Asian Credit Markets Supported by Dovish Central Banks

18 July 2016

Credit Markets Weekly

Asian Credit Markets Supported by Dovish Central Banks

                                                                      

APAC USD CREDIT MARKETS

¨      Asian credits markets remained buoyant as Asian CDS traded 17bps tighter at 121.3bps on continued CDS tightening trend as seen in both Sovereign names (Malaysia, Indonesia, China) and HK high grade names (Hutchinson Whampoa, Sun Hung Kai and Hongkong Land). IG credit spreads and non-IG bonds tightened 8-10bps to 203bps and 6.37% respectively, partly attributed to better-than-expected Chinese economic print. USTs bear steepened adding 6-19bps WoW as 2y gained 6bps to 0.66%, while 10y surged 19bps to 1.55% on extended rallies in global equities, the status quo of the BOE and stronger key US economic data points.

¨      On ratings, S&P upgraded China Three Gorges to A+/Neg from A/Pos premised on stronger government support due to its strategic importance to China’s national energy strategy and fulfilling essential social policy functions (flood control and navigation services). S&P handed China Metallurgical Group an upgrade to BBB/Sta from BB-, following the merger of China Minmetals Corp, where extraordinary government support is expected through its parent if deemed necessary. Meanwhile, Moody’s reviewed West China Cement’s Ba3 rating for downgrade on concerns on its weaker credit profile amid on-going challenges in industry conditions, after the company issued profit warnings, citing lower revenues and continuation of net losses. 

¨      Primaries remained active with USD8.7bn issuance slightly lower compared to previous week’s USD9.5bn, with notable issues such as ANZ (Aa2/AA-/AA-)’s USD1.0bn 3y bond priced at T+85bps and 2 perp deals priced i.e. ICBC Asia’s (A2/NR/A) USD1.0bn AT1 Pnc5 deal, followed Olam (NR)’s USD500m Pnc5 at 5.35%.

SGD CREDIT MARKETS

¨      HDB print supports issuance level. The issuance space was quiet save for a lone issuance from Housing Development Board (Aaa/-/-) with a SGD700m 5y print at 1.47%, boosting the YTD issuance to SGD14.5bn, or around 10% higher if compared to a similar period last year. Interest was seen in yielder papers this week amidst investors hunt for yield, with focus in names like EZISP, KRISSP and GALVSP. Meanwhile, Keppel REIT was downgraded by Moody’s to Baa3/Sta (from Baa2/Sta) due to softer office space conditions in Singapore and expected staggered decline in income support from the sponsor over the next three years. In the O&G space, Swiber announced that its customer has requested a delay in the completion of a USD700m offshore project in West Africa while Ezra registered a net loss of USD247m, though mainly due to a one-off loss on disposal of USD181m. 

¨      SOR mildly declines. There was a mild decline in the short-to-mid curve, with the 2y and 5y falling by 1.8bps to 2.5bps to close at 1.32% and 1.62% respectively. Looking ahead, investors will be eyeing June CPI (May: -1.6%).

MYR CREDIT MARKETS

¨      Market rallied on surprised BNM cut and slower inflation expectation. MGS plunged 8-17bps WoW with the 10y slipping 10bps WoW lower to 3.58% following the unexpected 25bps OPR cut to 3.0% by BNM. The governor cited that easing rates was a preemptive measure in light of the potential downside risks from Brexit as well as volatility in the financial market. Nevertheless, the governor dashed hopes for a further rate cut in the next few monetary policy meeting, although it is still data-dependent. The central bank projected a lower inflation target of 2-3% in 2016, from the earlier estimate of 2.5-3.5% while maintaining its GDP growth target of 4.0-4.5% this year. The MYR also appreciated 2.2% WoW to 3.9457, or YTD gain of 8.1%. Low global yields continued to support offshore flows into the Malaysia bond markets in June with foreign holdings in MGS increasing by MYR5bn to MYR182bn or 49.8% of total MGS outstanding.

¨      Active flows of MYR4bn in the corporate market with interests seen in quasi-government bonds such as Prasarana (MYR435m), DanaInfra (MYR390m) and Cagamas (MYR280m). Elsewhere, Maybank’s subdebt 24c19 and IT1 68c18 fell 11-13bps to 4.366% and 4.532% respectively despite Maybank reduced its Base Rate (BR) and Base Lending Rate (BLR) by 20bps which could lead to tightening of its net interest margin. Other banks such as Bank Simpanan Nasional and CIMB have also joined the largest domestic bank in reducing its BR and BLR by 20bps.