: RHB FIC Credit Market Update - 1/12/15

1 December 2015

Credit Market Update

           

Growing Pressure on Commodities-based Issuers 

APAC USD CREDIT MARKETS                                                    

¨      Mixed credit markets ahead of key meetings and data releases. The iTraxxx AxJ IG marginally inched up by 0.7bps to 130.8bps. Treasuries closed mixed as benchmark curve flattened overnight with short-dated 2y yields higher by 1bp at 0.93% while 10y and 30y tightened by c.1-3bps to 2.21% and 2.97% respectively ahead of ECB’s policy meeting on 3 Dec and Yellen’s speech on 4 Dec prior to release of US jobs data with market embracing for divergence in monetary policies.  

¨      Commodities-based players weakened; IG spreads widened 1bp to 145bps*, non-IG yields rose 4bps to 9.1%*. Most of O&G IGs under our coverage saw spreads widening, notably PETMK 19, CNOOC 20, SINOPC 23 and KOROIL 19 whereas in the HY space, decliners were led by Vedanta 18-23, Yancoal 22, Yingde Gases 18 and JSW Steel 19.

¨      China Oil and Gas downgraded to Ba2 by Moody’s with a stable outlook. The downgrade was on the back of deterioration in the company’s credit metrics partly driven by heightened level of business risk from its upstream exposure due to the bleak oil outlook. China Oil 18 rose 1bp to 5.49% per Bloomberg.

¨      Disappointing US and Chinese data with US Oct pending home sales only increasing by 0.2% MoM compared to expectations of 1.0% gain albeit an improvement from last month’s 1.6% decline while Chicago’s Nov PMI plunged into contraction at 48.7 (consensus; 54.0; prior: 56.2). Meanwhile, China remains in contraction as Nov manufacturing PMI came in at 49.6, a drop from last month’s 49.8 while Caixin manufacturing PMI inched up slightly to 48.6, better than consensus and last month’s 48.3.

¨      US’ final reading of Nov’s manufacturing PMI later today with market expecting it to remain unchanged from previous reading of 52.6

*based on RHBFIC internal indices.

SGD CREDIT MARKETS

¨      Otto Marine seeks to loosen bond covenants. There was a flattening in the short-to-mid curve, with the 2y rising by 2.2bps (to 1.87%) while the 5y saw a 0.8bps rise (to 2.40%).  Flows were lighter with interest centered on recent prints such as KEPSP, KDB and SINTEC while REITs such as SGREIT, SUNSP and MINTSP traded between 3-7bps tighter (based on Bloomberg). Meanwhile, Otto Marine (NR) became the latest HY O&G player to solicit consent for the loosening of its covenants, with the OSV charterer increasing the Net Borrowings/ Total Equity ratio ceiling to 2.85x (from 2.5x) and reducing minimum Total Equity to USD200m (instead of USD250m). This is on the back of recent bond solicitation exercises by other O&G players such as Pacific Radiance, Ezra, KrisEnergy and Dyna-Mac.

MYR CREDIT MARKETS

¨      Quiet end to November with only MYR176m transacted in corporate bonds. Volume fell to half from Friday’s as investors are largely on the sidelines while digesting position from primary space. KEXIM 3/18 was the most active with total MYR81m changed hands at 4.163% (z-spread: 22.5bps), while Cagamas 11/16 and 11/25 were seen traded at 3.674% (z-spread: -21.3bps) and 4.836% (z-spread: 36.6bps) respectively for total done of MYR65m. Elsewhere, Aman 5/21 settled at 4.45% (z-spread: 32.7bps) with MYR30m transacted.

¨      MGS ended firmer. MGS 3y-10y benchmarks ended the day between 3.42%-4.20% with total volume of MYR2.061bn. Ringgit gained +0.8% m-o-m to 4.2640 from 4.2987 in October, while CDS improved 29bps to 171.5bps as 1MDB made huge progress of cutting debts via disposal of its power assets during the month.