RHB FIC Credit Market Update - 17/11/15

RHB FIC Credit Market Update - 17/11/15

17 November 2015

Credit Market Update

           

Market Indecisive Ahead of US Inflation Report

APAC USD CREDIT MARKETS                                                    

¨      Sideways on diverging influences; i.e. safe haven flight and potential Dec rate hike. The iTraxx AxJ IG was relatively unchanged as it rose by a marginal 0.8bps to c.130bps. Meanwhile, USTs initially strengthened with yields declining between 2bps to 3bps on flight for safety mode before closing unchanged overnight with 5y and 10y at 1.65% and 2.27% respectively amid recurring speculation of a Fed rate hike possibility in Dec.

¨      Another stagnant day for IG credits as spreads remained unchanged at 145bps*. Notable movers were Telekom Malaysia 25, Yuexiu 23 and Korea Electric 18 as spreads tightened by c.4bps but overall IG was capped by c.4bps average spreads widening of Sun Hung Kai 22, Vanke 19 and CHGRID 23. HY credits continue to lose momentum as yields jumped another 8bps to 9.2%*. Vedanta 16-23 along with other commodities players such as Yancoal 17-22, ABJA Investment 20-24 and China Hongqiao 17 continue to be the drag in the HY complex following recent downgrades and poor results as commodity prices remained suppressed.  

¨      Noble Group may lose its investment grade rating after being placed on downgrade review by Moody’s. Baa3-rated Noble was placed on rating review on the back of weaker-than-expected liquidity profile and high leverage whereby cash balances as at Sep 15 dropped 34% QoQ to USD1.9bn with adjusted net debt/EBITDA of 3.6x. Yields of Noble 18-20 widened by c.33bps on average to 13.5% and 14.2% in yesterday’s trade (more in Credit Update).

¨      US inflation to garner attention today. Oct’s CPI is expected to increase by 0.1% YoY following last month’s flat inflation while CPI ex-food and energy is expected to remain at 1.9% YoY.

*based on RHBFIC internal indices.

SGD CREDIT MARKETS

¨      HY O&G spreads widen as oil hits two-month low. The short-to-mid benchmark curve tightened, with the 2y and 5y falling by 2.5bps (to 1.90%) and 3bps (to 2.51%) respectively. Better demand was seen for high grade commodity names like SCISP and NOLSP while HY O&G names such as SWIBSP, NCLSP and KRISSP saw spreads trade wider (based on Bloomberg) as Brent oil prices hit a two-month low of USD43.6/bbl. Continued interest was seen in the new prints from Julius Baer’s BAERVX AT1 Pc20 and ARTSP 11/22.

¨      In the primaries, Lippo Malls Indonesia Retail Trust (Baa3) printed a SGD100m 3y at par 4.5%. News broke of a potential SGX delisting (and relisting on the Indonesian stock exchange) of Lippo Karawaci’s REITs, Lippo Malls Indonesia Retail Trust, and its healthcare REIT (First REIT) at end-Oct, which sent prices of its 16’s and 17’s down by 0.2-0.5%. We spoke to Lippo Karawaci’s management last week which denied any firm plans for a delisting from the SGX at this point. This was on the back of the Business Times article (Oct-28) that reported Lippo Karawaci CEO, James Riady as saying that there were plans to shift the two Singapore REITs back to Indonesia to take advantage of the new tax benefits offered by the Indonesian government.

MYR CREDIT MARKETS

¨      Muted secondary market before FOMC minutes; WCT bagged MYR283m WCE job (refer Credit Update). Investors stayed on the sideline yesterday before the Fed releases the FOMC minutes this Thursday which could give hints on the likelihood for a Dec lift off. Merely MYR145m and MYR677m transacted in the corporate and sovereign market respectively. The MGS moved sideways with the 3y-10y ended the day in between 3.63%-4.35% (-2bps to +1bps); while Ringgit continued the depreciating trend to settle at 4.38/USD yesterday. Only few names exchanged hands in the corporate space – Maybank Islamic LT2 saw z-spread tightened by 14bps to trade at 3.825%; while Alliance Bank B3T2 10/25c20 crossing 8bps wider in term of z-spread.

¨      MARC downgraded offshore service provider, Alam Maritim from A+/Negative to A/Stable, premised on a deteriorated business profile dragged by falling orderbook of MYR745.5m and lower charter rates for its vessels.

CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
WCT Holdings Bhd (WCT) (AA-/Neg)	Construction	MY	WCT has secured MYR283m subcontract works for West Coast Expressway (WCE).	Maintain marketweight. The new contract will increase WCT’s external orderbook by c.7% to MYR4.2bn (or 3.5x of FY14 construction revenue). Nevertheless, we are concerned on WCT’s high gearing of 1.05x and slowing property sector which could put WCT’s rating outlook in less favorable position.  We will continue to monitor the management’s plan to reduce its net gearing to 0.5x by next year, from 0.8x as at 2Q15.
IOI Corporation (Baa2/BBB/NR; Neg)	Plantation	MY	IOI Corp double whammy as MYR and CPO hits harder. 1Q16 EBITDA declined noticeably by -36% to MYR254m, while it made a loss of -MYR716m during the quarter. This weakness was driven by weaker CPO prices realised of MYR2,119/MT vs MYR2,258/MT in 1Q15 and by the depreciation of the MYR against the USD dollar by 18% during the quarter that led to a non-cash foreign currency loss of MYR853.9m as well as fair value loses on derivative financial instrument of MYR202.8m	We may consider revising IOI to underweight. With the exclusion of foreign currency and fair-value derivative financial losses, IOI Corp’s downstream manufacturing segment posted profit of MYR189m mainly from better margins and higher sales volume in its refining segments. Overall, IOI Corp’s credit profile weakened substantially as D/E rose to 1.76x (Jun-15: 1.27x), LTM debt/EBITDA climbed to 5.5x (Jun-15: 4.3x), while its FFO/debt declined slightly to 0.17x (Jun-15: 0.19x).
Noble Group (Baa3/Neg; BBB-;Neg; BBB-/Sta) (RAM: AA2/Neg)	Commodities	SG	Noble’s ratings under review for downgrade. The group’s Baa3 ratings is under pressure as latest 3Q results showed that its leverage remains high, while its liquidity profile was weaker than expected. Furthermore, Moody’s remains concerned about the commodities industry down cycle will continue to have a negative effect on the company’s liquidity position and business operations. Moody’s is aware of Noble is in the midst of raising capital through asset sales, financial transactions or a combination of both. Over the next 2-3months, Moody’s review will be concentrated on Noble’s liquidity profile and cash flow generating ability as well as its capital management.	Maintain underweight. The negative rating action is as expected as Noble has breached its downgrade rating triggers over the past quarters. The group’s gearing level remains elevated at USD5.4bn in 3Q15 that translates into a net gearing and LTM net debt/EBITDA of 0.82x and 4.83x respectively, as its cash-to-short term debt remains around 0.43x. Moreover, Noble’s interest coverage ratio was weaker at 3.1x. We opine that the weaker global commodities outlook and negative sentiments towards Noble will linger in the near term.