Monday, July 25, 2016

Investors On The Sidelines Ahead of FOMC and BOJ

25 July 2016

Credit Markets Weekly

Investors On The Sidelines Ahead of FOMC and BOJ
¨      Cautious market before upcoming July FOMC meeting. Asian CDS traded 2bp tighter to 119.2bps, remaining on its tightening path since early Jul (140bps) on improved risk sentiment. IG credit spreads and non-IG bonds tightened 2-3bps to 200bps and 6.35% respectively. USTs climbed 1-4bps higher WoW on US housing, jobs and Preliminary PMI numbers, though it was moderated by falling oil prices (Brent: -4% to USD45.7/bbl). Accordingly, the 10y added 2bps to c.1.56%, while the 2y increased 4bps to 0.70%.
¨      On ratings, S&P affirmed Beijing Enterprises Holding (BEH)’s rating at BBB+/Neg as it views BEH as a core subsidiary of Beijing Enterprise group and is likely to receive extraordinary government support if deemed necessary, with elevated leverage at BEH level following the acquisition of EEW Holdings in Feb16. Additionally, Moody’s anticipates mix set of 2Q results from Asian O&G players as crude oil prices recover (2Q16 Brent average: USD46.7/bbl; 1Q16: USD35.2/bbl) though regional gross refining margins (GRM) declined (average GRM weakened to USD3.9/bbl in 2Q16 from USD6.6/bbl in 1Q16).
¨      Primary deals slowed to USD5.4bn from USD8.7bn in the earlier week, with most issues garnered strong BTC; averaging 5.7x. Chinese credits dominated most of the new issuances i.e. Greenland HK’s USD450m 3.875% 3y bond priced at 4.15%, followed by China Railway’s USD500m 10y at T+170bps and China Minmetals’ USD700m 4.2% 10y and USD300m 3.125% 5y at T+265bps and T+205bps respectively.
¨      Quiet primary space; Retail REITs’ performance impacted by lower occupancy levels. The issuance space was quiet this week even as some secondary flows were seen in O&G/ yielder names like OLAMSP, TATAIN, NOLSP and GALVSP as Brent oil prices held above USD46/bbl throughout the week, before closing a tad lower at USD45.7/bbl. Two retail REITs saw its end-June results decline due to lower occupancy rates, with Frasers Centrepoint Ltd (Baa1/BBB+/NR) net income falling 6% to SGD22.9m, while CapitaLand Commercial Trust core net profit dipped 3.3% to SGD74.3m. In the O&G segment, Otto Marine (NR) received approval from bondholders to extend the maturity of its sole outstanding SGD70m OTMLSP 8/16 to align the bond maturity with the delisting of Otto Marine from the SGX. Meanwhile, Keppel Corp (NR) saw its net profit decline 47% YoY to SGD219m dragged down by its O&M contributions. In addition, its O&M orderbook fell to SGD4.3bn (from SGD8.6bn in 1Q16) as Sete Brasil’s total orderbook of SGD4bn has been excluded after Sete filed for judicial recovery.
¨      SOR rises. There was a rise in the short-to-mid SOR curve, with the 2y rising by 13bps to 1.45% while the 5y saw similar movements by 9bps to 1.71%. Looking ahead, investors will be eyeing the Singapore June CPI (25-Jul) and June Industrial Production (26-Jul).
¨      Market muted before FOMC and BOJ meeting. The local currency recorded the biggest weekly drop of 2.8% since Sep-15 to 4.06/USD on lower oil prices and uncertainties before FOMC and BOJ meeting this week. MGS yields spiked 4-8bps up last week across the 5y-15y benchmarks on quiet trading week as market participants were focusing on the MYR3.5bn 5y GII Reopening which attracted 2.45x BTC at average yield of 3.401%. The corporate market were also softer on average daily trading activity of MYR550m, compared to above MYR800 in the previous week. Short-tenure Cagamas 10/16 and 7/17 were among the most active, realigned 50-53bps lower to 3.138-3.25%. Elsewhere, MAHB Pc24 settled 3bps lower at 4.699% on MYR160m trades.
¨      YTD GG issuances jumped to MYR18.7bn. A total of MYR6.1bn government-guaranteed bond/Sukuk issued last week from Jambatan Kedua (MYR2.6bn) and PTPTN (MYR3.5bn), while CIMB Bank printed MYR1.35bn 10nc5 sub-debt (AA2/AA+) at 4.77%. Meanwhile, RAM downgraded UMW Holdings to AA2/Sta, from AAA/Neg, as operating performance and financial profiles weakened across its automotive and O&G divisions.

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