Asia-Pac Credit Insights Get Ready for a Bumpy Summer

7/31/2019 Asia-Pac Credit Insights Get Ready for a Bumpy Summer

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CREDIT RESEARCH 20 April 20

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 101

ASIA-PAC CREDIT INSIGHTS

Get ready for a bumpy summer

Credit Strategy: Get ready for a bumpy summer................................................................. 1For 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 forVietnam 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-market-

oriented 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

Christina Chiow, CFA

+65 6308 3214

[email protected]

Krishna Hegde, CFA

+65 6308 2979

[email protected]

Lyris Koh

+65 6308 3595

[email protected]

Justin Ong

+65 6308 2155

[email protected]

Avanti Save

+65 6308 3116

[email protected]

Jit Ming Tan, CFA

+65 6308 [email protected]

Timothy Tay, CFA

+65 6308 2192

[email protected]

Erly Witoyo

+65 6308 3011

[email protected]

Nicholas Yap


www.barclays.com


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Barclays | Asia-Pac Credit Insights

20 April 2012 1

ASIA CREDIT STRATEGY

Get ready for a bumpy summer

Concerns about European sovereign risk and Chinas growth outlook are likely toproduce 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 aneutral 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 ofUSD75-80bn. 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 operatingoutlook 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 tomoderate. 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 externalfunding environment will highlight vulnerabilities and test reforms/mechanisms put

in place to mitigate external risks. We also expect political headline risk to tick up.

Krishna Hegde, CFA


Avanti Save

+65 6308 3116

[email protected]

Figure 1: Asia IG credit versus US credit (bp) Figure 2: Asia HY credit versus US HY credit (bp)

100

150

200

250

300

350

400

450

Dec-09 Jun-10 Dec-10 Jun-11 Dec-11

US Credit Asia IG ex sov

Avg difference: 43bp


Diff:

76bp

400

600

800

1,000

1,200

1,400

1,600

1,800

Dec-09 Jun-10 Dec-10 Jun-11 Dec-11

US HY Asia HY ex sov



Diff:

155bp

Source: Barclays Research Source: Barclays Research


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20 April 2012 2

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 growingdemand 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 ontightening USD liquidity, higher secondary supply of loan assets (as European banks deleverage and dispose of assets) andincreased loan/deposit ratios.

High yield corporates: Expect growing allocations from Japanese and Taiwanese accounts.Supply outlook 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%.

Sectorpositioning

Overweight: Korea and Indian HG credits. Chinese HY property. Philippines HY corporates.

Underweight: China and Indonesia in HG. Indonesian coal in HY.Source: Barclays Research

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 underweightingChina, 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. Wesuggest weighting positions in shorter-dated segments.

In high yield, overweight the Philippines HY corps, Chinese property and Indonesia non-coal 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, first-

home buyers are being encouraged via cheaper mortgages. Within the sector, we

recommend sticking to the mass market oriented developers.


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20 April 2012 3

Figure 4: Investment grade credit positioning

Universe OAS OAD

Spread duration

contribution

Recommended

positioning Comments

Benchmark EMAsia USD IG Index

239

Korea 218 3.82 22% overweight USD liquidity onshore has improved following which Moody'schanged ratings outlook to positive. Geopolitical risk hasdecreased slightly as the transition of power in North Korealooks to have gone through.

Hong Kong 276 5.16 23% neutral We expect supply out of Hong Kong corporates/banks to behigh given flush onshore liquidity conditions. Spillover fromChina concerns cannot be ruled out and spreads seem toadequately compensate for the supply and China risks. Werevise our view to neutral from overweight.

Indonesia 221 7.80 20% underweight Despite significant underperformance over the last six weeks,spreads are still tight to benchmark. We believe better value canbe found in high grade corporates in other countries. Politicalnoise and supply are key headwinds.

China 257 6.07 12% underweight With recent China data having a softer tone and growth

expected to slow further in Q2, we look for renewed concernsto translate into wider spreads. Expect supply to increase oncemarkets stabilise.

Malaysia 185 4.84 6% neutral Valuations are fair. USD2.7bn of Malaysian debt matures thisyear and we expect net supply to be low. With some of thesupply expected to be in sukuks (that attract a different buyerbase), technicals for straight bonds should be supportivedespite expected bond issuance from banks. Political cyclecould be a source of headlines and concern.

India 359 4.76 11% overweight Even after the strong outperformance in Q1, carry remainsattractive. Positioning in the institutional investor base remainsunderweight. Oil prices, a key source of risk have trended to thelower end of the range. We suggest weighting positions inshorter-dated segments.

Singapore 159 4.45 5% underweight Supply should keep a lid on tightening. Sector provides lowerspread than the benchmark

Thailand 277 5.61 3% underweight Expect political noise to tick up in coming months. Supply -potentially sovereign - could erode the scarcity value ofcorporate debt and result in repricing. We now recommend anunderweight, from overweight previously.

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


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20 April 2012 4

Figure 5: High yield credit positioning

Market

value (%)

OAS

(bp)

YTW

(%)

Recommended

positioning Comments

Benchmark EM AsiaUSD HY Index

565 7.20

HY sovereigns 39% 243 4.47 neutral In the context of the macro risks over the next few months, wenow believe a neutral weighting is appropriate (fromunderweight previously). Lower volatility should compensate forspread that is substantially below benchmark.

HY Quasis 8% 273 4.36 neutral Includes PSALM and old PLN bonds that are not rated by Fitch.PLN spreads to sovereign are at wides for the year. We changeour view to neutral from underweight.

China HY property 15% 1254 13.71 overweight After the selloff in March, valuations look more attractive.Regulatory measures are becoming more bifurcated - while homepurchase restrictions are likely to stay in place and investmentproperties will likely remain pressured, first-home buyers arebeing encouraged via cheaper mortgages. We now recommendbeing overweight, from neutral previously. Within the sector, wesuggest sticking to the mass market oriented developers.

China HY industrials 10% 871 9.99 neutral Most corporates are geared to investment which after surprising

to the downside in Jan/Feb seems to have stabilized somewhat inMarch. Following 13 Aprils GDP print we think there is scope forfurther policy support towards these activities. Our economistsexpect authorities to continue with policies of easing financingconditions and completing ongoing projects, especially those inthe railway, water transfer and power sectors. We turn lessnegative and change our view from underweight to neutral.

Philippines HY corps 5% 477 5.84 overweight Spread pickup in % terms of corporates vs the sovereign/quasi-sovereigns remains very high. Fundamentals remain strong andsentiment is positive (local stock market is close to an all-timehigh). Supply should be well-absorbed given domestic support.

Indian HY 4% 813 9.15 neutral Sector dominated by Vedanta where near-term outlook will bedriven by headlines around progress of the corporaterestructuring.

Indonesian non-coal 4% 852 9.43 overweight Sector has some wide spread credits where credit quality isimproving and we look for the market to recognise this change.We therefore revise to overweight from neutral.

Indonesian coal 4% 630 7.59 underweight Valuations are tight and potential supply could cheapen thesector. Coal prices have been trending lower.

Other Asian HY corps 11% 549 6.78 neutral Includes HY bank capital, perpetuals and unrated Hong Kongissuers. We have revised to neutral from overweight.

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

Source: Barclays Research


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20 April 2012 5

Asia IG lagging US Credit

Asia investment grade continues to offer value versus Asia high yield and global/US credit1.

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 investmentgrade 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

y = 2.4654x - 108.28

R2 = 0.8107

y = 1.0644x + 170.57

R2

= 0.8854y = 0.3882x + 199.33

R2

= 0.1272

y = 1.7846x - 22.767

R2

= 0.9858

y = 1.2723x + 51.347

R2

= 0.9264

120

170

220

270

320

370

420

470

520

570

120 140 160 180 200 220 240

13-Mar-12 24-Nov-11 24-Nov-11 04-Aug-11 04-Aug-11 07-Jun-10

07-Jun-10 22-Apr-10 22-Apr-10 01-Sep-09

US Credit

Asia Credit

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 hasbeen in BBB-rated credits.

Figure 8: Investment grade credit performance (OAS, bp) Figure 9: High yield credit performance (OAS, bp)

100

150

200

250

300

350

400

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

10

30

50

70

90

110

130US Credit Asia IG ex sov

Difference (RHS)

400

600

800

1000

1200

1400

1600


-100

0

100

200

300

400

500

600US HY Asia HY ex sov

Difference (RHS)


1 We have focused on the comparison with US credit because over the past two years, European credit performancehas been driven by developments in the eurozone sovereign debt crisis.


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20 April 2012 6

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 duringperiods of risk aversion.

Figure 10: Sharpe ratio for Asia credit compared with global credit

Sharpe Ratio

HY Credit IG Credit Sovereign Credit

Asia 0.51 Asia 0.65 Asia 0.59

US 0.98 US 0.53 EM 0.61

Europe 0.82 Europe 0.28

Note: Based on Sharpe ratios for monthly excess returns since September 2009. Source: Barclays Research

Value among Asian credits rated A and BBBWithin 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 cross-

currency 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) Figure 12: BBB rated credits (OAS, bp)

80

130

180

230

280

330

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

40

60

80

100

120

140

160'A' rated US Corps

'A' rated Asia Corps

Difference (RHS)

150

200

250

300

350

400

450

500

550

Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

50

70

90

110

130

150

170

190

210

230'BBB' rated US Corps

'BBB' rated Asia Corps

Difference (RHS)



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20 April 2012 7

Figure 13: Relative valuation of Asia and comparable US high grade and high yield credit sectors

OAS

(bp)

Amount

Outstanding

(USD bn)

S&P

Rating

Moody

Rating

Investment Grade Asia US Asia US Asia US Asia US Comments

Energy 223 166 21.9 198.5 A-/BBB+ A-/BBB+

A2/A3 A3/BAA1

Asian energy names have rallied and currentlyoffer modest pick-up over US names. We likehigher- spread names, such as Indian, Koreanand Indonesian energy companies.

Utilities 264 163 18.0 311.8 A-/BBB+ A-/BBB+

A2/A3 A3/BAA1

Asia utilities are trading wider than US utilitieseven on a historical basis. For instance the ratioof Asian utilities to US utilities is currently 1.6x,compared with the historical (since August2010) range of 1.1-1.7x. We like Korean, Chineseand Indonesian utilities, in that order.

Banking 256 256 69.6 680.8 A/A- A/A- A2/A3 A1/A2 We continue to see value in the Korea policybanks.

REITS/Construction

343 240 9.4 54.8 A-/BBB+ BBB+/BBB

A2/A3 BAA1/BAA2

Broadly, we like Hong Kong developers, giventheir stable fundamentals and wider spreads

versus the benchmark.

OAS

(bp)

Amount

Outstanding

(USD bn)

S&P

Rating

Moody

Rating

High Yield Asia US Asia US Asia US Asia US Comments

Metals andmining

793 667 7.2 38.5 BB/BB- BB-/B+ BA2/BA3 BA3/B1 Asian credits have outperformed US credits.The spread ratio stands at 1.2x versus a rangeof 1.0-1.8x since August 2010. The sector islargely made up of Indonesia coal producers.We suggest an underweight on the Indonesiancoal and Chinese metals and mining sectors.

Homeconstruction

1,241 840 13.4 23.3 BB-/B+ BB-/B+ BA3/B1 B1/B2 Asian real estate companies trade wide of USpeers on: 1) the weak outlook for Chinese

developers versus the improvingfundamentals in the US sector; and 2)expected supply from Asian developers. Wehave a neutral view on this sector.

Utilities 328 680 8.9 90.2 BB/BB- BB-/B+ BAA3/BA1

BA3/B1 Asian utilities trade tight compared with UShigh 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


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20 April 2012 8

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 first-

time 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 forsales 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 weexpect political noise to pick up (WSJreports that a Bersih 2.0 rally is slated for 28 April).

Thailand is another candidate where headline risk could rise we suggest keeping aneye on discussions around the reconciliation bill being discussed in Parliament.

Political posturing related to the Indonesian presidential election looks to have startedmuch 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 theimpeachment 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 leadershiptransition will occur over September-October both these events will be significant interms 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 SGD-

denominated 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 ofpaper 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.
https://live.barcap.com/go/publications/content?contentPubID=FC1809325https://live.barcap.com/go/publications/content?contentPubID=FC1809325https://live.barcap.com/go/publications/content?contentPubID=FC1809325https://live.barcap.com/go/publications/content?contentPubID=FC1809325


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20 April 2012 9

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.

Figure 14: CNH and SGD issuance

0

1,000

2,000

3,000

4,000

5,000

6,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr

CNH SGD

2011: USD34bn 2012 YTD: USD6.8bn



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20 April 2012 10

Primary revisions expect more supply from HK/China/IndonesiaWe now forecast gross issuance2 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 loan3 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 corporatessuch 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 Gross issuance

USD bn 2012 2012 YTD 2011 2010

High grade corporates 30-35 19.5 18.6 20.1

China 3.5-5.5 3.8 8.9 3.5

Hong Kong 12-15 10.0 1.9 8.4

India 3-3.5 1.5 1.0 2.0

Indonesia 1.5-2.0 NA NA NA

Korea 2-3 3.1 4.8 4.4

Other 3.5-5.5 1.1 2.1 1.8

2 USD-denominated bond issuance in Asia ex-Japan.3 In this note we refer to syndicated loans as loans. Bilateral loans have been excluded (unless stated otherwise) due tolimited data.

Figure 15: Distribution statistics for IG bonds Figure 16: Distribution statistics for HY bonds

0%

10%

20%

30%

40%

50%

60%

Commercial

banks

Insurance

companies

Retail/pvt

banks

Asset

Managers

Agencies

Others

2011 2012

0%

10%

20%

30%40%

50%

60%

70%

Commercial

banks

Insurance

companies

Retail/pvt

banks

Asset

Managers

Agencies

Others

2011 2012



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20 April 2012 11

Figure 17: 2012 gross issuance forecast, contd

Full year

forecast Gross issuance

USD bn 2012 2012 YTD 2011 2010

High yield corporates 13-15 5.6 16.0 16.2

China 6.0-8.0 3.1 8.6 9.5- Property 3.5-4.5 1.6 4.6 6.7

- Others 2.5-3.5 1.5 4.0 2.8

Indonesia 2.5-3.5 1.2 3.1 3.1

Philippines 0.9-1.2 0.5 1.0 2.5

Other 2.5-4.0 0.9 3.3 1.2

Financials 18-24 11.8 16.3 24.3

Hong Kong/China 2-2.5 0.3 2.3 5.5

India 3.5-4.5 0.5 4.3 5.6

Korea 7.5-10.5 5.0 8.7 9.8

Singapore 2.5-3.5 3.5 0.0 1.5

Others 2.5-3 2.5 1.0 1.9Sovereigns 6-6.5 5.8 8.3 9.9

Total 75-80 42.5 59.2 70.6


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 issuance1.1.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.


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20 April 2012 12

1.2. Deleveraging of European banks In line with our expectations, syndicated loanprices 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 andChinese corporates with upcoming loan and bond maturities).

2. Local-currency bond markets capacity to offer an alternative source of funding is likelyto 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 isscarcity 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 trendingwider 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-denominatedold-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 USD-

denominated syndicated loans)

1116

20

1312 11

15

6

1 33

5

0

5

10

15

20

25

1Q11 2Q11 3Q11 4Q11

AP EMEA US

46%49%

5%

53%

27%

10%

50%

37%

12%

61%

26%

13%

(USD bn)

Source: Dealogic


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20 April 2012 13

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 beacquisitive 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 needs2.1. 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 activelymanaged 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 in2012. 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 corporatesin 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 l ikely 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 debtalthough 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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20 April 2012 15

SUMMARY RECOMMENDATIONS

Sector Overweight Market Weight Underweight

High Grade China Resources Land China Overseas Land & Investment ENN Energy Holdings (Xinao)

Corporates Korea Hydro & Nuclear Power (KHNP) CNOOC Hongkong Land Holdings

Korea National Oil (KOROIL) GS-Caltex Corp Korea Gas Corporation (KOGAS)

Reliance Industries Henderson Land Noble Group

HKT Trust & HKT Limited Petroliam Nasional (Petronas)

Hutchison Whampoa POSCO

Hyundai Motor SK Telecom

Korea Electric Power Corp Sun Hung Kai Properties

Korea Land and Housing Corp Tenaga Nasional

Korean gencos

PTT Exploration & Production

PTT Global Chemical

PTT pcl

Swire Pacific

Telekom Malaysia

The Wharf (Holdings)

Woodside PetroleumHigh Yield Bakrie Telecom Agile Property Adaro Indonesia

Corporates Bumi Resources ('16s) Berau Coal Chandra Asri

Country Garden ('14s, '15s and '17s) Bumi Resources ('17s) CITIC Pacific

Evergrande Real Estate Central China Real Estate Glorious Property

Fufeng Group China Oriental Group Hopson Development

Gajah Tunggal Cikarang Listrindo ('19s) SK Hynix (formerly Hynix Semiconductor)

KWG Property (16s) CITIC Resources Holdings Indika Energy ('18s)

MIE Holdings Country Garden ('18s) Indosat

MNC Sky Vision Franshion Properties Road King

Pacnet Indika Energy ('16s) Star Energy

Shimao Property Holdings (17s) Kaisa Vedanta Resources ('14s)

KWG Property 12.5% (old '17s) Yanlord Land ('17s)

Longfor PropertiesShimao Property Holdings (16s and 18s)

STATS ChipPAC

Vedanta Resources ('16s, '18s and '21s)

Yanlord Land ('18s)

Banks and AmBank (M) Bhd Axis Bank Australia & New Zealand Banking

Financial CIMB Bank Bank of Baroda Bangkok Bank

Institutions Export-Import Bank of India Bank of China HK CITIC Bank International

Export-Import Bank of Korea Bank of East Asia Commonwealth Bank of Australia

Hana Bank Bank of India Hyundai Capital Services Inc

Kasikornbank Canara Bank IDBI Bank

Kookmin Bank Dah Sing Bank Industrial Bank of Korea

Korean Development Bank DBS Bank National Australia Bank

Korea Exchange Bank Export-Import Bank of China Westpac Banking CorpMacquarie Group Fubon Bank (Hong Kong)

National Agricultural Cooperative Federation ICICI Bank

Shinhan Bank Krung Thai Bank

State Bank of India Oversea-Chinese Banking Corp

Woori Bank Public Bank Bhd

United Overseas Bank

Wing Hang Bank

Note: 1) Shaded areas denote change of rating or initiation of coverage since the last publishedAsia 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
https://live.barcap.com/go/publications/content?contentPubID=FC1810354https://live.barcap.com/go/publications/content?contentPubID=FC1810354https://live.barcap.com/go/publications/content?contentPubID=FC1810354


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20 April 2012 17

SOVEREIGNS


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20 April 2012 18

SOVEREIGNS

Low-beta holdings to cushion bumps in the road

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 sovereignpeers.

2. 10y Indonesia bonds have cheapened recently, and at current levels look cheap to thecurve. 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.

Asia Credit Research

Avanti Save


Economics Research

Wai Ho Leong

+65 6308 3292

[email protected]

Prakriti Sofat

+65 6308 3201

[email protected]

Rahul Bajoria+65 6308 3511

[email protected]

Figure 20: Indonesia 10s30s curve slope (interpolatedTreasury spread, bp)

Figure 21: EM sovereign credit 10s30s curve (interpolatedTreasury spread, bp) vs 10y bond spread

-40

-20

0

20

40

60

80


INDON 10s30sbp

-20

-10

0

10

20

30

40

120 140 160 180 200 220

MexicoPHILIP

Brazil

COLOM

INDON

SOAF

10y bonds

10s30s

Source: Bloomberg, Barclays Research Source: Bloomberg, Barclays Research


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20 April 2012 19

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 thesame 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.

Indexbid: 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 increasedcapital 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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20 April 2012 20

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

Figure 22: Loans as a % of GDP vs GDP per capita Figure 23: US and European banks exposure to selected EMAsia countries (% of domestic borrowers credit at June 2011)

0%

20%

40%

60%

80%

100%

120%

140%

0 5000 10000 15000 20000 25000

Korea

MalaysiaVietnam

Thailand

Indonesia

Sri Lanka

PhilippinesGDP per capita ($)

Credit/GDP

0

5

10

15

20

25

ID MY PH TH VN KR CN

US Banks EU banks

Source: CEIC, Barclays Research Source: ADB, Barclays Research

Figure 24: Short-term external debt coverage ratio

0

2

4

6

8

10

12

VN IN ID KR LK MY PH TH

2008 Q4 Current

Source: BIS, Bloomberg, Barclays Research


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20 April 2012 21

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 Event

December 2012 South Korea Presidential elections

September-October 2012 (est) China leadership transition

2014 Indonesia presidential elections.

28 April 2012 Malaysia Bersih 2.0 rally

As early as end 2Q12 (May) 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 asIndonesia, Sri Lanka, India and Korea stand out as being the most potentially vulnerable.

Figure 26: External vulnerability indicators (% of GDP)

-60%

-40%

-20%

0%

20%

40%

60%

80%

CN TH MY IN KR PH VN LK ID

Net FDI C/A surplusFXR S/T external debtBond (foreign holding) Equity (foreign holding)Net

Note: Short term external debt data is as at 3Q11 from the World Bank. Foreign holdings of local-currency bonds arenot available for China and Vietnam. Foreign equity holdings data are not available for Sri Lanka and Vietnam; forothers the data are as at end-2010. Source: CEIC, BIS, Barclays Research


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20 April 2012 22

Republic of Indonesia

Weight Commentary

over We have a positive view on the Indonesian sovereign (BB+ Pos/Baa3 Stb/BBB- Stb) and expect its bonds to outperformother 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 moneyinflows 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 tocommodity 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. Althoughwe expect SBY to finish his term, his authority looks to have been eroded. Despite the Presidents strong endorsement ofthe 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 ofunprocessed 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 inINDOGBs to spillover into credit. Consequently, Indonesia CDS underperformed recently. While we acknowledge the risksof spillover, we believe pass-through into CDS will be less than in previous episodes given: (i) reduced hedging demand asmost offshore investors in INDOGBs remain underweight; and (ii) INDOGB prices have already adjusted to increasedinflation 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 2012would be IDR170trn or 2.1% of GDP and inflation would reach 5.5% by year-end. While these are higher than previousestimates, 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 likelygather pace towards the latter part of 2012. The focus will then turn to potential candidates for the presidential election in2014, as President Yudhoyono is not allowed to run for a third term. We believe political noise could be a source ofvolatility for credit especially towards the end of the year.

Supply outlook: Parliaments approval of the revised budget confirms additional gross issuance of IDR17trn, not theIDR50trn as reported in news reports previously (total gross issuance will be IDR271.6trn vs IDR254.8trn previously). Asper DMO strategy, 14-18% of the borrowing will be external, ie, USD4-5bn. We now believe the sovereign has nearlyconcluded external issuance for 2012 (2012F: USD4.5bn vs issuance YTD of USD4.25bn). From 2014, Indonesia has morethan USD1bn of USD-denominated bonds coming due each year until 2021. We think the sovereign should considerconducting a liability management exercise like the Philippines to term out short dated/high coupon debt into longertenor 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 abuying 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 10s30ssteepeners as a medium-term trade. The Indonesian curve is more inverted than its EM sovereign credit peers (see Figure21in the Sovereign Overview section). Given the rally in the INDON 42s and potential risk of political noise we think thecurve is likely to steepen in the medium term.


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20 April 2012 23

Republic of Philippines

Weight Commentary

under The Philippines sovereign (BB Pos/Ba2 Stb/BB+ Stb) is a defensive investment within Asia, in our view. We believe its bondspreads reflect the countrys strong external position and improved debt management. We have an underweight withinour EM Credit Portfolio on valuation grounds. We expect the sovereign to receive a one notch ratings upgrade in the next3-6 months, catching up with Fitch.

Fiscal position and structural reforms: We expect government capex to rise in 2012 given delineation of project details inthe budget and cash already being allocated to line ministries. But a risk is that spending remains constrained oncorruption-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 PPPprojects in the pipeline (worth PHP191bn). While we expect momentum on PPPs to pick up this year, we believe actualrealisation will be 50% given complicated nature of PPPs and lack of a strong program leader to drive progress. Progresson structural reforms is important for the medium term. Successful passage of sin tax legislation and rationalisation offiscal incentives under review by Congress, we think, would be a clear positive for the sovereign credit profile given thestructural 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 isthe 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 downabout 2% y/y in December 2011 (in USD terms), while at the same time the total outstanding amount of USD-

denominated Philippines bonds was also down about 2% on account of buybacks in October 2011; (2) Attractiveopportunity for retail investors to enhance yields (vs 1y USD time deposits that yield only 1.25-1.5%); and (3) Anincreasing 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. Thegovernments cash position is flush, with net excess financing of PHP200bn carried over from 2011. This providesflexibility 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 bondsand/or issuance of GPNs. Furthermore, the Philippines has indicated it will issue bonds (balanced between offshore andlocal) and on-lend the proceeds to the Power Sector Assets And Liabilities Management Corp (PSALM) to refinance someof 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 remainrobust. If global macro outlook turns weaker on worries such as European debt, we expect Philippine bonds tooutperform. As a core holding we suggest long-dated bonds such as the PHILIP 38s/34s.


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20 April 2012 24

Democratic Republic of Sri Lanka

Weight Commentary

over We suggest an overweight stance on Sri Lanka (B+ Stb/B1 Pos/BB- Stb) as we think the bonds offer attractive carryagainst the EM sovereign benchmark.

External position: Sri Lankas balance of payments position remains vulnerable to swings in commodity prices. Accordingto 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 tradedeficit. 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, curbimport demand and reduce reserve depletion: (1) Policy rates have been hiked twice - the repo rate by 75bp to 7.75% andreverse repo rate by 125bp to 9.75%; (2) Domestic fuel prices were increased effective 12 February to encourage energyconservation 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 currencymarkets is now driven by supply and not based on price. This change follows the 3% deprecation announced in thebudget in November 2011.

While the package of measures to temper import growth (oil-related in particular) looks comprehensive, we expect tradedata 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) andmonthly foreign reserves position (USD6.1bn on 4 April, including IMF disbursals, up from USD5.8bn in January). It isworth noting that a significant portion of the countrys FX reserves comprise borrowed funds (eurobonds, IMFdisbursements and foreign holdings of treasuries).

IMF Stand-by Arrangement: The Executive Board of the International Monetary Fund (IMF) completed its seventh reviewof Sri Lanka's Stand-By Arrangement (SBA) on 2 April. The completion of the review enables the immediate disbursementof USD426.8mn, bringing total disbursements under the SBA to about USD2.13bn. In addition, the Executive Boardapproved an extension of the arrangement period to 23 July 2012, to allow time for the completion of the eighth and finalreview. This development is in line with our expectations; we continue to believe that IMF support is positive for the creditin the near term. However, it is worth emphasising that the remaining USD400mn in the SBA facility alone may not besufficient 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 debtand boost foreign reserves. Sri Lanka has USD1.4bn of external debt due in 2012, and in excess of USD1bn repayable peryear over 2013-2015. The governments 2012 budget assumes LKR175.3bn (~USD1.5bn) of foreign financing (withLKR55bn (~USD0.5bn) as the foreign commercial component).

Valuations: We think Sri Lanka bonds offer attractive carry against the EM sovereign benchmark. We suggest buying theSRILAN '20s/'21s. The inverted 5s10s curve also makes the SRILAN '15s attractive, in our view, though we understandthese 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 July2011 (when the sovereign issued the SRILAN 21s at T+332.2bp). For comparison, the longer dated SRILAN 21s arecurrently quoted at CT10+413/399bp (+81/67bp since issuance).


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20 April 2012 25

Socialist Republic of Vietnam

Weight Commentary

under The Vietnam sovereign (BB- Neg/B1 Neg/B+ Stb) credit story is improving, but we suggest an underweight following theYTD rally.

External position: According to the Asian Development Bank, Vietnams FX reserves rose by USD1.4bn last year toUSD13.8bn. 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 state-owned enterprises are also a source of contingent liabilities USD-denominated loans have risen (credit growth of 23% in1H 11 vs 3% for VND loans) as a result of low lending rates (6-8%). Previously, we focussed on the premium implied bythe 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 thesovereign: (1) the pace of policy easing (so far the SBV has cut 200bp); (2) size of banking sector liabilities andrestructuring progress; and (3) SOE privatisation.

Policy: Measures to tame inflation and curb credit growth are showing signs of success, which has eased concerns aboutpotential 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% in2012, down from 18.6% last year. Plans to restructure the banking sector also look credible, in our view. Early signs areencouraging in December theFirst 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 state-owned 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% inNovember from 2% at end-2010 (based on Vietnam reporting standards). Credit growth moderated to 11% in 2011 (thegovernments target was 15-17%) compared with an average of more than 35% pa during 2006-10. For 2012, a policy of4-tiered credit growth limits will be applied to banks ranging from 0% to 17%, depending on the health of a bank and itsprofitability.

Supply outlook: We do not expect bond issuance from the sovereign this year. Foreign currency borrowing will most likelybe 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 thebanking system/SOEs are likely to surface in the medium term. We expect Vietnams sovereign ratings to remainunchanged in the coming 6-12 months. Our sense is that the outlook will remain negative in the near term. Key drivers willbe consolidation in the banking sector, SOE privatisation and increased transparency.


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Republic of Korea

Outlook Commentary

positive We have a positive view on Korea sovereign (A Stb/A1 Pos/A+ Pos) credit driven by the countrys sound and improvedexternal position.

Debt position: The total stock of gross external debt for Korea is high at USD398bn (137% of GDP). The high level ofnon-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-overrisks in 2011) to reduce external vulnerability have lowered the proportion of short term external debt (from 43% oftotal external debt in June 2010 to 34% by December 2011) while rising foreign reserves have boosted the short-termdebt coverage ratio. Furthermore, data from the Financial Supervisory Service (FSS) suggests reduced roll-over risks asbanks have been able to convert short-term foreign currency debt into long-term borrowings (banks held 74% ofshort-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 inany analysis of Koreas external position. We note that the same Korean entities that have USD15.8bn in foreigncurrency bonds maturing in 2012 (based on Dealogic) have also issued nearly USD9.1bn in new paper this year, inaggregate. This suggests that roll-over risk is still low. We believe the external debt position will continue to improveand 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% ofhousehold debt is property-related borrowing; total household debt to GDP c.70%). For the time being, we see comfortin the fact that most household debt is held by medium and high income households (3rd to 5th quintiles) and wagescontinue to grow.

External vulnerability: The risk of weaker exports and rising oil prices are key vulnerabilities for Korea. Exports areparticularly exposed to auto and electronics demand in the US, where high frequency indicators (ISM new orders andauto 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 bufferagainst any adverse trends. We think most pressure is likely to be felt by Kepco, the state-owned utility, as it cannotautomatically 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 forpolicy continuity. Although it now commands a smaller majority in the National Assembly (down from 174 seats out of300 previously), our economists think the outcome reduces the possibility of a sharp reduction in government supportfor 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, wewould 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 Commentary

neutral Malaysia (A-/A3/A- all Stb) has a strong external liquidity position, but the sovereign is vulnerable to fluctuations in globalcommodity/energy prices given its dependence on oil-related revenues. Our commodity analysts expect oil prices to stayelevated (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 petroleumproducts. A potential source of weakness is that nearly 39% of MGS are held by offshore investors. Similar toIndonesia, a sharp reversal in risk sentiment could see a reversal of such flows. The good news is that Malaysiandomestic banks and the Employees Provident Fund (EPF) are natural buyers of this paper, which, we think, would capany weakness from risk flares.

Politics: Our economists believe elections could be called as early as May. While we do not expect any disruption aroundelections, sovereign CDS may come under pressure on headlines.

Sukuk bond technicals: We have previously highlighted that demand for Sharia-compliant assets from Islamicbanks/funds/Takaful companies is robust, driven by the strong liquidity of Islamic banks, limited availability ofalternative Islamic investment products and scarcity of sukuk supply. We believe such demand dynamics are likely toremain 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 tappingsukuk bonds, the scarcity value is likely to diminish. In addition, Petronas has c.USD2bn of bonds coming due in May2012. 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 Commentary

neutral Macro fundamentals for Thailand (BBB+/Baa1/BBB all Stb) are intact and growth is expected to pick up, supported byflooding relief and reconstruction efforts. The political situation appears to be stable, with the governments focus onreviving the economy. We suggest keeping a watch on political news. The ban on some members of the Thai Rak Thaiparty 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 budgetfinancing at 20% of the annual budget; plus 80% of principal repayment expenditure. In addition, the government canborrow the equivalent of up to 10% of the annual budget to promote Economic and Social development (includingborrowing 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 foreignborrowing has been in JPY.

Valuations: As a tail risk hedge for Thailand, we recommend buying protection at levels inside a 30bp spread differentialto Malaysia. We think discussions about reconciliation and resumption of political activities by members of Thai Rak Thaicould be a source of political noise.

Note: Where indicated, weights refer to ourEM Credit Portfolio. See The Emerging Markets Quarterly

, page 18, March 2012.
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ASIA HIGH GRADE CORPORATES


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HIGH GRADE

Supply issues continue to drive spreadsThis 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 5-

10x, 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 toinvest 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 FY12given 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 KG-

D6 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.

Timothy Tay, CFA

+65 6308 2192

[email protected]

Justin Ong

+65 6308 2155

[email protected]


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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.


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China Overseas Land and Investment Ltd (COLI) Christina Chiow

Rating Rationale

Market Weight Credit view: Amid ongoing policy tightening, COLI achieved strong contracted sales of HKD87.1bn in 2011, ahead of itsHKD80bn target. We believe this reflects COLIs nationwide presence and an established brand name. The company alsodemonstrated prudence in preserving credit quality while pursuing growth. We expect COLIs credit profile to remainstrong and benefit at the expense of smaller players. COLI recorded contracted sales of HKD26.1bn in 1Q12, 33% of itsfull-year target. We expect debt/EBITDA and debt/capital to remain robust in 2011, at c.2.5x and 40%, respectively, andlook for interest cover to remain above 10x. Cash holdings of more than HKD19bn amount to more than 10% of totalassets at December 2011 and appear ample relative to short-term debt of HKD11.3bn (includes amounts due to relatedentities). In addition, leveraging its long operating track record and healthy financials, COLI continues to enjoy a high levelof financial flexibility in the equity, loan, and bond markets. In February 2012, COLI issued USD750mn of bonds, and inApril 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 state-owned company with a stable credit profile. We think the longer-dated 2020 at T+340bp is less attractive. Overall, wemaintain our Market Weight on COLI, as we expect its bonds to perform in line with the market. Valuations of other highgrade 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) Christina Chiow

Rating Rationale

Overweight Credit view: The outlook for China Resources Land (CRL, Baa2/BBB both Stb) remains stable, in our view. Execution todate has been better than expected, with the company more focused on asset turnover. It made good progress in itssales 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 theportfolio is expanding. Excluding newly opened investment properties, rental income grew 47.4% y/y; including newproperties it rose 57.6%, to HKD2.8bn in 2011. CRL is one of the few Chinese developers we cover that has a sizeableand quality investment property portfolio. We expect credit metrics to be relatively stable, with debt/EBITDA of c.4.5xand debt/capital of below c.45% in 2012. Asset injections from parent China Resources Holdings (CRH) are likely tocontinue there was a largely equity-funded injection in 3Q11 which in our view indicates the strong relationship CRLhas with CRH, a state-owned enterprise. Offsetting this is the companys appetite for growth, which has resulted in asignificant increase in debt, which climbed to HKD60.7bn at end-Dec 2011 from HKD37.8bn at end-Dec 2010. CRL has ahigh level of short-term debt of HKD22.1bn, but we do not think refinancing is a major risk as it continues to have accessto loan markets at reasonable costs. Average borrowing costs were only 3.6% in 2011. Cash remains relatively high atHKD15.4bn at Dec 11.

Valuation: At c.T+340bp, we think current valuations are compelling for a Baa2/BBB state-owned developer with a highquality investment property portfolio. The bonds have a relatively short tenor compared with the bonds of other state-

owned Chinese developers. We maintain our Overweight rating on CRL.

CNOOC Ltd Timothy Tay/Justin Ong

Rating Rationale

Market Weight Credit view: We continue to view CNOOC (Aa3, AA- both Stb) as a stable credit and it continues to have the strongestcredit metrics within the Asian Oil and Gas sector. For 2011, CNOOC reported strong results as FY sales rose 34% toCNY214bn and its EBIT increased 27% to CNY90.6bn, thanks to higher oil and gas prices. The realised oil price for CNOOCwas USD109.75/bb (+40.8%) and its realised gas price was USD5.15 (+14.7%). Management maintained its 2012production guidance of 330-340mn boe and it expects a higher capex of USD9.3-11bn (2011: USD6.4bn), comprisingdevelopment (USD6.9bn), exploration (USD1.7bn) and production (USD1.4bn). Balance sheet remained solid and itsliquidity position strong, marked by a net cash position of

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