20230215-招银国际-HK_corps__Prefer_perps_for_yield_pick-up_8页_623kb

CMBI Credit Commentary Summary

Core Content

This credit commentary from CMBI Fixed Income Department evaluates the investment opportunities in Hong Kong (HK) corporate bonds, particularly focusing on perpetual bonds (perps) that offer yield pick-up potential over senior bonds. The report highlights three specific perpetual bonds: NWDEVL 4.125 Perp, ROADKG 7.75 Perp, and LEEMAN 5.5 Perp, each with unique characteristics and investment appeal based on coupon reset, yield, and call incentives.

Main Points

1. HK Corporates: Prefer Perps for Yield Pick-Up

• HK corporates have shown strong performance since November 2022, aligned with market rebound.
• Valuation of HK corporates is lower than before, reducing investor conviction.
• Despite this, certain perpetual bonds (perps) are considered attractive due to:
  • Coupon resets and step-ups on first call dates.
  • Access to multiple funding channels.
  • Strong incentives for issuers to call the bonds to control funding costs.
  • Good carry and yield pick-up over senior bonds.

2. NWDEVL 4.125 Perp

• Yield pick-up: 2.2% over NWDEVL 4.125'29.
• YTC: 9.1% at a price of 81.4.
• Coupon reset: From 4.125% to 5yUST + 5.858%, which will be approximately 9.79% on the first call date (June 10, 2028).
• Time to call: 13 months before the maturity of NWDEVL'29.
• Asset disposals: NWDEVL has disposed over HKD5.3bn in non-core assets since FY22-23, supporting its liquidity.
• Debt management: Active liability management with two tender offers in 2022.
• Liquidity and repayment capability: Strong cash reserves (HKD57.7bn at Jun'22) and diversified funding channels.

3. ROADKG 7.75 Perp

• Yield pick-up: 21.4% over ROADKG 6.7 09/30/24.
• YTC: 31.9% at a price of 70.1.
• Coupon reset: From current level to 5yUST + 6.003% on Nov 18, 2024 (first call date).
• Reset coupon: Expected to be around 10% based on current UST rates.
• Liquidity and performance: Road King has shown resilience with property sales up 5% YoY in FY22.
• Debt maturity: The next USD bond maturity is in Sep'24, with active USD bond repurchases since Mar'22.
• Debt structure: Refinancing pressure is manageable, and the company has access to alternative funding.

4. LEEMAN 5.5 Perp

• YTC: 9.4% at a price of 93.9.
• Coupon reset: From 5.5% to 5yUST + 8.28% on May 29, 2024 (first call date).
• Reset coupon: Expected to be around 12.2% based on current UST rates.
• Incentive to call: High due to substantial coupon step-up (500bps).
• Tender offer: LEEMAN made a tender offer in Dec'22 to redeem USD59.2mn of the perp at 86.
• Refinancing ability: The company has a HKD4.75bn term loan facility, sufficient to refinance the perp.
• Profit warning: Issued in Feb'23, indicating a significant drop in net profit (c60% YoY), likely due to higher pulp prices.
• CAPEX: High CAPEX in FY19-21 for new pulp production lines, affecting short-term cash flow.

Key Information

Selected Perps for Yield Pick-Up

Key Financial Indicators (Jun'22)

Debt Redemption and Refinancing Activity

• Dec'22: Redeemed NWDEVL 4.5 05/19/30 and NWDEVL 3.75 01/14/31 at 81.4 and 76.5 respectively.
• Jun'22: Redeemed NWDEVL 4.375 11/30/22 at 100.5.
• Feb'23: Redeemed ROADKG 7.875 02/01/23 (USD343mn).
• Refinancing: Signed HKD4.75bn 5-year term loan facility.

Asset Disposals and Liquidity

• NWDEVL has realized over HKD5.3bn in non-core asset disposals.
• ROADKG has sold RMB41.7bn in mainland China property sales, outperforming peers.
• LEEMAN has high CAPEX in pulp production, affecting short-term cash flow.

Conclusion

The report identifies three HK perpetual bonds with strong yield pick-up potential and incentives for early call. These perps are viewed as good carry plays, supported by the issuers' liquidity, active liability management, and access to funding channels. Investors are advised to consider these opportunities while being aware of the risks associated with investing in securities.