Malaysia Target Fiscal Deficit at 3.0% in 2017; Lippo Karawaci On Negative by Moody’s

24 October 2016

Credit Markets Weekly

Malaysia Target Fiscal Deficit at 3.0% in 2017; Lippo Karawaci On Negative by Moody’s

                                                                      

APAC USD CREDIT MARKETS

¨      Asian bond markets settled mixed particularly on Friday due to the escalation of Typhoon Haima in Hong Kong. Non-IG yields traded 1bp tighter to 6.44%, though IG spreads widened 2bps to 192.2bps. Similarly, Asian CDS closed a tad lower to 116.1bps (-1bp). Separately, UST strengthened across the curve (1-7bps WoW) with investors pouring into safe haven assets following ECB Mario Draghi’s comments that the central bank did not discuss or provide further clarity over its bond buying program. 10y dipped -6bps to 1.73% and 2y at 0.82% (-1bp).

¨      On rating actions, Moody’s slashed Lippo Karawaci’s outlook to negative; affirmed at Ba3 surrounding the uncertainty in the Indonesian property developer’s ability to complete two planned asset sales (IDR1.7trn) and achieve its revised property sales target of IDR3.5trn. Furthermore, Moody’s projects its next 12-months debt/EBITDA to remain elevated at 4.5x and EBIT/interest cover to stay low at 2.5x, within its rating downgrade trigger. Moreover, Moody’s takes action on nine mid-to-small Chinese banks attributed to the growing risks in their funding profiles and increasing asset quality pressure.

¨      Turning to new issues, primary supply slowed to USD4.9bn compared to MYR7.66bn in the earlier week. We observed more deals from Chinese issuers such as ICBC (issue rating: A1/NR/NR), China Great Wall Asset Management (A3/A-/A), Huai An Traffic Holding (NR/NR/BB+), and Yuzhou Properties (B1/B+/BB-). On the other hand, Korea National Oil Corp (Aa2/AA/AA-) through a private placement deal, sold USD1bn bonds in 2-parts.

SGD CREDIT MARKETS

¨      Restructuring attempts to keep O&G names afloat. Primary markets were quiet again this week, with YTD issuances now only around SGD17.7bn, or 17% lower if compared to a similar period last year. Yielder names such as GALVSP, GUOLSP and ASPSP were tighter while interest appeared in banking names like AT1 DBSSP and BAERVX after the previous week’s sole issuance by Julius Baer with a SGD325m Pnc5 5.75%. Meanwhile, Ezra Holdings (NR) announced a bond consent solicitation exercise to completely waive its financial covenants and to allow the company to begin the debt restructuring process. Keppel Corp (NR) saw a c.40% YoY decline in both 3Q16 revenue and net profit due to deferment of some projects and suspension of its Sete Brasil contracts. Its orderbook currently stands at SGD4.1bn (from SGD9bn at 4Q15), as around SGD4bn was related to Sete Brasil.

¨      Decline in SOR curve. There was a decline in the short-to-mid SOR curve by around 3.5-5bps, with the 2y and 5y closing at 1.36% and 1.71% respectively. Looking ahead, investors will be eyeing the release of the Singapore Sept Industrial Production (26-Oct) and Bank Loans & Advances (31-Oct).

MYR CREDIT MARKETS

¨      MYR recovered pre-Budget 2017. The MYR settled firmer at 4.184/USD last Friday, from the high of 4.219/USD during the week, before the Budget 2017 on Friday. Govvies market remained quiet as investors looked-for more catalyst before the Budget 2017. We view that Budget is unlikely to have a significant impact on MGS and MYR, given that the projected 2017 fiscal deficit of 3.0% is largely in line with market expectations. Malaysia’s inflation was below-expectation at 1.5% for Sep (consensus: 1.8%), fueling speculations for another rate cut by the central bank in the coming MPC meetings. As a result, the govvies responded positively with the 3y declining 2bps WoW to 2.99% and 10y fell 9bps WoW to 3.57%. The improved sentiment could be conducive for the upcoming 20y Reopening MGS auction to be announced this week.

¨      Cagamas fueled last week trading flows. The national mortgage accounted for more than a quarter of last week total trades of MYR3.9bn where Cagamas ’17-’19 ended mixed to settle at 3.30%-3.62% (-29bps to +23bps from previous trade). Interest for Sime Darby resurfaced as MYR180m changed hands throughout the week, amid deleveraging efforts by the conglomerate with its Pc26 staying flat at 4.88%. MARC is currently conducting its annual review on Sime Darby where we view that its outlook could be revised back to AAA/stable, from negative, following the successful rights issue which would reduce its gearing to 0.4x, back to the historical level of 0.3-0.4x. RAM, meanwhile, downgraded Al-Bayan by 7-notch to BB2/Neg due to the latter failures to meet the minimum required balance in the FSRA vis-à-vis its MYR100m maturity in 16-Dec.