn) and one of the three note-issuing banks. It is also the sole RMB clearing bank in the territory. BOCHK is wholly owned by BOC Hong Kong (Holdings) Limited, which is in turn c.66% owned by Bank of China. We believe the likelihood of support for BOCHK from the Hong Kong government and Bank of China is very high given its systemic and strategic importance. Earnings: Net interest income growth was the main driver of BOCHKs revenue growth last year. 2011 y/y loan growth was relatively healthy at c.14% although there was a significant slowdown in 2H. This was driven by a decline in Chinarelated loans as BOCHK consciously reduced its China portfolio to meet the statutory 75% loan-to-deposit (LDR) requirement. Although BOC HK Holdings net interest margin (adjusted for its clearing bank function) declined c.10bp y/y, there was a c.2bp increase h/h to c.1.5% due to corporate loan repricing and increased deployment of RMB funds. The increased usage of RMB funds can be seen by the rise in BOCHKs RMB LDR (including other accounts) to c.22% from c.13% six months earlier. BOCHK reported a rise in its credit costs due to increased collective provisions. In our view, the credit cycle for Hong Kong banks has peaked and we expect credit costs to increase gradually this year. Funding: BOCHKs gross LDR increased slightly by about c.1.2pp y/y to c.60.8% at end 2011. Since end June 2011, however, BOCHKs overall LDR has been relatively stable due to the slowdown in its loan growth. However, reflecting the continued tight HKD liquidity, the banks HKD LDR (including other accounts) increased in 2H11 to c.79% as HKD deposits declined. The banks low-cost deposit ratio also continued to decline and was c.51% at end 2011 versus c.58% a year earlier. Asset quality: Contrary to the trends seen at some Hong Kong banks in 2H11, BOCHKs asset quality trends were relatively benign with its gross classified/impaired loan ratio remaining stable at c.0.1%. However, there was a pick-up in special mention loans from HKD1.9bn a year earlier to c.HKD5.2bn which management attributed to a tightening in its assessment criteria. We expect BOCHKs impaired loans to rise gradually, in line with our expectation of a global economic slowdown and a soft landing in China. Seasoning of the banks loan portfolio following its robust growth in the past couple of years could also add to impaired loans. Capital: BOCHKs capital position remained healthy with a T1 CAR of c.12.5% at end 2011. We see upside potential for BOCHKs capital ratios as it eventually migrates its remaining risk-weighted assets to FIRB and as the capital floor adjustment is removed over the next few years. Valuations: We raise our rating on BOCHK to Market Weight from Underweight. Our Market Weight rating is underpinned by our view that, following its underperformance last year, BOCHKs valuations have priced in some level of concerns about a China slowdown and the consequent potential weakening in the banks fundamentals. We prefer the BCHINA 20s to the BCHINA 16s given the slightly rich valuations of the latter.
Bank of East Asia (BEA) Rating Market Weight Rationale
Lyris Koh
BEA (A2 Stb/A Stb/NR) is the largest independent Hong Kong bank, with total assets of HKD611bn (USD79bn). The banks main shareholders are the Li family, Criteria Caixa and Guoco. Earnings: BEAs 2H11 trading losses and MTM losses from instruments designated at fair value through the P&L offset the benefits of its improved net interest income. We estimate that BEAs NIM improved c.4bp h/h to c.1.77%. Combined with higher operating expenses, BEAs 2H11 pre-provision profit declined c.33% h/h. Credit costs ticked up h/h but were a low annualised c.7bp. BEAs China operations are increasingly important as a driver of earnings growth profit before tax from its China operations increased c.71% y/y and contributed c.42% of the banks 2011 profit before tax. Funding: BEAs group loan-to-deposit ratio (LDR) declined slightly y/y to c.69% as deposit growth of c.11% y/y outpaced loan growth of c.8% y/y. We believe this is due to its efforts to maintain its China LDR below the statutory 75% requirement. In our view, HKD liquidity is likely to remain tight although we expect a slight respite as demand for loans slows as economic growth moderates. Given the rally in spreads since the start of year and the focus on stable sources of funding under Basel III, we believe BEA may be a potential senior bond issuer. Asset quality: BEAs gross impaired loan ratio remained low at 0.46% at end 2011. While we are hesitant to extrapolate from trends over a single period, we note that BEAs impaired loans in Hong Kong increased c.63% h/h. Given the subdued global economic outlook, we think BEAs NPLs may rise over the year, albeit from a low base. With c.42% of its loans related to mainland China, BEA is also vulnerable to a sharper-than-expected slowdown in Chinas economy. Capital: We remain concerned about BEAs capital ratios. Although its T1 CAR was stable h/h at c.9.4% due to capital management efforts, BEAs capital ratios are still weaker than peers in Hong Kong. Moreover, unlike most Hong Kong banks we cover, BEAs Tier 1 capital does not consist solely of common equity. Valuations: We raise our rating on BEA to Market Weight from Underweight. Our Market Weight rating is underpinned by our view that following its underperformance last year, BEAs valuations have priced in some level of concern about a China slowdown and the consequent potential weakening in the banks fundamentals.
20 April 2012
78
Bank of India (BOI) Rating Market Weight Rationale
Lyris Koh
Bank of India (Baa3 Stb/BBB- Stb/NR) is c.66% owned by the government and had total non-consolidated assets of c.USD71bn at end-December 2011. We have long been concerned about BOIs asset quality, and trends seen over FY12 have only reinforced our caution on the issuer. The ratings downgrade by Moodys in March was therefore not a complete surprise and the agency cited the accelerated pace of deterioration in BOIs asset quality, its stressed core capital levels and therefore the increasing pressures on its profitability as reasons for the downgrade. Earnings: Although BOIs 3QFY12 net profit exceeded consensus estimates, we continue to believe the banks earnings will remain pressured over the coming quarters. Notably, BOIs 3Q non-interest income was supported by recoveries from its written-off accounts a volatile line item. Furthermore, the bank did not take advantage of its improved pre-provision profit levels to set aside higher provisions. BOIs coverage ratio (excluding technical write-offs) therefore remained at a low c.36% at end 2011. We note that BOIs credit costs may eventually climb if the RBI implements its proposed dynamic provisioning guidelines. Funding: BOIs funding profile is typical of most Indian banks, with a gross loan-to-deposit ratio of c.76%. At c.32%, its low-cost deposit ratio is, however, slightly weaker than banks such as SBI and Axis. Media reports have said that BOI may raise funds offshore this year after the European situation stabilises. Asset quality: While gross NPLs declined c.2% q/q, BOI's restructured loans increased c.24% q/q. Restructured loans as a percentage of total loans therefore increased to a hefty c.5.9%. The telecom, engineering, entertainment and paper sectors were key contributors to the rise in restructured loans. Slippages from BOI's restructured loans also ticked up over 3QFY12 the aviation sector was the main contributor. We note that reported new NPL formation of INR5.2bn over 3QFY12 may also understate the extent of slippage, as the figure is reported net of some recoveries. Capital: BOIs Tier 1 CAR declined c.32bp q/q to c.8.4% at end 2011 as risk-weighted assets expanded 8% q/q. According to the bank, the increase in risk weights is due to its decision to reduce its trade finance exposure (with lower risk weights and correspondingly lower yields) and increase its exposure to higher yielding segments. As with most other Indian banks, BOIs capital ratios are expected to benefit from a c.INR21bn preferential issue of shares to the government and LIC. Valuations: We remain cautious on BOIs fundamentals and expect asset quality will remain under pressure. However, at current levels, we believe the BOIIN 15s are attractive given their 3y tenor and therefore we raise our rating on BOI to Market Weight from Underweight.
Canara Bank (CBK) Rating Market Weight Rationale
Lyris Koh
Canara Bank (Baa2 Stb/NR/BBB- Stb) is c.68% owned by the government and had total non-consolidated assets of c.INR71bn at end 2011. Management changes are in store as Canaras MD will be retiring this year. Earnings: Although total provisions declined q/q, we believe this is partly due to the bank's decision not to improve its coverage ratio. Indeed, we are disappointed by the bank's decision to maintain its coverage ratio excluding technical write-offs at the low level of c.18%. Pre-provision profit declined c.2% q/q as revenues came under some pressure. The bank's loan growth was muted at c.1% q/q and its NIM declined c.12bp q/q to 2.52%. Funding: Although Canaras gross loan-to-deposit ratio has remained broadly stable at about 70%, its low-cost deposit ratio has seen a significant c.5.5pp y/y decline to c.25%. This is lower than the c.34% at Bank of Baroda and c.32% at Bank of India. Canaras cost of deposits has therefore increased from c.5.7% a year earlier to c.7.3%. As Canara has fewer international assets than banks such as BOB and BOI, we believe its USD funding needs are lower. Asset quality: We believe the headline c.5% q/q increase in Canaras gross NPLs in 3QFY12 understates the true extent of the underlying asset quality issues facing the bank. Stripping out the impact of the banks migration to systembased recognition of NPLs in 2QFY12, we estimate that new NPLs increased c.40% q/q. Loans restructured during the quarter surged to INR15.6bn from INR212mn a quarter earlier. We believe most of the loans restructured in Q3 were to the telecom sector. While Canaras gross NPL ratio remains lower than most of its peers at c.1.8%, we are not convinced that its asset quality is better than average given that infrastructure loans accounted for a chunky 18% of the banks total loans at end-3QFY12. Capital: Canaras T1 CAR of c.10.7% at end 2011 partly alleviates our concerns about its asset quality, especially given the banks low coverage ratio. Valuations: Although we view Canaras metrics as weaker than that of its peers, such as BOB, spreads on its bonds tend to move in line with the large state-owned banks. Given the sizeable carry on Canaras bonds relative to its benchmark, we raise our rating on Canara to Market Weight from Underweight.
20 April 2012
79
CIMB Bank (CIMBB) Rating Overweight Rationale
Lyris Koh
CIMBB (A3 Stb/A- Stb/BBB+ Stb) is wholly owned by CIMB Group Holdings (CIMBGH), which is in turn c.30% owned by Khazanah and c.12% owned by Malaysias Employees Provident Fund. Given its indirect government ownership and systemic importance as the key operating subsidiary of the second-largest banking group in Malaysia, we believe there is a very high likelihood of government support, if needed. M&A: We believe CIMBGHs appetite for growth via inorganic expansion is the key issue to watch in 2012. CIMBGH recently announced its acquisition of some of RBSs Asia-Pacific cash equities and associated investment banking businesses for a total of MYR849.4mn. The group is also in talks to buy a stake in Philippines Bank of Commerce. Although these purchases would not directly affect CIMBBs credit metrics, we think an overly aggressive acquisition strategy by its parent could result in an increase in upstreamed dividends from CIMBB (given that CIMBB contributes 50% of the groups profit before tax). Earnings: CIMBBs 4Q11 results were largely in line with expectations. The main surprise was the doubling in CIMBBs 4Q11 credit costs. However, the spike was due to a change in the banks provision methodology rather than deterioration in asset quality. Overall, we expect CIMBBs earnings momentum to slow in 2012, as household loan growth moderates and credit costs tick up. Funding: CIMBBs funding profile is stable, with a gross loan-to-deposit ratio of c.81% at end-4Q11. The banks consumer banking strategy has also shown signs of progress, with retail deposits increasing to c.36% of total deposits from c.27% at end-2008. We note that CIMBB has set up a USD1bn MTN programme and could be a potential USD-bond issuer. Asset quality: CIMBBs impaired loans declined c.5% q/q, which led to a c.34bp decline in its gross impaired loan ratio, to c.3.6%. Despite the improvement, we remain cautious on the outlook for asset quality and think impaired loans may have reached a cyclical low. Capital: CIMBBs non-consolidated capital ratios remained robust at end-2011. Although the banks core T1 CAR declined slightly, to c.11.9%, it is still higher than the minimum 7% level required under Basel III. Valuations: We raise our rating on CIMBB to Overweight from Market Weight. The carry on the banks Tier 1 bonds is attractive and following the rally in the Malaysian banks senior bonds, the back-end coupon is wider than levels at which CIMBB could issue a 5y senior bond In addition, although CIMBBs credit metrics may weaken slightly, in line with subdued global economic conditions, we expect them to remain relatively healthy.
CITIC Bank International (CINDBK) Rating Underweight Rationale
Lyris Koh
CINDBK (Baa2 Stb/NR/BBB Stb) is an unlisted, medium-sized Hong Kong Bank, wholly owned by CITIC International Financial Holdings (CIFH), which is in turn c.70% owned by China CITIC Bank and c.30% owned by Spains BBVA. CIFH was privatised in November 2008 to enable CINDBK to become CITICs exclusive vehicle to develop commercial banking business in Hong Kong and serve as an international commercial banking platform for new business expansion for CITIC in Asia. Parental support: In our view, there is an extremely high likelihood of parental support, which was demonstrated last year when CIFH agreed to assume CDS losses arising from CINDBKs Farmington exposure. Our expectation of parental support is also driven by the increasing integration of CINDBKs operations with its parent. According to CINDBK, There was a marked increase in financing to CNCBs [China CITIC Bank] corporate customers and their overseas subsidiaries. Earnings: After adjusting for the one-off gain due to the Lehman minibond writeback in 1H11, CINDBK generally displayed positive earnings trends in 2H11. Pre-provision profit improved h/h as revenue growth offset the increase in operating expenses. We estimate that CINDBKs NIM decreased slightly h/h to c.1.21%, likely due to rising funding costs from intense deposit competition. Impairment losses increased h/h as the bank took a HKD178mn impairment charge on one of its European bond holdings. Funding: CINDBKs gross loan-to-deposit ratio displayed a significant c.9pp h/h decline to c.74%. The decline was driven by both a stable loan portfolio over 2H11 as well as a c.13% h/h growth in deposits. Notably, loan growth over 2011 was driven by CINDBKs overseas loans, with its mainland China loans registering c.22% y/y growth and its Singapore loans rising from c.HKD607mn at end 2010 to c.HKD3.6bn. Reflecting CINDBKs increasing exposure to mainland China, Chinarelated loans accounted for c.26% of total loans at end 2011 compared with c.18% two years earlier. CINDBKs reliance on CDs continued to increase over 2H11, with CDs accounting for c.8% of total liabilities versus c.5.2% at end 2010. Asset quality: CINDBKs headline gross impaired loan ratio declined c.53bp h/h to c.0.75% at end 2011. However, we note that the decline in NPLs was driven by the banks overseas loan portfolio. Hong Kong and China related impaired loans crept up slightly over 2H11. CINDBKs coverage ratio improved from c.50% at end June 2011 to c.77%. The improvement was driven largely by the decline in impaired loans as total allowances decreased. Capital: Although CINDBKs T1 CAR was healthy at c.10.4% at end 2011, we note that it declined c.160bp h/h in 2H11. Given the banks rising exposure to China and the continued global macro headwinds, we would view negatively a further weakening in the banks capital position. CINDBK has USD500mn of Tier 2 bonds callable in 2012 and could seek to refinance these bonds. Valuation: We affirm our Underweight rating on CINDBK. Following its outperformance over the past month, we believe spreads on the CINDBK 20s are tight. The regulatory par call on the bonds also poses downside risk.
20 April 2012
80
Commonwealth Bank of Australia (CBA) Rating Underweight Rationale
Krishna Hegde
CBA (Aa2/AA-/AA- all Stb) remains our preferred pick among the big four Australian banks, due to its better fundamentals and conservative approach to provisioning. While the Australia economy continues to weaken (the terms of trade have peaked), but fears of a hard landing in China having a knock-on impact on Australia (from lower commodity prices) have eased, with China reporting better-than-expected March activity data, suggesting that the governments stance of policy easing has started taking effect. That said, with tight valuations, we see limited scope for CBAs bonds to outperform their benchmark and retain our Underweight rating. Asset quality: CBAs asset quality continued to improve in 1H FY12, with arrears and loan impairment expense decreasing. Specifically, 90+ day mortgage arrears decreased 14bp h/h, to 1.03%, and 30+ day arrears decreased 15bp h/h, to 1.93%. In addition, management stated that arrears for the 2008 and 2009 mortgage vintages were past their peak. Collective provisions as a percentage of credit-risk-weighted assets declined 8bp h/h, to 1.15% There was an increase in individually assessed provisions in the mortgage book, while the AUD970mn of management overlay was unchanged. We believe there is a potential for credit costs to tick up given the challenging economic environment, but CBAs operating earnings should be sufficient to cover this increase. Funding and liquidity: In line with its peers, deposit growth (+8% h/h) outstripped loan growth (+3% h/h) in 1H FY12, driven mainly by savings and other demand deposits (including CDs). Deposit funding now accounts for 62% of total funding, up 2pp y/y. CBA has also successfully tapped the recently opened covered bond funding market, issuing c.AUD9.1bn (in USD, EUR, NOK, CHF, GBP and AUD) since law took effect. That said, it has clearly been affected by rising funding costs AUD7bn of funding completed in January was done at an average of 200bp over swap costs. Management expects the tough funding conditions to persist. The bank also increased its liquid asset position by AUD32bn h/h, to AUD133bn, with management stating that it did not see a need to increase it further. Earnings: CBA reported cash earnings of AUD3,576mn for 1H FY12 (+2.2% h/h, +7.2% y/y), in line with Bloomberg consensus of AUD3,572mn. Expenses increased due to higher staff and occupancy costs, and one-off compliance costs, among other things. The group underlying NIM declined 6bp h/h, to 2.09%, hurt by increased deposit and wholesale funding costs (which subtracted 10bp) and increased holdings of liquid assets (which subtracted 4bp). Capital position: CBAs Tier 1 CAR declined 11bp h/h to 9.90%, as growth in risk-weighted assets (+5.7% h/h) outstripped Tier 1 capital generation (+4.5% h/h). RWAs grew as a result of increased corporate lending (higher risk weighting) relative to mortgage lending, greater demand for undrawn facilities from corporate clients, and holding extra liquid assets. CBA estimates its common equity ratio at c.9.3% on a harmonised Basel III basis. Valuations: We retain our Underweight rating on CBA. Despite sound fundamentals, the bank is exposed to a slowing Australian economy and a weakening housing market (with the potential for higher delinquencies). Coupled with tight valuations, we see limited potential for CBAs bonds to outperform benchmarks.
Dah Sing Bank (DSB) Rating Market Weight Rationale
Lyris Koh
Dah Sing Bank (A3 Stb/NR/BBB+ Stb) is wholly owned by Dah Sing Banking Group (DSBG), which in turn is c.74% owned by Dah Sing Financial. The ultimate shareholders of DSB include the Wong family and Bank of Tokyo Mitsubishi. DSB operates outside of Hong Kong through its wholly owned subsidiaries, Banco Comercial de Macau and Dah Sing Bank (China). It also has a 20% stake in Bank of Chongqing (BoCQ). Like other small Hong Kong banks (its assets were c.USD19bn at end-December 2011), the key challenge facing DSB is to improve profitability in the intensely competitive market. Earnings: The poor trends in DSBGs earnings continued into 2H11, with the bank reporting weaker results across most line items. Revenues declined c.7% h/h while operating expenses increased c.8% h/h. The banks cost-to-income ratio therefore jumped to c.66%. We estimate that DSBGs NIM declined c.22bp h/h to c.1.3%. The bank attributed its weaker NIM to increased funding costs and the drag from its holdings of liquid assets. Notably, profit contribution from BoCQ continued to increase and accounted for c.34% of DSBGs pre-tax profit versus c.24% six months earlier. We do not view the profit contribution from BoCQ as high-quality earnings given that they are equity accounted profits. Asset quality: After the surprise increase in impaired loans in 1H11, DSBGs impaired loans declined c.4% h/h in 2H11. Its gross impaired loan ratio consequently declined c.3bp h/h to 0.47%. That said, we remain cautious on the outlook for DSBGs asset quality. Overdue loans spiked c.82% h/h, with China-related loans accounting for c.87% of the increase. Capital: DSBGs capital ratios weakened over 2H11, with its T1 CAR declining c.40bp h/h to c.10.5%. Given the potential for further deterioration in DSBGs asset quality, we would view negatively further weakening in its capital position and hence loss absorption capacity. DSB refinanced its USD150mn T2 bond callable in August with a SGD225mn T2 issuance in February this year. Valuations: We raise our rating on Dah Sing to Market Weight from Underweight. In our view, current spread levels compensate for some risks related to the China slowdown as well as the structural challenges facing Dah Sing as a small bank in a competitive mature market.
20 April 2012
81
DBS Bank Ltd (DBS) Rating Market Weight Rationale
Lyris Koh
DBSs (Aa1 CW Neg/AA- Stb/AA- Stb) credit profile is strengthened by its systemic importance as the largest bank in Singapore and its indirect government ownership via Temasek Holdings. The bank had total assets of SGD341bn at end-2011. Danamon acquisition: Given DBSs ambitions to be a pan-Asian bank and its targeted revenue mix of 40:30:30 from Singapore, Greater China and South and Southeast Asia by 2015, we were not surprised by its proposed acquisition of Danamon. The deal further reinforces our view that the risk profile of DBS is gradually increasing as the bank expands into higher-risk emerging markets. In particular, Danamons strengths in microfinance and auto financing represent a different spectrum of risk from DBSs target segment of large corporate and commercial customers. According to DBS, South and South-East Asia accounted for c.27% of its pro forma 2011 revenues versus the actual c7%. In the near term, the balance sheet metrics of DBS should remain broadly intact as the proposed issuance of 439mn shares to Fullerton Financial Holdings should help cushion the impact on capital ratios from the goodwill incurred due to the transaction. Post the share issuance, Temaseks stake in DBS will rise from 29.5% to c.40.4%. Please refer to DBS Group Holdings, Ltd.: Acquiring Danamon for more details. Earnings: DBSs 4Q11 net profit declined c.4% q/q, largely due to weaker fee and trading income as well as higher operating expenses. Net interest income, however, recorded a healthy c.6% q/q growth on the back of robust 5% q/q loan expansion and stable net interest margin (c.1.7%). On a full-year basis, DBSs earnings trends were generally positive, with growth in NII and fee income. Although trading and investment income weakened in line with the difficult market conditions, it held up better than at its peers. Notably, customer income as a percentage of treasury income improved c.6pp to c.42%. DBSs efforts to grow its transaction banking franchise is also slowly bearing fruit, with the business contributing c.14% of 2011 revenues versus c.11% a year earlier. Overall, we expect the momentum in DBSs earnings to slow in 2012 as loan growth moderates from the c.28% recorded in 2011 and credit costs creep up. Funding: DBSs group-wide gross loan-to-deposit ratio (LDR) increased c.8pp y/y to c.88% at end 2011as loan growth outpaced deposit growth. While SGD liquidity remains robust (SGD LDR of c.64%), the banks USD liquidity has tightened. DBSs USD LDR increased significantly during 2011, reaching a peak of c.171% in 3Q11 before moderating to c.151% at year end. Given the tight USD liquidity, DBSs issuance of USD1bn of senior bonds was not a surprise we highlighted our expectation of opportunistic senior bond issuance from DBS in the Asia Credit Outlook, 6 January 2012. We expect DBS to further diversify its wholesale funding sources once the MAS finalises its covered bond guidelines over the coming months. Reuters has reported that DBS is considering issuing a covered bond and could be the first Singaporean bank to tap the market. Asset quality: DBS's gross NPLs rose in 4Q11 after declining over 9M11, largely due to a shipping exposure in Singapore. However, the bank's gross NPL ratio remained relatively low, at c.1.3%, at end-December 2011. Although NPLs from the bank's Greater China portfolio were relatively stable, we expect concerns about the portfolio's asset quality to persist given the strong growth over the past year. Indeed, Greater China (excluding Hong Kong) loans accounted for c.39% of the growth in loans over 2011. Capital: DBS's core T1 CAR improved c.30bp q/q but declined c.80bp y/y to c.11%. We note that DBS is the only Singaporean bank to maintain its scrip dividend scheme. DBS estimates that its pro forma T1 CAR after the Danamon acquisition (including the impact of the tender offer) will decline to c.12.1% (versus c.12.9% at end-2011). Its pro forma core T1 CAR assuming Basel III deductions are fully applied would be c.10.3%. Valuations: Our Market Weight rating on DBS reflects our view that its bond complex as a whole is likely to perform in line with its benchmark over the next six months. However, among its bonds, we prefer DBSs Tier 2 bonds. In particular, we believe the DBSSP 3.625% 22c17s offer value and expect technicals to be supportive, given that more than USD4bn of old-style T2 Asian bank bonds have call dates this year. We are more cautious on DBSs senior bonds given their relatively tight valuations and the potential for rating/outlook changes by Fitch and Moodys.
20 April 2012
82
Export-Import Bank of China (CHEXIM) Rating Market Weight Rationale
Krishna Hegde
CHEXIM (Aa3 Pos/AA- Stb/A+ Stb) is a quasi-sovereign Chinese policy bank tasked with supporting the nations international trade. It is wholly owned by the Chinese government via the Ministry of Finance (MoF). Government support: We believe CHEXIM enjoys a high probability of government support given its important policy role. Its close relationship is reflected in its sovereign-linked credit rating. The bank receives liquidity support from the Peoples Bank of China (PBoC) and compensation from the MoF for losses incurred in providing policy loans below its cost of funding. Furthermore, it has vice-ministerial status and reports directly to the State Council. Margins: Given that it is policy- rather than profit-driven, CHEXIMs NIM has historically been very low, largely because of the low yield on its loans and its relatively high funding cost via bond issuance. CHEXIMs 2011 annual report was unavailable at the time of this report. Liquidity: CHEXIM relies primarily on bond issuance for funding bonds accounted for c.66.8% of its total liabilities at end-2010. Given that almost all of its bonds are denominated in CNY (c.96%), we believe CHEXIM is unlikely to face funding issues. This is bolstered by the fact that it plays an important policy role, as noted above. Valuations: Our Market Weight rating is predicated on the fact that although CHEXIMs standalone credit profile is weak, it will continue to enjoy a high level of government support. Despite speculation about its possible commercialisation, we do not believe there will be a material change in the level of support provided to CHEXIM by the Chinese government.
Export-Import Bank of India (EXIM) Rating Overweight Rationale
Lyris Koh
EXIM (Baa3 Stb/BBB- Stb/BBB- Stb) is wholly owned by the Indian government and is tasked with promoting and financing Indias foreign trade. Government support: Government ownership cannot fall below 100%, as the Export-Import Bank of India Act requires the capital of EXIM to be wholly subscribed by the Indian government. Given its role as a key policy institution, we believe there is a clear likelihood of support from the government, if needed. We note that EXIMs credit ratings are linked to the sovereign. Government support for EXIM is demonstrated by regular capital infusions the government injected INR3bn into the bank in FY11 (ending March 2011). That said, we note that EXIMs Tier 1 CAR declined to c.15.1% at end-March 2011 from c.16.9% a year earlier. Standalone: Overall, EXIMs relatively healthy capital position and low operating costs are balanced against its reliance on wholesale funding and sensitivity to the economic cycle, given its exposure to the export sector. EXIMs loan portfolio is almost evenly split between the INR and foreign currencies, with foreign-currency loans accounting for 47% of the total portfolio at end-FY11. During FY11, EXIM raised long-term foreign-currency funding of about USD1.38bn from the offshore market. In particular, for the first time the bank sold bonds in the Swiss market, raising CHF175mn. It also raised USD150mn via a syndicated loan, mainly from Taiwanese banks. Since the start of 2012, EXIM has issued about USD125mn of 3y uridashi bonds in JPY, AUD and ZAR. Valuations: We raise our rating on EXIM to Overweight to reflect our view that the spreads on its bonds are wide for their 3y tenor. In addition, EXIM does not face the same pressures on asset quality from infrastructure exposure as the other state-owned commercial banks.
20 April 2012
83
Export-Import Bank of Korea (KEXIM) Rating Overweight Rationale
Krishna Hegde
KEXIM (A1 Pos/A Stb/A+ Pos) is a quasi-sovereign Korean policy bank tasked with providing export credit and guarantee programs for Korean enterprises conducting business overseas. It is effectively 100% owned by the government, and this relationship is reflected in its credit ratings, which are linked to those of the sovereign. Government support: We believe KEXIM enjoys an extremely high probability of government support given its policy role of facilitating trade. KEXIM has the explicit support of the Korean government under Article 37 of the KEXIM Act, which states that the government is legally mandated to cover any losses the bank may incur in excess of its capital reserves. Failure to support under the provisions of Article 37 is considered an event of default (EoD). Similarly, if the government no longer controls KEXIM directly or indirectly, it is also considered an EoD. Under an EoD, KEXIM would be required to repay outstanding bonds. Asset quality: KEXIMs 2011 results were unavailable at the time of publishing, but based on regulatory disclosures, we believe that KEXIMs gross NPL ratio declined c.6bp q/q, to c.0.65%, at end-2011. While the improvement is encouraging, we are hesitant to draw conclusions about KEXIMs underlying asset quality based solely on this data. In our view, rapid loan growth in the loan book over the past few years and a greater concentration on the stressed shipbuilding sector are likely to have taken a greater toll on KEXIMs loan portfolio than is implied by its NPL ratio. Indeed, the banks precautionary-and-below loan ratio was c.6.5% at end-Q11. Funding and liquidity: KEXIM is not a deposit-taking institution and relies solely on the wholesale market, in particular the foreign-currency wholesale market, to fund its operations. As such, the lender is highly vulnerable to dislocations in global financial markets. This weakness is mitigated to a large extent by its institutional importance to the Korean economy and the governments explicit support mechanisms, as noted above. As at end 2011, we estimate that foreign-currency bonds and borrowings accounted for c.78% of total liabilities. Following KEXIMs USD2.25bn bond issues in January, we believe the bank is largely done with its USD issuance for the year. However, we expect the bank will remain an active issuer in non-G3 currencies to diversify its sources of funding. For example, KEXIM raised BRL710mn in the onshore Brazilian market last month. Capital position: Korea Finance Corp injected KRW1trn into KEXIM in 2Q11, improving the banks Tier 1 CAR to c.10.83% at end-June 2011. However, KEXIMs capital ratios have since weakened and it reported a T1 CAR of c.9.3% at end-2011. Valuations: KEXIMs bonds have tightened through Q1, in line with the Korea complex. As a quasi-sovereign, spreads are likely to remain tightly coupled with other quasi-sovereigns and the Korea sovereign. We have a constructive view on Korea. Continued improvement in external financing conditions as result of measures taken by the banking sector has addressed a key concern, and we believe spreads can tighten further and outperform the benchmark. As a result, we maintain our Overweight rating.
Fubon Bank (Hong Kong) (FBHK) Rating Market Weight Rationale
Lyris Koh
FBHK (NR/ BBB+ Stb /NR) is a wholly owned subsidiary of Taiwan-based Fubon Financial Holding (FFH). FBHK was privatised by its parent in early 2011 and delisted from the Hong Kong Stock Exchange. In our view, FBHKs operating profitability is likely to remain challenged by its small size total assets of c.USD7.8bn at end-December 2011 given the intensely competitive Hong Kong market. Parental support: Despite its modest contribution to FFHs net profit (c.3% for 2011), we expect FFH to provide FBHK with a high level of support. FBHK is strategically important to FFH because it holds a c.20% stake in mainland-based Xiamen Bank. The growing importance of Xiamen Bank is reflected in its rising contribution to FBHKs pretax profit (2011: c.29% versus 2010: c.10%). Overall, we think the privatisation of FBHK underscores FFHs commitment to FBHK and believe that the main benefit of the privatisation will be the increased ease with which FFH will be able to provide capital to FBHK, given the absence of minority interests. Earnings: Only headline numbers were available at the time of publishing this report. Based on the available data, we believe FBHKs operating profits remained under pressure in 2H11. Both net interest income and fee income were weaker, declining c.3% h/h and c.10% h/h, respectively. We estimate that FBHKs already low net interest margin declined a further c.6bp h/h, to c.1.06%, due to intense competition for deposits. On a slightly more positive note, FBHK recorded a writeback in its credit costs, boosting its bottom line. However, given continued macro headwinds, we believe credit costs are unlikely to remain at current levels and are likely to rise over coming quarters. Funding: In our view, small banks, such as FBHK, face greater difficulties than larger banks, such as Bank of China (Hong Kong), in growing deposits given the intense competition in Hong Kong. Indeed, FBHKs deposits declined c.3% h/h (-c.5% y/y), resulting in an increase in its net loan-to-deposit ratio to c.74%. We believe FBHK is unlikely to be able to significantly expand its loan portfolio if its deposit growth does not pick up. Asset quality: FBHKs gross impaired loan ratio improved in 2H11, declining c.17bp h/h to c.0.33%. Capital: FBHKs total CAR decreased c.108pp h/h to c.15.86% at end 2011. Valuations: We raise our rating on FBHK to Market Weight from Underweight. Although FBHKs fundamentals are clearly under pressure, we expect spreads on its bonds to remain supported by market expectations of parental support. In our view, market sentiment and macro concerns are therefore more likely to be the drivers of spreads rather than issuerspecific concerns.
20 April 2012
84
Hana Bank (Hana) Rating Overweight Rationale
Krishna Hegde
After numerous delays, the Hana-KEB merger was concluded successfully early this year, with HFG currently holding a c.57.3% stake in the latter. Although Hanas management has agreed that KEB will remain an independent entity for at least the next five years, we expect the two banks to eventually be merged and think the spreads of KEB and Hana should track each other. Asset quality: Hana has generally had slightly better asset quality than its peers over the past few years. For example, its gross NPL ratio at end-2011 was c.1.04% compared with an average of c.1.29% for Korean commercial banks. However, 1Q12 asset quality trends were slightly mixed although Hanas headline gross NPL ratio declined c.2bp to c.1.02%, new NPLs increased c.55% q/q. Precautionary loans also increased c.10% q/q and accounted for c.1.5% of total loans. Funding and liquidity: Hanas KRW loan-to-deposit ratio improved in 2011, declining c.6pp y/y to 99% at year end. This improvement continued in 1Q12, and its KRW LDR decreased further to c.97%. We expect this ratio will continue to hover in the 90% range this year. As with most Korean banks, Hana has a moderate degree of reliance on foreign-currency wholesale funding markets we estimate that foreign-currency borrowings and bonds accounted for c.8% of the banks total liabilities at end-2011. Considering that Hanas foreign-currency LDR decreased c.21pp y/y, to c.129%, we believe the increase in Hanas foreign-currency bonds outstanding (+c.25% y/y) partly reflects the regulatory push to shore up foreign-currency liquidity. We look for Hana to increase its foreign-currency deposits. Coordination with KEB (which has a much lower foreign-currency LDR) could help alleviate some of the pressure on Hanas LDR, and we look for Hana to reduce the proportion of wholesale foreign-currency borrowings over time. Earnings: After a disappointing 4Q11, Hana reported slightly better earnings in 1Q12. The banks net profit jumped c.63% q/q to reach KRW254bn. The improvement was largely driven by the decline in operating expenses and credit costs. However, net interest income weakened further as loans fell c.2% q/q while NIM declined slightly to c.1.72%. We note that management guided for an improvement in NIM from 2Q11 as the drag from high-cost foreign-currency funding will dissipate when the bonds are called. Capital position: Hanas capital ratios are adequate, although we note that they are declining. The banks T1 CAR was c.9.4% at end March 2012 compared with c.9.6% a quarter earlier. Valuations: Hana bonds have tightened through Q1 in line with the Korea complex. While the spread differential versus Korean quasis has also tightened, we believe it is currently at fair levels. We have a constructive view on Korea. The continued improvement in Koreas external financing situation, especially in the banking sector, has addressed a key investor concern. Benign asset quality, improvement in the funding profile and a more supportive sovereign backdrop create support for Hana. Hence, we believe Hanas spreads will tighten further and outperform the Barclays EM Asia USD High Grade index, and we upgrade our rating to Overweight.
Hyundai Capital Services Inc (HCS) Rating Underweight Rationale
Krishna Hegde
Hyundai Capital (Baa2 Pos/BBB+ Stb/BBB Pos) is the captive finance company of Hyundai Motor Group in Korea and is the only Korean consumer finance platform for GE Capital. HCSs credit profile benefits from its key shareholders GE Capital Corporation (43%) and Hyundai Motor Company (57%). Earnings: HCSs 2011 pre-provision profit increased c.4.6% y/y. However, bad debts spiked (c.144% y/y) and resulted in a fall in post-provision income. Despite the increase in credit costs, HCSs coverage ratio was broadly stable y/y at c.117%. Funding: HCS has a high dependence on wholesale borrowing, but our concerns about liquidity/refinancing risks are mitigated in part by HCSs demonstrated ability to access new funding, even in periods of market stress. As at end-2011, long-term funding accounted for c.65.4% total funding versus 63.5% a year earlier. HCS plans to diversify its funding in 2012 and has issued in CHF and MYR this year. Asset quality: After increasing during 9M11, HCSs 30+ delinquency rate stabilised in 4Q11 at c.2%. However, HCSs exposure to personal loans continued to increase and reached c.9.1% at end-2011. We are concerned about this trend, given the high level of household debt in Korea. We expect further stress on asset quality over the coming months. Valuations: Hyundai Capital bonds are traded at spreads that are slightly inside the spreads of large commercial banks. While the spread differential has narrowed over Q1, with Hyundai Capital underperforming slightly, we feel a fair spread differential would be for Hyundai Capital to trade at least 15-20bp wide of commercial banks and maintain our Underweight rating.
20 April 2012
85
ICICI Bank (ICICI) Rating Market Weight Rationale
Lyris Koh
ICICI (Baa2 Stb/BBB- Stb/BBB- Stb) is Indias second-largest commercial bank and its largest private sector bank, with total non-consolidated assets of c.USD89bn at end-December 2011. While the rating agencies view the likelihood of government support for the bank as high, ICICIs foreign-currency senior debt ratings currently do not benefit from systemic support uplift. Earnings: ICICIs 3QFY12 net profit of INR17bn exceeded market expectations due to strong revenue growth and lowerthan-expected credit costs. ICICIs NIM improved c.9bp q/q, to 2.7%, and its 3QFY12 annualised credit costs remained stable at about c.55bp. ICICI is guiding credit costs to be about 70bp in FY12 and marginally higher, at 75bp, in FY13. We view this as slightly optimistic and expect investors to remain sceptical about the sustainability of ICICIs profit growth given the challenges to asset quality facing the sector. Funding: Due to its sizeable international operations, ICICI remains reliant on wholesale funding. This is reflected in its higher global loan-to-deposit ratio (LDR) of c.97% compared with its domestic LDR of c.71%. ICICI has actively grown its low-cost (CASA) deposit base over the past few years, and its CASA ratio has increased from c.27% at end 2007 to c.44%. However, given the difficulties in maintaining its CASA ratio in a high interest rate environment, the bank has not surprisingly said that it intends to maintain an average CASA ratio of about 40% for FY12. ICICI has a USD1.7bn bond maturing in October, and we believe the bank has been tapping the private placement markets and USD deposits to help refinance the bonds. Based on Bloomberg data, we estimate that ICICI has raised about USD404mn via short-tenor USDdenominated private placements and a CNH210mn 3y deal. Asset quality: Surprisingly, ICICIs gross NPLs declined c.3% q/q and its gross NPL ratio fell to c.3.8%. However, we note that unlike its peers, which have classified a large aviation account as a NPL, the account is still performing for ICICI as payments were on time at end-2011. In a trend seen across the sector, loans restructured in 3QFY12 increased. The bank indicated that it has a further INR13bn of loans to be restructured under the CDR process, with the bulk of it pertaining to two large accounts. In our view, loans restructured over 4QFY12 may overshoot ICICIs guidance. Capital: ICICIs T1 CAR remains healthy at c.13.1%. Valuations: Following the strong rally in ICICIs bonds over 1Q12, we see less scope for its bonds to outperform over the next six months especially considering investors continued concerns about the macroeconomy and asset quality issues facing the Indian banking sector.
IDBI Bank Ltd (IDBI) Rating Underweight Rationale
Lyris Koh
Established as a development finance institution (DFI) in 1964, IDBI (Baa3 Stb/BBB- Stb/BBB- Stb) was converted into a commercial bank in 2004. It had total non-consolidated assets of USD50bn at end-December 2011, and the government holds a c.84% stake. Due to its legacy as a DFI, the banks funding profile and margins are weaker than other large Indian banks. It also has a higher concentration of loans to the infrastructure sector, which adds to concerns about the banks asset quality, given the recent problems in the power and aviation sectors. Earnings: IDBIs 3QFY12 earnings were weak on most fronts. Both net interest income and non-interest income declined q/q, and operating expenses increased. Credit costs jumped during the quarter and accounted for c.60% of 3QFY12 preprovision profit. NIM declined c.11bp q/q, to c.1.9%, as the cost of funds increased. We believe the growth in agricultural loans to meet priority sector lending targets also weighed on IDBIs loan yield. We do not expect significant improvement in IDBIs earnings performance over the next few quarters as credit costs will likely remain high and NIM is unlikely to improve in the current interest rate environment. Funding: IDBIs funding profile remains weaker than most Indian banks. This is reflected in its higher than peer gross loanto-deposit ratio of c.89% and weaker than average low cost deposit ratio of c.20%. That said, we acknowledge that IDBI has made significant strides in reducing its reliance on wholesale funding, and we view positively its efforts to grow its lowcost deposit base. The banks focus on building its liability franchise was displayed when it waived fees on its current and savings accounts to grow its low-cost deposits. Asset quality: Gross NPLs increased c.19% q/q, resulting in a c.47bp increase in IDBI's gross NPL ratio to c.2.9%. As with other state-owned banks, an aviation account was a key contributor to the increase. Restructured loans rose c.8% sequentially, with the infrastructure sector (mostly telecom related) accounting for c.77% of the increase. Due to its development finance roots, IDBI has a relatively high exposure to infrastructure. The banks outstanding infrastructure loans (including non-fund-based) accounted for c.36% of its loans. Of this, about 16% of IDBIs total loans are to the power sector, although it has no exposure to the troubled state electricity boards. Given the ongoing challenges facing the infrastructure sector, we expect this portfolio to be a source of NPLs for some time to come. Capital: IDBIs T1 CAR was stable at c.8.2% at end-December 2011. We expect its capital ratios to improve following the INR8.1bn equity injection from the government. Also, Life Insurance Corp of India has agreed in principle to subscribe up to a maximum of 5% of IDBIs pre-issue paid-up equity capital. Valuations: We retain our Underweight rating on IDBI due to its weaker-than-peer credit profile and potential risks stemming from its sizeable infrastructure exposure.
20 April 2012
86
Industrial Bank of Korea (IBK) Rating Underweight Rationale
Krishna Hegde
IBK (A1 Pos/A Stb/A+ Pos) is a quasi-sovereign financial institution whose charter is to provide financing to small- and medium-sized enterprises (SMEs). The Korean government has a direct ownership stake of c.69% and indirect stakes of 1.9% through Korea Finance Corp (KoFC) and 1.6% through Export-Import Bank of Korea. While the local media has reported that the government plans to privatise IBK, we believe this is unlikely in the near term, given the parliamentary and presidential elections in 2012, as well as the greater priority the government places on privatising Woori Finance Holdings. We would not rule out a small stake sale, as recently indicated by a finance ministry official. Government support: We believe IBK enjoys a high probability of government support given its role in supporting SMEs. IBK has the support of the Korean government under Article 43 of the IBK Act, which states that the government is legally mandated to cover any losses that the bank may incur in excess of its capital reserves. In addition, the government showed its commitment to support IBK through capital injections during 2008-10. That said, the government could withdraw its support for IBK if the lender is fully privatised, although such a move could be politically challenging, in our view. Earnings: IBKs 4Q11 net profit of c.KRW64bn was significantly short of market expectations. The key reason for the sharp fall in net profit was the surge in credit costs to c.KRW633bn, from c.KRW171bn in 3Q11, due to tightened regulations and the migration to the Advanced Internal Ratings Based Approach. Credit costs accounted for a hefty c.85% of 4Q11 pre-provision profit. IBKs net interest margin also recorded a sharp fall in 4Q11, declining c.24bp q/q to c.2.39%. The decline was not due solely to accounting changes; the bank faced pressure on its loan yields. The bank's asset yield declined c.21bp q/q to c.5.42%. We believe IBKs earnings momentum could slow as the bank seeks to support its SME customers via lower lending rates and fee reductions. Asset quality: While headline asset quality metrics improved (4Q11 gross NPL ratio of c.1.5% versus c.1.8% in 3Q11), we are less convinced that underlying asset quality is truly on a positive trajectory. In our view, the regulatory push to reduce NPL ratios was the key reason for the improvement in metrics. Our view is supported by the jump in sales of NPLs, to KRW631bn in 4Q11 from KRW288bn a quarter earlier. We also estimate that new NPLs were slightly higher q/q. In addition, IBKs precautionary loans increased c.5% sequentially, and accounted for c.2% of total loans. On a more positive note, IBKs coverage ratio strengthened to a healthy c.162% at end-2011. While our base case is for IBKs NPLs to creep up in 2012, the banks SME focus leaves it more vulnerable to a sharper-than-expected slowdown in economic growth. Funding and liquidity: IBK continues to rely primarily on the wholesale markets for funding, which we view as a potential weakness. That said, we do not expect IBK to face funding/liquidity pressures, given investors confidence in continued government support. Relative to other policy banks, IBKs reliance on foreign-currency funding is lower, accounting for c.6% of total liabilities at end-2011. In a trend seen at other Korean banks, IBK has sought to diversify its funding sources away from the USD bond market and issued THB7.3bn of 3y bonds in March. Capital: Despite the migration to advanced IRB, IBK's T1 CAR was stable q/q at c.8.94%. We think that the benefit of lower risk weights was offset by lower capital generation due to the surge in credit costs. Valuations: We continue to view IBK bonds as rich (spreads almost flat relative to benchmarks), and we believe there is potential for underperformance versus the benchmark and the Korea complex if privatisation headlines continue. Among the policy banks, we prefer KEXIM to IBK, considering the bonds trade relatively close to each other. KEXIMs bonds do not face headline risk related to possible privatisation.
Kasikornbank (KBANK) Rating Overweight Rationale
Lyris Koh
Kasikornbank (Baa1 Stb/BBB+ Stb/BBB+ Stb) had total assets of USD56bn, compared with USD68bn at Bangkok Bank at end 2011. KBANK has a strong franchise in SME lending, which accounted for about 36% of its total loans as at end 2011. In our view, there is an extremely high likelihood of government support for KBANK, if required, given its systemic importance. Earnings: Similar to its peers, KBANKs 4Q11 net profit was affected by the severe flooding and fell c.61% q/q. The decline in non-interest income was the main driver of the decrease in operating income. Contrary to our expectations, KBANKs net interest income increased c.2% q/q due to a modest expansion in loans and the net interest margin. Operating expenses also increased, and KBANKs cost-to-income ratio consequently increased c.11pp to c.55%. Although KBANKs credit costs increased c.26% q/q, the rise was not as large as it was at BBL and KTB, whose reported credit costs more than doubled in 4Q11. KBANK targets relatively robust loan growth of 9-11% in 2012 (2011: c.12%) and expects its margins to decline slightly to 3.4-3.5%. KBANK tends to have higher margins than its peers due to its larger proportion of higher-yielding SME loans. Funding: KBANKs group gross loan-to-deposit ratio (LDR) was stable on a y/y basis at c.98% but crept up c.2pp on a sequential basis. Its THB LDR was slightly lower at c.92%, but is still relatively elevated in our opinion. Asset quality: KBANKs gross NPLs increased c.6% q/q and therefore its gross NPL ratio rose c.20bp to c.2.45%. We expect the banks NPL ratio to edge higher over coming quarters and note that the bank has guided for its gross NPL ratio to remain below 2.7% in 2012. At end 2011, KBANKs coverage ratio was a healthy c.127% and was stable q/q. Capital: KBANKs capital position is adequate, with a Tier 1 CAR of c.10.6%. Valuations: Our Overweight rating on KBANK is underpinned by the attractive carry on the bonds, especially given their bullet nature. That said, we acknowledge that the bonds are illiquid and hard to source.
20 April 2012
87
Kookmin Bank (Kookmin) Rating Overweight Rationale
Krishna Hegde
Kookmin Bank (A1 Stb/A Stb/A Stb) is the largest Korean commercial bank and has a strong retail franchise. The banks total assets were KRW257trn (c.USD227bn) at end-2011, and household loans accounted for c.56% of total KRW loans. Since chairman Euh Yoon-Dae took the helm in mid-2010, Kookmin has cleaned up its balance sheet and improved its profitability. We expect this trend to continue in 2012. Asset quality: Kookmins asset quality has been slightly weaker than the industry average over the past couple of years. Indeed, despite the improvement during 2011, Kookmins gross NPL ratio of c.1.43% at end-2011 was higher than the Korean commercial bank average of c.1.29%. Precautionary loans increased c.11% q/q in 4Q11, but the bank attributed the rise to its proactive reclassification of real estate-related loans and the reclassification of some loans to precautionary from substandard. We expect new NPLs to be broadly stable y/y, despite continued troubles in the real estate, shipping and construction sectors. Reported NPLs may decline due to aggressive loan write-offs and NPL sales. Funding and liquidity: Kookmin's KRW gross loan-to deposit ratio was broadly stable during 2011, hovering in the 98100% range. We note that the bank said that its foreign-currency LDR improved as it has increased its foreigncurrency deposits. We expect regulators to continue to encourage banks to build their foreign-currency deposits this year, and this may reduce bond supply from commercial banks at the margin. Earnings: Kookmin Banks net profit improved significantly y/y in 2011, rising to KRW2,047bn from KRW151bn in 2010, when results were hurt by the bank's efforts to clean up its balance sheet and higher operating expenses due to the Early Retirement Program conducted in 4Q10. Kookmin's 4Q11 net profit declined c.59% q/q due to a jump in operating expenses and credit costs. As was the case at its peers, tightened regulatory guidelines contributed to a rise in credit costs. However, the bank said that its decision not to participate in the bailout programme of a troubled shipbuilder (Sungdong Marine) also added to credit costs. In contrast to its peers, Kookmin's NIM was stable q/q at c.2.4% as it was unaffected by the accounting rules change for overdue loans. Capital position: Kookmin's T1 CAR fell c.103bp q/q, to c.10.3%. However, we are not overly concerned about the decline given that the key reasons for the decrease were the redemption of hybrid securities and a rise in reserves for credit losses. In our view, the key risk to capital remains the potential for capital-eroding M&A, although we believe regulatory pressure to conserve capital will help to keep this in check. Valuations: Kookmin Banks bonds tightened through Q1, in line with the Korea complex. While the spread differential versus Korean quasis also tightened, we believe it is currently at fair levels. We have a constructive view on Korea. The continued improvement in Koreas external financing situation, especially in the banking sector has addressed a key investor concern. The stable funding profile and asset quality, combined with a more supportive sovereign backdrop provide support for Kookmins credit. We believe Kookmins spreads will tighten further and outperform the benchmark, and we upgrade our rating to Overweight.
20 April 2012
88
Korea Development Bank (KDB) Rating Overweight Rationale
Krishna Hegde
KDB (A1 Pos/A Neg/A+ Pos) is a policy bank that has traditionally provided long-term financing for projects with the goal of facilitating economic growth and development in Korea. KDB is currently wholly owned by KDB Financial Group, which in turn is effectively 100% owned by the government (a 9.7% direct stake and 90.3% indirect stake through the Korea Finance Corporation (KoFC)). Privatisation: The government initiated plans to privatise KDB in 2008. Under the amended KDB Act, the initial sale of the governments stake in KDBFG must be made by May 2014. However, according to a Reuters report on 22 February, KDBFG chairman Kang Man-soo said that the group may sell more than 10% of its shares in an IPO by the end of this year. The selection of seven banks, including Goldman Sachs, Citigroup and UBS, for the IPO lends further credence to the report, in our view. Though not our base case, given political considerations ahead of the presidential elections and low equity valuations for Korean banks (price/book of ~0.7), we believe chances of an IPO in 2012 have increased. Under Article 18-2(1) of the KDB Act, when KDB Financial Group is privatised, the government will guarantee the banks outstanding medium- and long-term foreign-currency debt (with a maturity of greater than 1y) until it matures, assuming this amount is within the limit authorised by the National Assembly. Furthermore, under Article 18-2(3), the government could also guarantee the repayment of new long-term issuance that occurs after the initial stake sale, provided the governments stake remains greater than 50%. Under Article 44 of the KDB Act, the government is also legally mandated to maintain the solvency of KDB, provided the governments stake remains greater than 50%. Overall, we expect government support for KDB to remain in place until it ceases to be the controlling shareholder and KDB ceases to carry out policy functions for the government. Asset quality: In a trend seen across most Korean banks in 4Q11, KDBs gross NPL ratio improved, declining c.72bp q/q, to c.1.64%. However, this is still higher than the industry average of c.1.36%. In our view, the decline in KDBs NPLs is likely to be the result of active sales and write-offs over the quarter. Given its policy mandate to support the Korean economy, it is not surprising that KDBs asset quality is weaker than that of commercial banks. As at end-2010, KDBs exposure to financially troubled companies, such as Kumho Tire and Daehan Shipbuilding, accounted for c.1.3% of its total assets. Funding and liquidity: Reflecting its policy bank status, wholesale borrowings account for a large proportion of KDBs funding. We estimate that wholesale borrowings accounted for c.67% of total liabilities at end-2011. Although KDB has been growing its deposit base to prepare for its privatisation (+142% since end-2009), we note that its efforts will take time to bear fruit, and the banks loan-to-deposit ratio was still elevated, at c.323%, at end 4Q11. Capital position: Based on regulatory disclosures, KDBs T1 CAR was a healthy c.13.9% at end-2011. Valuations: KDBs bonds have tightened through Q1 and outperformed the Korea complex as a result of the discussion about the IPO. If the IPO occurs, we could see an additional 10-15bp of spread compression towards the sovereign. Our base case is that the IPO does not occur this year; however, the bonds are unlikely to give back their recent gains, in our view. We have a constructive view on Korea. The continued improvement in the external financing situation as result of measures taken by the banking sector have addressed a key concern, and we believe spreads can tighten further. As a result, we maintain our Overweight rating.
20 April 2012
89
Korea Exchange Bank (KEB) Rating Overweight Rationale
Krishna Hegde
KEB (A2 Pos/A- Stb/A- Stb) was established by the government in 1967 to specialise in foreign exchange and trade finance. These areas remain competitive advantages for the bank today. We view Hanas recent acquisition of KEB as positive for the latter for two reasons: 1) increased systemic importance; and 2) the completion of the deal enables KEB to return its focus to its operations. Hana has agreed to operate KEB as an independent entity for the next five years, but we expect the two banks to be integrated over the medium term. Following the acquisition, S&P raised its rating on KEB to Afrom BBB+ to reflect its view that KEB will now benefit from strong support from Hana. However, Moodys opted not to upgrade KEBs ratings immediately and said it will be assessing factors such as the progress of integration with Hana, Hanas plans to acquire the remaining stake in KEB and the possibility of a merger between the two banks. Asset quality: Despite the headline improvement in the gross NPL ratio to c.1.18%, we note that new NPLs more than doubled q/q. The decline in gross NPLs outweighed the decrease in total provisions, resulting in a rise in KEB's coverage ratio to c.141%. We also note that although the SME delinquency ratio for the real estate sector has declined, it still remains relatively elevated at c.2.83%. This segment accounted for c.22% of KEBs KRW SME loans at end 2011. Funding and liquidity: Given KEBs traditional role of providing trade finance and foreign exchange services, the bank has a relatively higher exposure to foreign-currency funding. However, the banks relatively sizeable foreign-currency deposits partially mitigate its foreign-currency liquidity/funding risks. Earnings: KEB's 4Q11 net profit of c.KRW277bn beat market expectations, owing largely to lower credit costs and a rebound in gains from FX transactions. The decline in credit costs was a surprise as it is contrary to the trend seen at other banks. KEB attributed the decline to "benefits from NPL sales and the updated probability of default used in calculating LLP [loan loss provisioning]". KEB's NIM declined c.11bp q/q to c.2.52%.The bank said that the decline was mainly due to drag from its increased holdings of lower-yielding short-term assets and a change in accounting standards. Capital position: KEB's T1 CAR increased c.48bp q/q, to c.12.1%, driven by capital generation and a decline in riskweighted assets We note that the decrease in RWA was due to a decline in both credit and market RWA. Valuations: KEBs bonds tightened through Q1, in line with the Korea complex. While the spread differential between KEB and Korean quasis also tightened, we believe it is currently at fair levels. We have a constructive view on Korea. The continued improvement in Koreas external financing situation, especially in the banking sector has addressed a key investor concern. Following Hanas acquisition of a majority stake in KEB, we would look for KEBs bond spreads to converge with Hana Bank. We believe KEBs spreads will tighten further as the integration progresses and outperform the high grade benchmark. Therefore, we upgrade our rating to Overweight.
Krung Thai Bank Public Company Limited (KTB) Rating Market Weight Rationale
Lyris Koh
KTB (Baa1 Neg/BBB Stb/BBB Stb) is the second-largest bank in Thailand and is c.55% owned by the government via the Financial Institutions Development Fund. The banks total assets were THB1965bn (USD64bn) at end-2011. KTB has a weaker credit profile than its peers, and this is reflected in its lower ratings from S&P and Fitch. Not surprisingly, given its state-ownership, loans to the government and related enterprises account for a chunky c.19% of total loans. Earnings: KTB reported an c.85% q/q fall in its 4Q11 net profit, as its bottom line was pressured by a drop in pre-provision profit and a spike in credit costs. In a trend also seen at its peers, KTB pre-emptively boosted provisions, and its credit costs consequently increased to c.THB7.5bn (c.92% of 4Q11 pre-provision profit) from c.THB3bn in 3Q11. KTB is targeting loan growth of c.5-7% in 2012, a decline from the c.14% recorded in 2011. The bank also targets deposit and bills-ofexchange growth of c.5% this year. We view the slowdown in loan growth positively given KTBs tightening liquidity (see below for details). Funding: KTBs group-wide gross loan-to-deposit ratio (LDR) increased c.11pp during 2011 to reach c.111%. Its THB LDR climbed to c.107% at end 2011 from c.99% a year earlier. We are increasingly concerned about the rise in the banks LDR and its growing dependence on bills of exchange (B/Es) it had c.THB242bn of B/Es outstanding at end-4Q11 versus c.THB120bn a year earlier. With the tightened regulations related to the issuance of B/Es, we expect growth in B/Es to moderate this year and KTB to therefore renew its efforts to grow its deposit base. Issuance of local-currency bonds may also increase, in our view. Asset quality: KTBs asset quality is weaker than that of its peers due to legacy loans, but its gross NPL ratio has improved significantly over the past few years. As at end-2011, the banks gross NPL ratio was c.4% (c.5.3% at end 2010). We expect KTBs asset quality to come under pressure over the coming quarters due to the lagged impact of the floods in Thailand, although we note the bank is more optimistic about the outlook for its asset quality, guiding for a reduction in its gross NPL ratio this year. Despite the improvement in KTBs coverage ratio to c.69%, it remains lower than the c.199% at BBL. Therefore, KTB faces a higher likelihood of a spike in credit costs if its asset quality deteriorates more than expected. Capital: The banks T1 CAR was adequate at c.9.2% at end-2011. Given its relatively weak coverage ratio and the potential for asset quality deterioration, we would be more comfortable with KTBs credit profile if it strengthened its capital position. Valuations: Our Market Weight rating on KTB is unchanged. In our view, the upside potential on the KTB 7.378% perp 16s is capped given the presence of a regulatory par call. In addition, given its state ownership, KTB is likely to be affected by government policy decisions.
20 April 2012
90
Macquarie Group Ltd Rating Overweight Rationale
Krishna Hegde
Despite taking steps to bolster its balance sheet, improve its funding profile and shift its business toward more stable revenue streams (eg, asset management), Macquarie Group Limited (MGL, A3/BBB/A- all Stb) continues to be viewed as a high-beta credit. We do not believe this perception will change. That said, given that the Australian banks bond complex tends to move in tandem, we believe that investors should switch out of bonds of the big four banks into bonds of MGL for the attractive spread pick-up. Asset quality: Macquaries asset quality deteriorated slightly, with impaired assets ticking up q/q in 3Q FY12 after declining in 1Q FY12 and 2Q FY12. Gross exposures decreased in 3Q FY12, especially to banks. Provisions have ratcheted up, and we believe the slowing economy is likely to result in provisions remaining at higher levels. Funding and liquidity: As of 3Q FY12 (ended December 2011), deposits as a percentage of total funding increased 2pp q/q, to 40%, which is a positive, as MGL continues to diversify its funding base. Although cash and liquid assets declined q/q, they still comfortably cover short-term wholesale paper and debt maturing in less than a year. MGL had been taking steps to term out its wholesale portfolio. It recently issued a Basel III-compliant Tier 1 exchangeable capital securities (ECS), intending to replace hybrid instruments that no longer qualify under Basel III. Earnings: In its February trading update, management guided for a c.25% y/y decline in FY12 net profit after tax (NPAT). It also expects 2H FY12 NPAT to be c.35% higher h/h, due to an improvement in operating conditions for the Fixed Income, Currencies and Commodities (FICC) Group, and the receipt of AUD300mn of cash from Macquarie Airports, which will offset a more subdued contribution from Macquarie Securities. Capital position: MGLs reported capital surplus as of 3Q FY12 was unchanged q/q, at AUD3.5bn, on a Basel II basis. During the February trading update, management said it expects Macquarie Banks common equity Tier 1 ratio to be 11.2% at 31 March 2012. MGL plans to buy back up to 10% of its ordinary shares in 1H13, subject to regulatory approval. Valuation: After outperforming through mid-March, Macquaries bonds have widened over the past three weeks. We revise our rating on MGL to Overweight from Market Weight to reflect our view that its bonds offer an attractive spread versus the index and any spread compression will add to the potential outperformance versus the benchmark indices. Within the complex we prefer the senior bonds issued out of Macquarie Bank, as well as the recently issued Macquarie 10.25%. We believe the catalyst for Macquarie spread compression is a demonstration of continued execution on the shift away from volatile markets-linked businesses something we expect to occur over coming quarters.
Malayan Banking Bhd (Maybank) Rating Not rated Rationale
Lyris Koh
Maybank (A3 Stb/A- Stb/A- Stb) is the largest bank in Malaysia, with total assets of MYR451bn (USD146bn) at endDecember 2011. The Malaysian government indirectly owns a majority stake in the bank via the Employees Provident Fund Board (c.11%), Permodalan Nasional Berhad (c.5%) and Skim Amanah Saham Bumiputera (c.45%). M&A: We remain cautious about Maybanks appetite for M&A. In addition to its purchase of Kim Eng Holdings last year, Maybank also attempted to acquire RHB Capital, although that deal ultimately fell through. We note that Maybank has said that it targets a 40% contribution from its international business to pre-tax profit by 2015, raising the possibility of an overseas acquisition at some point. Maybanks international operations contributed about 27% of its 2H11 pre-tax profit, with Singapore the largest international contributor, at c.16%. Funding: Maybanks group loan-to-deposit ratio (LDR) improved in 4Q11, declining to c.90% from c.93% in 3Q. Management said it intends to maintain the group LDR at current levels. The banks domestic liquidity remains comfortable its Malaysian LDR declined c.4pp to c.83% at end-2011. After reaching a high of c.97% at end-September 2011, Maybanks Singapore LDR eased to c.93%. Given that the bank does not have a natural USD deposit base, we view its USD LDR of c.104% as reasonable. Earnings: 4Q11 earnings were generally sound, although we expect momentum to slow this year. Maybank is targeting 2012 loan growth of c.16%, down from c.24% in 2011. Credit costs crept up over the quarter and accounted for c.11% of 4Q11 pre-provision profit. Management said credit costs could rise in 2012, guiding for them to be in the 35-40bp range. Asset quality: Maybanks asset quality improved over 4Q11, with its gross impaired loan ratio declining to c.2.9% from c.3.2%. In our opinion, the drop in impaired loans was due to a cleanup at its Indonesian operations Maybanks Indonesian impaired loans declined c.48% q/q. Capital: Maybanks capital position remains comfortable. Assuming all dividends are paid in cash, its T1 CAR was c.10.95% at end-2011. Management said it intends to continue the dividend reinvestment plan to support the banks organic growth.
20 April 2012
91
National Agricultural Cooperative Federation (NACF) Rating Overweight Rationale
Krishna Hegde
NACF is a financial institution that supports policy objectives related to the agricultural sector in Korea. NACF was reorganised in March 2012 and adopted a holding company structure. Following the reorganisation, NACF owns two intermediate holding companies, NongHyup Financial Group and NongHyup Agribusiness Group. NongHyup Financial Group owns NH Bank. Reorganisation: Under the reorganisation, NACFs credit and banking business (about c.62% of NACFs assets and c.64% of liabilities) was transferred to NH Bank. Other businesses (life insurance/non-life insurance, etc) were transferred to different subsidiaries, leaving the mutual credit, and education and support businesses with parent NACF. NH Bank is now a co-obligor of the bonds issued under the Global MTN programme. NACF and all newly established entities are jointly and severally responsible for the debt incurred prior to reorganisation under the Commercial Codes of Korea. Government support: Unlike other policy financial institutions in Korea, NACF does not benefit from explicit government support mechanisms. However, we believe government support for NACF/NH Bank remains high. This has been demonstrated by the KRW2trn in-kind capital contribution from the government and interest support of up to KRW150bn per year over five years. In addition, the policy functions of NACF remain intact. We would look for further demonstration of government support in coming months when NACF undertakes its planned borrowing. Supply risk: NACF has USD400mn of bonds maturing this year, and we expect it to seek to refinance the bonds. Valuations: Although we believe government support for NACF remains high, we expect investors to remain concerned about whether the reorganisation will ultimately result in a reduction in the degree of financial/strategic support provided by the government. In our view, NACFs bonds should trade in line with Korean commercial banks. We have a constructive view on Korea. The continued improvement in Koreas external financing situation, especially in the banking sector, has addressed a key investor concern. For NACF, we expect further demonstration of government support following the March reorganisation to underpin valuations. The positive sentiment around Korea should also help NACF. As a result, we upgrade our rating to Overweight.
National Australia Bank (NAB) Rating Underweight Rationale
Krishna Hegde
NAB (Aa2/AA-/AA- all Stb) has greater sensitivity to the weakening Australian economy with terms of trade already having peaked as a result of its relatively large exposure to business lending. That said, fears of a hard landing in China having a knock-on impact on Australia (from lower commodity prices) have eased somewhat, with China posting betterthan-expected March activity data, suggesting that the governments stance of policy easing has started taking effect. On an idiosyncratic basis, we expect NABs asset quality to deteriorate following a spell of aggressive mortgage lending to increase market share. As such, we see limited scope for its bonds to outperform the market. We retain our Underweight rating on NAB. Asset quality: NABs asset quality trends were mixed in 1Q FY12. The ratio of 90+ days past due plus gross impaired assets to gross loans and acceptances increasing only 1bp q/q to 1.78%. However, bad debt charges rose to 0.45% of total gross loans and acceptances from 0.35% in 2H FY11. The main drivers were higher bad debts in UK Banking, Wholesale Banking and Specialised Group Assets. Management stated that 90% of the increase in bad debts (primarily from these three divisions) was related to difficult operating conditions in the UK, half being related to its UK commercial property portfolio. We see a high likelihood of a pick-up in mortgage delinquencies due to NABs aggressive expansion of mortgage market share by competing on price. One bright spot was the removal of economic risk from NABs remaining SCDO exposure, which is credit positive. Funding and liquidity: In line with its peers, NABs deposit growth outstripped its loan growth in 1Q FY12. That said, deposit costs increased during the quarter. In addition, the bank has also been affected by rising wholesale funding cost. Management stated that the AUD7bn of total YTD group term funding (including AUD4bn of covered bonds) was raised at mid swaps+195bp, compared with an average of mid swaps+124bp for the existing stock of wholesale funding as of September 2011. Earnings: NAB reported cash earnings of AUD1.4bn for 1Q FY12, missing Reuters consensus of AUD1.45bn. Although sales and trading income in Wholesale Banking recovered, the main drag to earnings came from margin compression the group NIM fell 9bp q/q, to 2.19%. The decline was driven by increased wholesale funding and deposit costs, and increased holdings of liquid assets. Capital position: NABs Tier 1 CAR improved 32bp q/q to 10.02% in 1Q FY12. We highlight that NABs capital levels are higher than those of its peers, with the exception of ANZ (which we believe prefers to hold more capital as a result of its super-regional expansion strategy). Valuations: We retain our Underweight rating on NAB. Given the many headwinds greater exposure to the weakening Australian economy and asset quality pressures from mortgage lending at home and its UK Banking division and its bonds with tight valuations, we see limited potential for NABs bonds to outperform benchmarks.
20 April 2012
92
Oversea-Chinese Banking Corp Ltd (OCBC) Rating Market Weight Rationale
Lyris Koh
OCBC (Aa1 Stb/AA- Stb/AA- Stb) has a very high likelihood of support from the government, if needed, given its systemic importance as one of Singapores three domestic banks. OCBCs total assets were SGD278bn at endDecember 2011 compared with SGD341bn at DBS. Relative to its peers, OCBC has a stronger wealth management franchise the division contributed c.23% of total 2011 revenues. After a decade at OCBC, David Conner stepped down as CEO in April 2012. He is succeeded by Samuel Tsien, previously head of the Global Corporate Bank division. Although the retirement of Mr Conner after 10 years at the helm introduces some uncertainty with respect to the banks strategy, we do not expect significant changes in the short term. Earnings: OCBCs 4Q11 revenues grew c.14% q/q. However, the bulk of the increase was due to the volatile trading income line, which swung to a profit of SGD163mn from a loss of SGD68mn in 3Q11. Fee income was weaker, falling c.16% q/q. On a more positive note, net interest income growth was a healthy c.6% q/q due to robust loan growth (c.5% q/q) and a stable net interest margin (c.1.85%). On a full-year basis, a rise in NII was the key driver of net profit growth, helping to offset the impact of weaker insurance and trading income. Credit costs rose as OCBC set aside increased provisions, in line with its c.27% y/y loan growth. Increased NPLs also contributed to a rise in specific provisions. That said, credit costs as a proportion of pre-provision income remained low at c.7%. Funding: Like its peers, OCBCs USD liquidity tightened last year. The banks USD loan-to-deposit ratio (LDR) increased c.51pp y/y to c.163% at end-2011. We believe commercial paper (CP) played an important role in funding the USD loan growth OCBC had SGD8.3bn of CP outstanding at end-2011 compared with SGD461mn a year earlier. Despite OCBCs ease of access to short-term funding sources, we think the bank is conscious of the need to term out its funding profile. Our view is supported by OCBCs decision to issue USD1bn of 3y senior bonds in March. We do not rule out further opportunistic USD issuance from OCBC if spreads rally from current levels. Asset quality: After declining through 9M11, OCBC's gross NPLs jumped c.30% q/q in 4Q11, and its gross NPL ratio increased to c.0.9% from c.0.7% in 3Q. The bank attributed the rise in NPLs to a comprehensive review of its portfolio conducted during the quarter. This explanation is supported by the fact that most of the increase in NPLs was in the "not overdue" category. Loans classified as NPLs but in the "not overdue" category accounted for c.43% of total NPLs. We expect some rise in NPLs in 2012 as economic growth moderates. The seasoning of the bank's loan portfolio after the strong growth in 2011, could also add to NPLs, in our view. Notably, OCBC's NPL coverage ratio weakened c.36pp q/q to c.130% at end 4Q11. While this is still healthy, we would view further slippage in this ratio over 2012 negatively. Capital: OCBC's core T1 CAR improved slightly q/q to reach c.11.4%. The bank reiterated that it will be able to meet MAS's Basel III requirements without raising additional equity, cutting dividends or changing its strategic plans. OCBC suspended its scrip dividend scheme for its final dividend. Valuations: We affirm our Market Weight rating on OCBC and prefer moving down its capital structure to pick up spread. Lyris Koh Rationale Public Bank (A3 Stb/A- Stb/NR) is the third-largest banking group in Malaysia, with total assets of c.MYR249bn (USD81bn) and c.16% of the domestic loan market. PBK has a strong domestic retail franchise its retail operations contributed c.59% of pre-tax profit and loans to individuals accounted for c.63% of total loans. Earnings: PBK reported stable earnings for 4Q11, as a marginal increase in operating income was offset by higher expenses. That said, PBKs cost-to-income ratio remains below that of its peers, at c.30%. The banks NIM declined slightly to c.2.6% over 4Q11 and management said it would face further pressure this year. Overall, although we expect PBKs earnings momentum to moderate, profit metrics should still remain healthy. Funding: After increasing for the past couple of years, PBKs group-wide gross loan-to-deposit ratio stabilised at c.89% in 2011. However, its HKD LDR was much higher at c.122% at end-2011. Given that PBKs USD LDR was a low c.41% at end-2011, we see a relatively low likelihood of PBK tapping the USD bond market and think any issuance is likely to be opportunistic. Asset quality: PBKs asset quality has always stood out as among the strongest of the Malaysian banks under our coverage. Its gross NPL ratio declined c.6bp q/q to a low c.0.86% at end 2011. Its coverage ratio also improved to a very healthy c.189%. Despite the improvement in asset quality, PBKs credit costs increased c.15% q/q; in 3Q11, the bank benefitted from one-off recoveries. Capital: BNM said it intends to follow the Basel III transitional timelines proposed by the Basel Committee. This would provide PBK with a reprieve because it will only need to meet the minimum core T1 CAR of 7% by 2019. Given that: 1) restrictions on dividends will apply if the banks core T1 CAR falls below 7%; and 2) PBKs core T1 CAR of 7.5% is only marginally higher than the ultimate minimum requirement, we expect the bank to be conscious of the need to conserve capital and eventually boost its capital ratios. Valuations: There is no change to our Market Weight rating on Public Bank. At current valuations, we believe the AmBank and CIMB Bank Tier 1s offer more value than Public Banks, given the lower back-end coupon on the Public Bank bonds. In addition, the PBKMK 6.84% 36c16s contain a regulatory par call.
Public Bank Bhd (PBK) Rating Market Weight
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Shinhan Bank (SHB) Rating Overweight Rationale
Krishna Hegde
We have long viewed Shinhan Banks (A1 Stb/A Stb/A Stb) fundamentals as slightly stronger than its commercial bank peers, and its 4Q11 results have reinforced our constructive view on the issuer. Asset quality: After peaking at c.1.77% in 3Q10, Shinhans gross NPL ratio has declined and was c.1.09% at end-2011. The decline in NPLs was not due simply to write-offs and NPL sales we estimate that new NPLs fell c.32% y/y. We also view positively the c.9% q/q decrease in precautionary loans in 4Q11. The banks coverage ratio increased to a robust c.166% at end-2011. Funding and liquidity: Shinhans KRW loan-to-deposit ratio increased slightly last year, rising to c.98.9% at end-2011, and we expect the bank to maintain this ratio at the higher end of the 90% range in 2012. Like its peers, Shinhan relies on the foreign currency wholesale market for funding, exposing it to refinancing risk if the markets freeze up. However, Shinhan has taken steps to mitigate this risk and acquired more than USD935mn in committed credit lines as at Dec 11. Shinhan Banks foreign-currency liquidity ratio (FC assets/liabilities due within 3m) improved to 116.3% at end-2011 from 105% at end-2010. Earnings: Shinhan's 2011 net profit increased c.27% y/y, to KRW2118bn, driven by net interest income growth and reduced credit costs. Credit costs declined c.42% y/y as asset quality improved over 2011. Headline 4Q11 net profit however, was weak, falling c.50% q/q. The drop was due to a c.64% increase in expenses, which the management attributed to one-off factors, such as additional retirement allowance charges due to actuarial changes and early retirement expenses. The 4Q11 cost-to-income ratio was elevated at c.70%. Shinhans NIM was c.14bp weaker q/q (c.2.1%) due to an accounting change and increased deposit costs, but the bank expects its NIM to remain stable in 2012. Notably, unlike other Korean banks, which reported sharp increases in credit costs in 4Q11, Shinhans credit costs increased at a more moderate c.7% q/q. Capital position: Shinhans T1 CAR was a healthy c.12.5% at end 2011 versus the commercial bank average of c.11%. However, given that it contributes c.64% of the groups net income, the risk of dividend upstreaming from Shinhan Bank to support other group subsidiaries cannot be ruled out. Valuations: Shinhans bonds tightened through Q1, in line with the Korea complex. While the spread differential between Shinhan (and other commercial banks) and Korean policy banks also tightened, we believe it is currently at fair levels. We have a constructive view on Korea. The continued improvement in Koreas external financing situation, especially in the banking sector, has addressed a key investor concern. The improved foreign currency liquidity profile, healthier than average capital position and improved asset quality, combined with a more supportive sovereign backdrop provide support for outperformance by Shinhans credit. We upgrade our rating to Overweight.
State Bank of India (SBI) Rating Overweight Rationale
Lyris Koh
State Bank of India (Baa2 Stb/BBB- Stb/BBB- Stb) is the largest bank in India, with total non-consolidated assets of USD252bn at end-December 2011. The bank has a c.16% share of Indias deposit market, and we believe there is a high likelihood of government support, if needed. Our view of the high systemic importance of SBI was reinforced recently by Financial Services Secretary D K Mittals comments that the government is targeting a T1 CAR of 11% for SBI versus 9% for the other state-owned banks. Earnings: SBIs 3QFY12 net profit of INR33bn was boosted by writebacks on investment depreciation. Pre-provision profit fell slightly q/q as the bank incurred losses on sales of its equities portfolio. Net interest income registered healthy growth of c.10% q/q, driven by a c.26bp increase in its NIM, to c.4%, and c.7% q/q loan growth. We are slightly concerned about the robust expansion in SBIs NIM, given the potential impact on asset quality from expanding loan yields in the current high interest rate environment. To our surprise, credit costs performed better-than-expected, increasing only c.5% q/q. However, we remain cautious on the outlook for asset quality and expect credit costs to remain elevated. Funding: As the largest bank in India, SBI has a very healthy deposit franchise. This is reflected in its low-cost deposit ratio of c.48%. In addition, retail term deposits account for c.79% of the banks total term deposits. With the European banks deleveraging, we believe SBI is trying to gain market share in the syndicated loans space, and this could account for reports that SBI intends to raise up to USD1.5bn in the offshore markets in June/July. Asset quality: SBIs asset quality continued to decline over 3QFY12, with gross NPLs increasing c.18% q/q. The banks gross NPL ratio increased to c.4.6%. While a large aviation account contributed to the increase, SBI also saw a broadbased increase in NPLs across sectors. In addition, assets restructured over 3QFY12 increased to c.INR22bn versus c.INR5bn a quarter earlier. Local media have reported SBI officials as saying that 4QFY12 NPLs would not rise significantly from 3Q levels. In our view, even if SBI were to report stable NPLs q/q, the market would remain sceptical about its asset quality given the ongoing issues in the infrastructure sector and challenges facing the Indian economy. Capital: SBIs T1 CAR improved q/q to c.8.5% at end-2011. The bank expects its T1 CAR to reach c.9% at end March 2012, partly due to the INR79bn capital injection from the government over 4QFY12. According to the Hindu Business Line, Financial Services Secretary, Mr D.K Mittal, said that the government will inject more capital into SBI over FY13. Valuations: Despite our cautious view on the outlook for SBIs fundamentals, we raise our rating on SBI to Overweight from Market Weight to reflect our view that spreads on the SBIIN 14s and 15s are wide for their tenor and could outperform their benchmarks over the next six months.
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United Overseas Bank (UOB) Rating Market Weight Rationale
Lyris Koh
UOB (Aa1 Stb/AA- Stb/AA- Stb) has a very high likelihood of support from the government if needed, given its systemic importance as one of Singapores three domestic banks. UOBs total assets were SGD237bn at end-December 2011, compared with DBSs SGD341bn. UOB was founded by the Wee family, which still holds a 19% stake in the bank. Earnings: UOBs 4Q11 earnings were mixed. Net interest income growth was healthy at c.7% q/q, driven by both loan growth (c.3% q/q) and net interest margin expansion (up c.6bp to c.1.95%). UOB was the only Singaporean bank to report an improvement in its NIM in 4Q11. However, credit costs more than doubled q/q, largely due to a rise in specific provisions. In particular, UOB recorded a SGD68mn charge in its legacy rest of the world portfolio and a SGD53mn charge for contingent items (some of which were shipping related). UOBs full-year pre-tax profit fell c.12% y/y, to SGD2.8bn. The decline was driven by lower non-interest income and increased expenses and credit costs. Non-interest income was affected by weaker markets, as well as the bank's decision to pare its European securities exposure. 2011 credit costs increased c.10% y/y, largely due to increased collective provisions. Funding: UOB has been slightly more conservative than its peers in growing its USD loans faster than USD deposits. Its USD loan-to-deposit ratio (LDR) has been lower than the other banks. Indeed, UOB's USD LDR declined c.27pp q/q to c.100% at end 2011. However, we believe UOBs USD LDR may creep up again, given that part of the decline in 4Q11 was driven by the repayment of trade-related loans. Furthermore, following the banks issuance of USD750mn of senior bonds, we believe management may be a bit more comfortable allowing its USD LDR to rise above 100%. Asset quality: After the surprise increase in NPLs in the previous quarter, UOB's gross NPLs declined c.4% q/q in 4Q11, and its gross NPL ratio dropped c.10bp q/q to c.1.4%. The manufacturing sector was the main driver of the improvement in NPLs this segments NPLs declined c.25% q/q over 4Q11. UOBs coverage ratio remained healthy, at c.136%, at end-2011. Despite the headline improvement in NPLs, we believe NPLs may surprise to the upside over coming quarters. Capital: UOB's core T1 CAR was a robust c.11.9% at end 2011. Valuations: We affirm our Market Weight stance on UOB and prefer moving down its capital structure to pick up spread.
Westpac Banking Corp (WBC) Rating Underweight Rationale
Krishna Hegde
We maintain our Underweight rating on WBC (Aa2/AA-/AA- all Stb), given tight valuations and the weakening Australian economic landscape, with its terms of trade having peaked. That said, fears of a hard landing in China having a knock-on effect on Australia (from lower commodity prices) have eased somewhat, with China posting better-than-expected March activity data, suggesting that the governments stance of policy easing has started to take effect. On an idiosyncratic level, WBC has a relatively greater exposure to the Australian mortgage market, which is beginning to show signs of stress. We believe these headwinds will limit the scope for near-term outperformance by WBCs bonds. Asset quality: WBCs asset quality continued to improve, with stressed exposures as a percentage of total committed exposures declining 15bp q/q, to 2.33%, at 1Q FY12. Mortgage delinquencies performed better than expected, with 90+ day delinquencies at 55bp, roughly unchanged q/q. However, 30+ day delinquencies increased 16bp q/q, to 140bp. Given WBCs relatively greater exposure to the Australian mortgage market it had a sector-leading market share of 26% as of March 2012 and the weakening Australian housing market, we see the potential for an uptick in delinquencies. That said, provisioning coverage remains healthy, with collective provisions as a percentage of credit-risk-weighted assets roughly unchanged q/q at 1.24%. No change was made to economic overlays. Funding and liquidity: WBCs deposits rose a strong c.AUD5bn in 1Q FY12, and most of the increase was in term deposits, which fully funded loan growth during the quarter. In addition, the bank has issued c.AUD6.7bn of covered bonds in EUR, NOK, USD and AUD after the new law took effect. Overall, WBCs stable funding ratio increased 100bp q/q, to 78%, in 1Q FY12. In line with its peers, WBC faced higher funding costs both deposits and wholesale but management stated that it has since improved. Earnings: WBC reported cash earnings of AUD1.5bn for 1Q FY12, down c.3% from the AUD1.55bn a year earlier. In particular, markets-related revenue declined AUD200mn, two-thirds of which was due to credit spread movements resulting in downward mark-to-market adjustments for the liquid asset portfolio. The remaining one-third was due to lower Treasury risk management income. This was offset to an extent by AUD100mn of gains from asset sales and accelerated recognition of establishment fees in the Institutional Bank. Outside of the global markets business operating income remained relatively healthy. In 1Q FY12, the group NIM declined 10bp from the average in 3Q FY12 and 4Q FY12. Capital position: WBCs Tier 1 CAR increased 12bp q/q, to 9.80%, at end-1Q FY12, due to solid organic capital growth and a 10bp contribution from the St George Bank tax consolidation (management expects another 17bp of capital benefits over the next two years). This was offset to a small extent by a rise in risk-weighted assets. Valuations: Valuations are tight. Senior bonds of the big four banks with tenors of 4-7 years traded at an average OAS of 140bp as of 18 April 2012, roughly 136-137bp inside the c.277bp and c.276bp average for US banks senior bonds and Asia ex-Japan banks senior bonds respectively, for similar tenors. Coupled with the weakening Australian economic backdrop and WBCs relatively higher exposure to the softening Australian mortgage market, we see limited scope for WBCs bonds to outperform benchmarks.
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Wing Hang Bank (WHB) Rating Market Weight Rationale
Lyris Koh
Wing Hang Bank (A2 Stb/NR/A- Stb) is a mid-sized Hong Kong bank with total assets of HKD187bn (c.USD24bn) at endDecember 2011. The banks major shareholders are the Fung family and the Bank of New York Mellon. Like most Hong Kong banks, WHB has expanded overseas to support its earnings growth. It operates in China and Macau via its wholly owned subsidiaries Wing Hang Bank (China) and Banco Weng Hang, respectively. Earnings: WHBs earnings displayed mixed trends over 2H11. We estimate that core revenues (net interest income and fee income) increased c.3% h/h. Net interest income growth was driven by loan growth of c.3% h/h, as WHBs net interest margin declined c.8bp h/h to c.1.63% due to higher deposit costs. The banks credit costs also increased h/h, albeit from a low base, and were c.5bp in 2H11. Asset quality: Although WHBs overall gross impaired loan ratio was a low c.0.3% at end-2011, asset quality showed early signs of deterioration. Absolute gross impaired loans increased c.23% h/h, driven by its Hong Kong loans. The banks coverage ratio declined c.19pp h/h, to c.57%, but this was offset by the increase in its regulatory reserves, to c.HKD1.4bn from HKD1.2bn six months earlier. Given WHBs relatively high exposure to SMEs, we expect its asset quality to be more vulnerable in an environment of slowing economic growth. In addition, we note that its exposure to China is growing and accounted for c.12% of total loans at end 2011. Capital: WHBs T1 CAR declined c.20bp h/h, to c.10.1% at end-2011, and we believe part of the decline was due to the increase in regulatory reserves, which are excluded from Tier 1 capital. We expect WHB to be conscious of the need to conserve its capital given upcoming Basel III implementation. Valuations: We maintain our Market Weight rating on WHB and expect the bonds to move in line with the market. We also note that WHBs bonds are extremely illiquid.
Woori Bank Rating Overweight Rationale
Krishna Hegde
Woori Bank (A1 Stb/A- Stb/A- Stb) is the main banking subsidiary of Woori Financial Group. Plans to privatise the group, revived in mid-2011, proved unsuccessful, with the Public Fund Oversight Committee suspending the sale after only one of three potential bidders MBK Partners submitted a letter of intent before the deadline. While the local media has reported that the government plans to resume its privatisation of Woori this year, we believe this is unlikely to make significant progress in the near term, given the presidential elections in Q4 2012. Asset quality: Woori's asset quality continued to improve its gross NPL ratio fell to c.1.65% and its coverage ratio increased to c.143%. Despite the improvement, Woori's metrics still lag those of its peers. Given its relatively higher exposure to SMEs, Woori's asset quality is also more vulnerable to an economic downturn. Funding and liquidity: The KRW loan-to-deposit ratio for the banking entities within Woori Financial Group was relatively stable during 2011. At 95%, the KRW LDR was also slightly lower than that of the other large Korean commercial banks. However, like its peers, Woori relies on wholesale markets for foreign-currency funding, which exposes it to refinancing risks if markets freeze. At end-2011, borrowings and bonds accounted for c.72% of the banking entities foreign-currency funding sources. Earnings: Compared with its peers, Woori was better able to manage its NIM. The bank's NIM declined a marginal 2bp q/q, to c.2.48%. Net interest income remained broadly stable q/q. However, 4Q11 credit costs doubled q/q and accounted for c.67% of 4Q11 pre-provision profit. We expect credit costs to remain elevated but absorbable relative to operating profit, as Woori continues to clean up its balance sheet and reduce its NPLs. Capital position: Despite a c.72bp decline in 4Q11, Wooris T1 CAR remained healthy, at c.10.7% at end-2011. Valuations: Woori banks bonds tightened through Q1, in line with the Korea complex. Although the spread differential between Woori (and other commercial banks) and Korean policy banks also tightened, we believe it is currently at fair levels. We have a constructive view on Korea. The continued improvement in Koreas external financing situation, especially in the banking sector, has addressed a key investor concern. Wooris asset quality continues to improve as the bank gets its NPL levels closer to its peers. Given the improvements to its fundamental and a supportive sovereign backdrop, we expect outperformance versus the index and upgrade our rating to Overweight.
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ISSUER INDEX
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Sovereigns
Republic of Indonesia Republic of Philippines Democratic Republic of Sri Lanka Socialist Republic of Vietnam 22 23 24 25 Republic of Korea Federation of Malaysia Kingdom of Thailand 26 26 27
Corporates
China Overseas Land and Investment Ltd (COLI) China Resources Land Ltd (CRL) CNOOC Ltd ENN Energy Holdings Ltd (Xinao Gas) GS Caltex Henderson Land HKT Trust & HKT Limited Hongkong Land Holdings Ltd (HKL) Hutchison Whampoa Ltd (Hutch) Hyundai Motor Co Ltd (HMC) Korea Electric Power Corp (KEPCO) Korea Gas Corp Korean gencos Korea Land and Housing Corp Korea National Oil Corp Noble Group Petroliam Nasional Bhd (Petronas) POSCO PTT Exploration & Production Public Company Limited PTT Global Chemical Company PTT Public Company Limited Reliance Industries Ltd SK Telecom Sun Hung Kai Properties Limited (SHKP) Swire Pacific Limited Telekom Malaysia Bhd Tenaga Nasional Bhd The Wharf (Holdings) Limited Woodside Petroleum Ltd Adaro Indonesia Agile Property Holdings Ltd Alliance Global Group Inc. (AGI) Bakrie Telecom Berau Coal Bumi Resources Central China Real Estate (CCRE) Chandra Asri China Oriental Group Co Ltd Cikarang Listrindo CITIC Pacific CITIC Resources Holdings Ltd Country Garden Holdings (Cogard) Energy Development Corp. Evergrande Real Estate Group First Pacific Company Limited Franshion Properties (China) Ltd Fufeng Group Limited Gajah Tunggal Glorious Property Guangzhou R&F Properties Co. Ltd Hidili Coking Coal Hopson Development Holdings Limited Indika Energy Indosat Tbk, PT International Container Terminal Services Inc. Kaisa Property Group 32 32 32 33 33 34 34 35 35 36 36 37 37 37 38 38 38 39 39 40 40 40 41 41 42 42 43 43 43 47 47 48 48 49 49 50 50 51 51 52 52 53 53 54 54 55 55 56 56 57 57 58 58 59 59 60 KWG Property Holding Ltd Longfor Properties MIE Holdings MNC Sky Vision Pacnet Limited Powerlong Real Estate Holdings Ltd Road King Infrastructure Ltd Shimao Property Holdings Limited SK Hynix (formerly Hynix Semiconductor) SM Investments Star Energy STATS ChipPAC Vedanta Resources Winsway Coking Coal Yanlord Land Group AmBank (M) Bhd (AmBank) Australia and New Zealand Banking Corp (ANZ) Axis Bank (Axis) Bangkok Bank (BBL) Bank of Baroda (BOB) Bank of China (BOC) Bank of China (Hong Kong) (BOCHK) Bank of East Asia (BEA) Bank of India (BOI) Canara Bank (CBK) CIMB Bank (CIMBB) CITIC Bank International (CINDBK) Commonwealth Bank of Australia (CBA) Dah Sing Bank (DSB) DBS Bank Ltd (DBS) Export-Import Bank of China (CHEXIM) Export-Import Bank of India (EXIM) Export-Import Bank of Korea (KEXIM) Fubon Bank (Hong Kong) (FBHK) Hana Bank (Hana) Hyundai Capital Services Inc (HCS) ICICI Bank (ICICI) IDBI Bank Ltd (IDBI) Industrial Bank of Korea (IBK) Kasikornbank (KBANK) Kookmin Bank (Kookmin) Korea Development Bank (KDB) Korea Exchange Bank (KEB) Krung Thai Bank Public Company Limited (KTB) Macquarie Group Ltd Malayan Banking Bhd (Maybank) National Agricultural Cooperative Federation (NACF) National Australia Bank (NAB) Oversea-Chinese Banking Corp Ltd (OCBC) Public Bank Bhd (PBK) Shinhan Bank (SHB) State Bank of India (SBI) United Overseas Bank (UOB) Westpac Banking Corp (WBC) Wing Hang Bank (WHB) Woori Bank 60 61 61 62 62 63 63 64 64 65 65 66 66 67 67 74 75 76 76 77 77 78 78 79 79 80 80 81 81 82 83 83 84 84 85 85 86 86 87 87 88 89 90 90 91 91 92 92 93 93 94 94 95 95 96 96
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ASIA CREDIT RESEARCH ANALYSTS

Barclays, Singapore Level 28, One Raffles Quay South Tower, Singapore 048583 Phone: Fax: +65 6308 3000 +65 6308 3206
Jon Scoffin Head of Research, Asia Pacific +65 6308 3217 jon.scoffin@barclays.com
Krishna Hegde, CFA Head of Asia Credit Research +65 6308 2979 krishna.hegde@barclays.com
Christina Chiow, CFA Chinese Real Estate; High Grade Industrials +65 6308 3214 christina.chiow@barclays.com Jit Ming Tan, CFA N. Asia High Yield Industrials and Resources +65 6308 3210 jitming.tan@barclays.com
Lyris Koh Financial Institutions +65 6308 3595 lyris.koh@barclays.com
Justin Ong High Grade Industrials; Oil & Gas and Utilities +65 6308 2155 justin.ong@barclays.com Erly Witoyo S.E. Asia High Yield Industrials and Resources +65 6308 3011 erly.witoyo@barclays.com
Avanti Save Credit Strategy +65 6308 3116 avanti.save@barclays.com
Timothy Tay, CFA High Grade Industrials; Oil & Gas and Utilities +65 6308 2192 timothy.tay@barclays.com
Nicholas Yap Financial Institutions +65 6308 3180 nicholas.yap@barclays.com
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Analyst Certification(s) We, Rahul Bajoria, Christina Chiow, CFA, Krishna Hegde, CFA, Lyris Koh, Wai Ho Leong, Justin Ong, Avanti Save, Prakriti Sofat, Jit Ming Tan, CFA, Timothy Tay, CFA, Erly Witoyo and Nicholas Yap, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 212-526-1072. Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays may have a conflict of interest that could affect the objectivity of this report. Barclays Capital Inc. and/or one of its affiliates regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). Barclays trading desks may have either a long and / or short position in such securities and / or derivative instruments, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, Barclays fixed income research analyst(s) regularly interact with its trading desk personnel to determine current prices of fixed income securities. Barclays fixed income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income, Currencies & Commodities Division ("FICC") and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investing clients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. The Corporate and Investment Banking division of Barclays produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. Barclays Capital is acting as financial advisor to Vedanta Resources in its proposed stake purchase in Cairn India. Explanation of the High Grade Sector Weighting System Overweight: Expected six-month excess return of the sector exceeds the six-month expected excess return of the Barclays Capital U.S. Credit Index, the PanEuropean Credit Index, or the EM Asia USD High Grade Credit Index, as applicable. Market Weight: Expected six-month excess return of the sector is in line with the six-month expected excess return of the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index, as applicable. Underweight: Expected six-month excess return of the sector is below the six-month expected excess return of the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index, as applicable. Explanation of the High Grade Research Rating System The High Grade Research rating system is based on the analyst's view of the expected excess returns over a six-month period of the issuer's index-eligible corporate debt securities relative to the Barclays Capital U.S. Credit Index, the Pan-European Credit Index or the EM Asia USD High Grade Credit Index, as applicable. Overweight: The analyst expects the issuer's index-eligible corporate bonds to provide positive excess returns relative to the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months. Market Weight: The analyst expects the issuer's index-eligible corporate bonds to provide excess returns in line with the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months. Underweight: The analyst expects the issuer's index-eligible corporate bonds to provide negative excess returns relative to the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company. Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended. Not Rated (NR): An issuer which has not been assigned a formal rating. For Australia issuers, the ratings are relative to the Barclays Capital U.S. Credit Index or Pan-European Credit Index, as applicable. Explanation of the High Yield Sector Weighting System Overweight: Expected six-month total return of the sector exceeds the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Market Weight: Expected six-month total return of the sector is in line with the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Underweight: Expected six-month total return of the sector is below the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Explanation of the High Yield Research Rating System The High Yield Research team employs a relative return based rating system that, depending on the company under analysis, may be applied to either some or all of the company's debt securities, bank loans, or other instruments. Please review the latest report on a company to ascertain the application of the
rating system to that company. Overweight: The analyst expects the six-month total return of the rated debt security or instrument to exceed the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Market Weight: The analyst expects the six-month total return of the rated debt security or instrument to be in line with the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Underweight: The analyst expects the six-month total return of the rated debt security or instrument to be below the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company. Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended. Not Rated (NR): An issuer which has not been assigned a formal rating. 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Asia-Pac Credit Insights Get Ready For A Bumpy Summer

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Asia-Pac Credit Insights Get Ready For A Bumpy Summer

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CREDIT RESEARCH

ASIA-PAC CREDIT INSIGHTS Get ready for a bumpy summer

Barclays | Asia-Pac Credit Insights

ASIA CREDIT STRATEGY

Get ready for a bumpy summer

Figure 1: Asia IG credit versus US credit (bp)

Figure 2: Asia HY credit versus US HY credit (bp)

Source: Barclays Research

Source: Barclays Research

Barclays | Asia-Pac Credit Insights

Figure 3: Summary of 2Q12 Asian credit views

Supply outlook Sector positioning

Source: Barclays Research

Positioning and forecasts

Barclays | Asia-Pac Credit Insights

Figure 4: Investment grade credit positioning

Note: Spreads as at 10 April 2012. Source: Barclays Research

Barclays | Asia-Pac Credit Insights

Figure 5: High yield credit positioning

Indonesian coal Other Asian HY corps

Note: Spreads as at 10 April 2012. Source: Barclays Research

Figure 6: Key trade ideas

Barclays | Asia-Pac Credit Insights

Asia IG lagging US Credit

13-Mar-12 24-Nov-11 07-Jun-10 22-Apr-10

24-Nov-11 04-Aug-11 22-Apr-10 01-Sep-09

y = 1.0644x + 170.57 y = 0.3882x + 199.33 R = 0.1272

y = 2.4654x - 108.28 R = 0.8107

y = 1.2723x + 51.347 R = 0.9264 US Credit 240

Source: Bloomberg, Barclays Research

Asia IG has lagged the global rally in credit

Figure 9: High yield credit performance (OAS, bp)

Source: Barclays Research

Source: Barclays Research

Barclays | Asia-Pac Credit Insights

and continues to offer better risk-adjusted returns

Value among Asian credits rated A and BBB

Figure 12: BBB rated credits (OAS, bp)

80 40 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

Source: Barclays Research

Barclays | Asia-Pac Credit Insights

Banking REITS/ Construction

Amount Outstanding (USD bn) Asia 7.2 US 38.5

S&P Rating Asia BB/BBUS

Moody Rating Asia US Comments

Source: Barclays Research

Themes for the rest of 2012

China growth to bottom in Q2 12; Easing of financing conditions underway

Barclays | Asia-Pac Credit Insights

Rest of Asia Uptick in political noise

Local-currency markets continue to grow - SGD outpacing CNH

Barclays | Asia-Pac Credit Insights

Figure 14: CNH and SGD issuance

Barclays | Asia-Pac Credit Insights

Figure 15: Distribution statistics for IG bonds

Figure 16: Distribution statistics for HY bonds

Source: Barclays Research

Source: Barclays Research

Primary revisions expect more supply from HK/China/Indonesia

Barclays | Asia-Pac Credit Insights

Figure 17: 2012 gross issuance forecast, contd

Underlying themes for issuance remain intact