: RHB FIC Credit Market Update - 2/9/15

2 September 2015

Credit Market Update

           

China Manufacturing Spur Flight to Safety; FRANSH 3/19 to Ride on Recovery in Property Market 

APAC USD CREDIT MARKETS                                                    

¨      APAC credit markets spooked by concerns on China’s growth rate (again). The iTraxx AxJ IG widened by approximately 6bps to 138bps after going as high as 140bps as global equities and commodities (Brent: -8.5% to USD49.6/bbl) declined as concerns on China’s economic slowdown and its impact on the global economy heightened following the lowest Chinese manufacturing data in 3 years. Accordingly, UST strengthened across the curve with 10y yield declining by 7bps to close at 2.15% as investors sought for safe haven assets.

¨      IG spreads widened by c.2bps to 167bps, led by SOE-backed O&G. CNOOC 20, Pertamina 21, PETMK 19 and PTT PCL 22 widened as oil price fell on expected slower demand from China. However, gainers were seen in high grade space such as Swire 22, Korea Oil 19 and UOB Senior 20. 

¨      HY yields jumped 11bps to 9.97% driven by selling in mining/steel players; Chinese properties were not spared. We observed underperformers among steel and real estate players such as Vedanta 16-23, China Hongqiao 17, JSW Steel 19, Evergrande 18, Country Garden 19-23 and Agile Property 19.

¨      Downgrades by S&P on China Hongqiao, Maoye and IOI. China Hongqiao was downgraded to BB+ from BBB- on stable outlook by S&P on the back of declining liquidity, higher-than-expected capex and aggressive expansion plan despite volatile aluminum price. Maoye International was also downgraded to BB- from BB on negative outlook by S&P, following deteriorating leverage and weakening capital structure due to its significant short-term debt maturities and aggressive expansion appetite despite weak operating performance. Furthermore, IOI’s outlook was revised to negative by S&P citing concerns on weakening of CPO prices (more on IOI in the credit update section).

SGD CREDIT MARKETS

¨      Equities renewed rout drives selling in CN/HK names; yesterday’s oil spurt short-lived. The 2y and 5y benchmark swaps rose between 3-5bps to close at 1.97% and 2.59% respectively. Global markets took a bearish but familiar turn yesterday due to the disappointing August manufacturing PMI from Caixin (actual: 47.3; consensus: 47.1; July: 47.1) and the official number (actual: 49.7; consensus: 49.7; July: 50.0), resulting in selling in Chinese/ HK names such as GRCHAR, PCRTSP and FRESHK. This renewed bout of uncertainty may be a silver lining for property names (like YLLGSP, VANKE) if the PBoC utilizes its liquidity and rates arsenal to stabilise the market again.            

¨      Brent reversed its initial Monday high of USD54.2/bbl, closing at USD49.6/bbl, though unsurprisingly buyers were seen in the Sembcorp complex (SCISP, SMMSP) after Sembcorp Marine announced that it secured a SGD1.41bn contract, a c.13% addition to its current orderbook. 

MYR CREDIT MARKETS

¨      Corporate bonds headed north amid quiet session. Credit flows doubled but still lackluster at c.MYR203m. Yields continue to normalise, PLUS 1/19 rose 28bps to 4.273%; while on the AA3 space, we saw Mumtalakat 4/18 and BGSM 6/24 climbed 31bps-48bps to 5.515% and 5.304% respectively.

¨      MGS curve flattened; Fitch renews concern on Malaysia’ outlook. The local govvies continued the recuperating trend yesterday with the 3y-10y MGS inching 5bps-17bps downward, settling at 3.26%-4.22%. Meanwhile, the local currency improved to 4.16/USD yesterday, before showing weakening sign this morning. The Ringgit is trading at weaker range of 4.17-4.20/USD at the time of writing as Fitch hinted to reinstate Malaysia negative outlook on the back of dismay currency, declining foreign exchange reserves, and narrowing current account surplus. Elsewhere, 3y-IRS declined 3bps to 4.10% yesterday, while 5y and 10y ended the day flat at 4.23% and 4.60% respectively.

CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
IOI Corp (Baa2/Sta; BBB/Neg; NR)	Plantation	MY	IOI’s outlook was cut by S&P to Negative from stable, while affirming its BBB rating. S&P's revised the outlook on IOI on concerns of the sharp decline in CPO prices and weaker ringgit assumption in 2016, which affects the group’s EBITDA and cashflows over the next 12 months, along with S&P expectations that shareholder distributions to stay elevated.	Marketweight. We opine that the weak CPO prices (YTD average: MYR2,200/mt) will take a toll on IOI’s earnings profile and cashflows, however we remain neutral as we expect its low cost production and above industry average upstream margins, to offset these negative headwinds. On the other hand, IOI leverage profile has weakened slightly as its debt/EBITDA rose to 4.43x in FY15 from 3.82x in FY14, while its D/E ratio remains manageable at 0.49x during the same period. Although its interest coverage ratio declined to 5.3x from 6.8x, further backed by a cash ratio remains above 1.0x in FY15. IOI 6/22 was seen quoting at bid/ask 4.419%/4.304%.