APAC Bond Rallied on Improved Risk Sentiment; Tan Chong Motor Downgraded to A1 from AA2

4 July 2016

Credit Markets Weekly

APAC Bond Rallied on Improved Risk Sentiment; Tan Chong Motor Downgraded to A1 from AA2

                                                                      

APAC USD CREDIT MARKETS

¨      Asian credits rally on risk-on sentiment as Asian CDS shed 4.3bps to 140.4bps led mostly by Chinese FIs’ such as Bank of China, China EXIM Bank and China Development Bank. Similarly, IG credit spreads and average HY bond yield tightened 14-30bps to 218.5bps and 6.62% respectively. In the US, USTs strengthened across the curve by 4-18bps WoW largely due to Mark Carney’s statement last week that the BOE would need to ease its monetary policies to counteract the Brexit impact.

¨      8 downgrades for the week led mostly by Chinese credits with S&P slashing COFCO HK to BBB+ from A-, premised on its high leverage and poor cash flows. S&P also slashed Beijing Capital Group to BBB- from BBB with a negative outlook, driven by its elevated leverage position with debt/EBITDA ratio rising to 16.5x at end-15 from 13.5x a year earlier, largely owed to its aggressive debt-funded expansion. S&P revised Perusahaan Listrik Negara’s BB rating outlook to stable from positive on expectations of thin liquidity and debt servicing capability in the next 3-4 years following delays in the new tariff mechanism while it continues to embark on debt-funded investment plans. 

¨      Moody’s placed Power Construction Corporation of China’s A3 rating on review for downgrade, over concerns of its rising leverage whereby adjusted debt/EBITDA jumped from 6.4x in FY14 to 8.0x in FY15, as it continues to expand its investment programs. Furthermore, Moody’s downgraded China South City to B2/negative from B1 to reflect expectations of weaker sales and credit metrics with interest coverage slipping to 1.4x in FY16 from 3.0x in FY15. On a positive note, S&P upgraded China Cinda (HK) to A-/Sta from BBB+ as the rating agency views it as a core subsidiary of the group which in turn will boost its capitalization level via a planned CNY30bn preference share issuance.

¨      Primary issuances remained low at USD1.3bn against USD985m recorded in the earlier week. Notable issuers were China Development Bank’s (Aa3/AA-/A+) USD600m 3y senior bond and Semiconductor Manufacturing (Baa3/BBB-/NR)’s USD450m convertible bond deal.

SGD CREDIT MARKETS

¨      Issuances dominated by quality names. Issuances were dominated by quality names, with CapitaLand Mall Trust printing an SGD150m 15y at 3.35% while Fullerton Healthcare Corp issued a dual tranche SGD100m FHCL 5nc3 and 7nc5 at 2.45% and 2.75% respectively. The issuance is guaranteed by the Asian Development Bank’s Credit Guarantee and Investment Facility, thus receiving a AA rating from S&P. Demand was healthy, with a BTC of over 3x, with fund managers and financial institutions comprising over 90% of demand. YTD issuances are at SGD13.85bn, around 6% higher if compared to a similar period last year. 

¨      The O&G sector saw some key events, with Ausgroup (NR), which technically defaulted on its sole outstanding SGD110m bond in May-2016, announcing a meeting with bondholders on 18-July while Ezion (NR) is conducting a SGD137.5m rights issue, with proceeds mostly being used to acquire new or upgrade existing O&M assets.

¨      SOR shifted downward with the 2y falling 16bps to 1.33% while the 5y declined by 14bps to 1.65%. Looking ahead, key data releases include the Singapore June PMI (4-June).

MYR CREDIT MARKETS

¨      Local govvies gained last week as falling global yields attracted flows into emerging markets. MGS curve bull-flattened with the 3y benchmark slipped 16bps WoW to 3.04%, while 10y fell 21bps WoW to 3.68%. Bullish sentiment has supported the demand for MYR2.5bn 30y MGS Reopening auction (BTC: 2.37x) which later inched 2.3bps lower to 4.59%, from the average auction yield of 4.613%. The MYR strengthened 2.2% WoW to 3.9980/USD and also saw cost to insure Malaysia sovereign declined 12bps WoW to 153bps.

¨      Corporate flows increased by 71% with total MYR5.1bn transacted during the week. Yields generally ended firmer with investor’s interest focused on the government-related-entities such as Aman Sukuk, DanaInfra, Prasarana, Cagamas and PLUS. Yields for AAA-AA3 declined 1-3bps across the 3y-10y, according to the indicative yields from BNM.

¨      Valuecap (NR) led the primary market with MYR1b 5y bonds at 4.109%. Elsewhere, Islamic Development Bank via its SPV, Tadamun Services (AAA), issued MYR350m 8y IMTN at 4.36%. To date, total issuance amounted to MYR38.7bn, about 23% higher than previous year corresponding period.

¨      Tan Chong Motor was downgraded to A1/Sta, from AA2/Neg as fundamental weakened by deteriorating margin amid stiff competition and challenging macroeconomic conditions, rising leverage as well as tighter liquidity profile.