MGS market was firmer with solid demand for belly and long end bonds as the MGS curve lowered 2-6bps WoW along the 10y15y. PDS yields also tightened 2-8bps WoW in the belly and back end spaces across credit curves.

Credit Market Watch: Summary for week ending 29-Jul

·         MYR Credit:

Ø  MGS market was firmer with solid demand for belly and long end bonds as the MGS curve lowered 2-6bps WoW along the 10y15y. PDS yields also tightened 2-8bps WoW in the belly and back end spaces across credit curves. Trading volume was light with just MYR2.2b for the week. 

Ø  Fitch's downgrade on the local currency rating of Malaysia was deemed as a non-event with neutral market impact as it was due to the change in rating methodology, not fundamentals (see Page 2 attached for details). No impact on Malaysia's foreign currency rating.

Ø  New issue: Sarawak Hidro raised MYR5.54b from its multi-tranche IMTN with tenors from 3 to 15 years. There was a total of 12 tranches but to summarise on the key tenors, issuance was sold down at 4.06% for 3y, 4.16% for 5y, 4.24% for 7y, 4.38% for 10y and 4.60% for 15y. The credit is enhanced by liquidity support from the government via a letter of undertaking to top up cash flow shortfalls so that the project DSCR meets a 2.0x target, which corresponds with RAM's AAA rating.

Ø  Banking sector: Remains lacklustre with loan growth still on a downtrend (5.6% YoY in June vs 6.2% in May) and loan approvals contracting for a 10th consecutive month on 3M MA basis. Deposits also contracted in June by 0.8% YoY and as such, LDR ticked up to 87.8% (87.6% end-May). On asset quality, GIL was 1.66% for June (1.65% end-May) mainly on higher impairments in working capital and construction.

Ø  Relative value: MEX II 31 seemed to offer value last trading at 5.54%, 43bps above our fitted AA3/AA- line.

·          Asian Credit:

Ø  UST curve bull-flattened along the 2y10y WoW. At one point the BoJ disappointment, which delivered neither a rate cut nor substantial increase in monetary base, pushed UST yields higher. However, the dismal US 2Q16 GDP figure (1.2% vs. consensus 2.5%) painted a tepid outlook on growth and increased the demand for UST. The 10y UST yield wrapped the week 11bps stronger.

Ø  In Asian USD credit, market was quiet but sentiment was generally constructive, with JACI composite -2bps, JACI IG -2bps and JACI HY +2bps WoW. The INDON and PHILIP curves were marginally stronger by about 1-2bps, while KOREA and MALAYS were a tad wider.

Ø  Rating changes: MAHB's outlook was revised to negative by Moody's, citing heightened operating challenges for MAHB's 100%-owned Sabiha Gokcen International Airport (SGIA), which contributes 12% to MAHB's earnings, came when MAHB's operations in Malaysia are experiencing slower growth. MAHB's standalone rating was revised down to Baa3 from Baa2, but enjoys a 3-notch uplift to A3 as the agency expects government's support under a distressed scenario.

·         CDS: EM Asia 5y CDS spreads were generally wider with Malaysia +6bps, Thailand +2bps, while China, Indonesia and Korea +1bp each WoW.