Lower Rental Rates for Sabana REIT; WCT-KKB Won MYR1.29bn from Pan Borneo Highway Project

27 July 2016

Credit Markets Update

¨      Lower Rental Rates for Sabana REIT; WCT-KKB Won MYR1.29bn from Pan Borneo Highway Project

APAC USD Credit Market: Investors brace for the US July FOMC meeting as Asian credit markets closed mixed. IG spreads and Asian CDS crept up 1bp to 198.2bps and 120.1bps respectively, though average HY bond yields tightened 1bp to 6.295. Similarly, benchmark UST yields settled mix with the 2y adding 2bps to 0.75% whereas the 10y shed 1bp to 1.56%. The short-dated 2y rose mainly on better-than-expected June new home sales which grew 3.5% MoM to 592k (consensus: 560k; prior: 572k) and improved July consumer confidence index at 97.3 (consensus: 96). On rating action, Korean refiners i.e. SK Innovation (SKI) and SK Global Chemicals’ Baa2 ratings were handed positive outlooks by Moody’s, with the former driven by improving financial profile, stable earnings and cashflows, that could lead to a decrease in debt levels, while the latter was also revised given its full ownership by SKI. In the primary space, CDB Capital (NR/AA-/A+), guaranteed by China Development Bank (Aa3/AA-/A+) priced USD500m 5y bonds at T+115bps against IPT +145bps area, receiving BTC of 7.5x. China Minsheng Investment (Unrated) received USD1.25bn orders for USD500m 3y bonds at 3.9%; IPT at 4.125% area. Elsewhere, Adani Transmission (Baa3/BBB-/BBB-) mandates Barclays, DBS and StanChart for benchmark USD 10y bonds.

¨      SGD Credit Market: Sabana REIT’s performance hit by lower rental rates. There was a bull flattening in the short-to-mid curve, with the 5y falling by 2.5bps to 1.72% while the 2y dipped 1.6bps to 1.46%. Some pickings were observed in yielder names like OLAMSP and EZISP as well as mid-dated REITs such as CREISP and MINTSP. Sabana REIT (NR) saw its 2Q16 core net income decline 33.6% to SGD7.3m due to negative rental reversions and increased property expenses due to revised rental agreements that offloaded some expenses from the lessee to the lessor. In addition, aggregate leverage has risen to 41.2% (from 39.6% in 1Q16). Cambridge Industrial Trust (Baa3) announced a 1.7% YoY increase in its 2Q16 revenue to SGD28.3m while its core net income rose 6% to SGD13.4m mainly due to property acquisitions while its aggregate leverage rose to 37.2% (from 36.9% in 1Q16).

¨      MYR Credit Market: WCT-KKB (30/70 JV) secured MYR1.29bn contract for Phase 1 of Pan Borneo Highway Project. On proportionate basis, the new contract will increase WCT’s orderbook by 8% to MYR4.8bn which is equivalent to 3.8x of its construction division’s revenue in FY15. Moderate flows of MYR428m in the corporate market,UMWH 2/19 increased by 10bps to 4.499% after the 2-notch downgrade to AA2 by RAM on 19-Jul. Elsewhere, the top traded was Cagamas 10/16 (MYR100m) which rose 1bp to 3.151%. Trading activity in the govvies market stayed around MYR2.2bn with GII7y was the most active, slipping 5bps lower to 3.61%. MYR settled flat at 4.06/USD and has weakened 3% over the past 6 trading sessions ahead of FOMC and BOJ.