Fitch Places Indonesia on Positive Radar; Saudi Budget Deficit Targeted at 7.7%

27 December 2016

Global Sukuk Markets Weekly

Fitch Places Indonesia on Positive Radar; Saudi Budget Deficit Targeted at 7.7%

Highlights & Performance

¨   Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) index closed with modest gains at 104.1 (+0.11%) and 160.6 (+0.21%) respectively; with the index yield falling 0.9bps to 2.908% along with mixed US economic data, which saw the Nov personal spending slow by 0.2% from 0.4%, while the 3QGDP was revised up to 3.5% from 3.2%. AUBKWK Pc10/21 (-76bps), DIBUH Pc3/19-1/21 (-26 to -16bps), ADIBUH Pc10/18 (-19bps) and DAMACR 4/19 (-19bps) were among the best performers.

¨   Saudi Arabia Budget 2017 projects a 33% YoY reduction in the budget deficit to 7.7% of GDP in 2017 from 11.5% in 2016 (see Sovereign/Corporate Update). Malaysia’s Nov CPI jumped larger-than-expected to 1.8% YoY from 1.4% in Oct-16, led by a 36.6% jump in oils and fats following the removal of subsidies for cooking oil. Further upward pressure on inflation is expected on account of higher administered prices, and pick-up in imported price pressures due to the weak MYR.

¨   Kuwait’s Warba Bank (Baa2/NR/A+) mandated nine banks to arrange a Tier 1 sukuk of up to USD250m which is expected to launch in 1Q17. The bank’s Tier 1 ratio as at Jun-15 stood at 21.0% (Dec-15: 24.9%). Moving to ratings, Fitch placed Indonesia on Positive outlook to reflect (1) track record of macroeconomic stability by the authorities and (2) strong structural reform drives that improve difficult business environment.

¨   Turning to MYR space, a new MYR500m sukuk Wakalah programme established by Lafarge Cement, the main operating subsidiary of Lafarge Malaysia, was assigned with a rating of AA2/Sta by RAM Ratings. The proceeds from the first issuance will be used to refinance existing MYR280m Lafarge Malaysia’s ICP maturing on 16 Jan next year. Meanwhile, the rating agency downgraded Al Bayan, a Saudi-based conglomerate, to D after it failed to redeem MYR100m sukuk on the maturity date of 16 Dec. Malaysia Building Society Berhad (MBSB) will commence negotiations with Asian Finance Bank, in its third attempt in about two years to become a full-fledged Islamic player.

SOVEREIGN/CORPORATE UPDATE

Country/Issuer	Update	RHBFIC View
Saudi Arabia (A1/Sta; A-u/Sta; AA-/Neg)	·        Saudi Arabia released its budget on 22-Dec, noting a projection of a 33% reduction in the deficit for 2017. Key points to note in the 2017 budget were: -   Spending is estimated at SAR825bn (1.8% below budget) while total expenditure is expected to be SAR930bn in 2017. -   Deficit is projected at 7.7% of GDP or SAR198bn in 2017, lower than 2016 estimated deficit at 11.5%. Deficit financed by debt and reserves. -   Revenue is expected to be 2.7% above target at SAR528bn, while oil revenue is projected at SAR480bn in 2017 versus SAR329bn. -   Non-oil economy is expected to rise to SAR212bn in 2017 from the estimated SAR199bn in 2016. -   The government is “very optimistic” on an oil price recovery in 2017 -   Government debt is projected at 12.3% of GDP in 2016 while the Budget noted that the debt ceiling is set at 30% by 2020. ·        GDP growth expected at 1.4% in 2016. The 2017 forecast was not mentioned in the Budget statement.	Neutral. We view this as a neutral development, given the credibility of the data despite it being mentioned as the most detailed budget in country’s history. For example its oil revenue is forecasted to be 10% higher than the 2016 estimate. We believe that this is not aligned with the agreement of Saudi Arabia with the OPEC, as the kingdom cuts 486 tb/d, one of the largest cuts among OPEC members. In our view, there are risks that lie in the continued reliance of oil as the Budget still depends on rising oil prices to balance the budget.  Nevertheless, there is a strong commitment and willingness in cutting its deficit, where it is positively viewed. The IMF expects for Saudi Arabia’s GDP growth to rise to 1.2% in 2016 and to improve in 2017 to 2%.

Anticipate larger supplies in 2017 but lessens pressure off the front of curve

Anticipate larger supplies in 2017 but lessens pressure off the front of curve

• Malaysia’s Budget 2017 unveiled 21 Oct 2016 indicated the federal government’s targeted fiscal deficit of 3.0% of GDP for fiscal year 2017, in contrast to a deficit of 3.1% of GDP estimated for 2016 and 3.2% in 2015. Based on the projected numbers, the 2017 fiscal deficit will require financing of around RM40.3 billion, which is higher than RM38.7 billion and RM37.2 billion for 2016 and 2015, respectively. Adding on upcoming 2017 maturity of MGS and GII of RM66.8 billion translates into a possible gross domestic government bond issuance of up to RM107.0 billion in 2017. Hence, we assume a potentially larger supply from the primary side in 2017, in contrast to RM86.0 billion and RM92.5 billion each in 2016 and 2015.
• The 2017 government bond auction calendar comprises a total of 32 offerings (2016: 29 offerings), which include 16 MGS (15 in 2016) and 16 GII (14 in 2016) auctions.
• Partly due to the heavy-load on short term maturities in the current MGS+GII portfolio [Exhibit 4], 3-year benchmark offerings will be thin in 2017 with only one (1) for each MGS and GII. This lessens pressure off the front of the yield curve, and supports our view of a steeper MGS curve in 2017.
• We expect the government to continue to dish more supplies on the 5-10 year tenors, to avoid further concentration on the front end of the curve. On top of that, Bank Negara is also likely to extend portfolio duration into the 15-20 year segments, which has relatively smaller sizes compared to the 5-10 year maturities [Exhibit 3].
• There will be RM22.3 billion worth of government securities maturing in 1H2017, and another RM44.5 billion maturing 2H2017 [Exhibit 2]. Despite that, the primary market should a shade larger 1H2017. We anticipate the government to provide larger offerings in order to provide liquidity for the new benchmarks which auctions are stacked towards 1H2017.
• The 30-year GII will be introduced for the first time. In our opinion, it is the authority’s effort in providing a benchmark to aid longer term sukuk pricing.
• We note that the government auctions were pretty diversified into both MGS and GII in 2016 (50.6%: 49.4%), compared to 2015 (55.7%: 44.3%) and 2014 (60.4%: 39.6%). Hence, it is possible that the primary supplies to see a balance 50%:50% in 2017, or even slightly higher allocation for GII papers.
• In Exhibits 5, we compiled a list of key fixed income investors. In 2017, government bond maturities surmount to RM66.8 billion, and the crux of this should be reinvested. In addition, we anticipate new monies likely to be allocated by key investors to be invested into Malaysian government bonds to be at least RM19.9 billion in 2017, down slightly from 2016’s estimated RM20.0 billion. The sum of two sources of monies (reinvestment and new monies) add up to RM86.7 billion and will make the bulk of the genuine demand for new government bonds auction in 2017 (expect to surmount to around RM107.0 billion). The RM86.7 billion is made up of demand from insurance companies and the EPF only; the figure does not take into account participation from other major players such as inter-bank participants and offshore investors.

Way Open for Proposed MBSB Merger; Mudajaya Secured Financing

22 December 2016

Credit Markets Update

Way Open for Proposed MBSB Merger; Mudajaya Secured Financing 

¨      APAC USD Credit Market: Oil weighed on Treasuries. Dampened inflation outlook, Brent price weakness (-1.6% to c.USD54/bbl) coupled with the underperformance in US equities led to lower benchmark UST yields. UST 2y and 10y shed 2-3bps to 1.19% and 2.53% respectively. Moving to Asia, both IG credit spreads and average speculative bond yields were unchanged at 182.1bps and 6.85%. Elsewhere, the iTraxx AxJ IG declined 7.8bps to 115.6bps driven by lower CDS spreads observed in banking credits such as IDBI Bank, ICICI Bank and Bank of China.

¨      SGD Credit Market: Bondholders reject Rickmers consent solicitation. There was a mild decline in the short-to-mid SOR curve by 1-1.3bps, with the 2y and 5y closing at 1.76% and 2.43% respectively. Rickmers Management Trust, which is seeking to reverse the technical default on its sole outstanding SGD100 RMTSP 5/17, failed to receive approval from its bondholders for its proposal to extend its bond maturity. Meanwhile, Sembcorp Industries (NR) announced that it had secured financing for its Bangladeshi power plant project from sources including International Finance Corporation while Keppel Corp (NR) announced that it has won the bid to develop Singapore’s fourth desalination plant.

¨      MYR Credit Market: New facility from Lafarge Cement; Mudajaya’s new financing alleviates liquidity concern. RAM has assigned AA2/Sta rating to Lafarge Cement Sdn Bhd’s proposed MYR500m Sukuk Wakalah Programme. Receiving a similar rating to that of its holding company, Lafarge Malaysia, as Lafarge Cement is the main operating subsidiary which accounts for over 70% of the Group’s total revenue over the past few years. The proceeds from the first issuance from the proposed Sukuk, estimated at MYR280m, is earmarked for refinance existing Lafarge Malaysia’s ICP maturing on 16-Jan next year, hence the Group’s gearing should remain stable at 0.14x, similar to current levels. Meanwhile, BNM has no opposition for the M&A proposition of MBSB and Asian Finance Bank, a 66.7% owned bank by Qatar Islamic Bank. The merged entity, if the M&A succeeds, would fetch a total asset value of MYR47bn based on the latest quarter result as at 30-Sep, about 85% of the total asset size of Alliance Financial Group. Elsewhere, Mudajaya (A2/Neg) has secured a USD50m term loan facility from UOB Malaysia along with the USD60m bond issuance, which alleviates the concern of its upcoming MYR240m bond repayment maturing on 23-Jan-17. Moreover, govvies rallied further yesterday with the 3y and 5y MGS declining to 3.52% (-10bps) and 3.68% (-7bps) respectively, while the MYR lingering slightly below the 4.48/USD level. Corporate volume totaled at MYR383m where CMBS 5/17, Kimanis 12/18 and LPPSA 9/23 were the top traded.

RAM Ratings has reaffirmed the enhanced AAA(fg)/Stable rating of Mydin Mohamed Holdings Berhad’s (Mydin Holdings or the Group) RM350 million Danajamin-Guaranteed IMTN Programme (2011/2024). The rating reflects an irrevocable and

Published on 22 December 2016

RAM Ratings has reaffirmed the enhanced AAA(fg)/Stable rating of Mydin Mohamed Holdings Berhad’s (Mydin Holdings or the Group) RM350 million Danajamin-Guaranteed IMTN Programme (2011/2024). The rating reflects an irrevocable and unconditional financial guarantee extended by Danajamin Nasional Berhad (Danajamin; rated AAA/Stable/P1), which enhances the credit profile of the IMTN beyond the Group’s stand-alone credit strength.

Excluding the guarantee, Mydin Holdings’ stand-alone credit profile remains supported by its position as one of the largest locally owned grocery retailers. The Group has built an extensive presence, mainly in Peninsular Malaysia, with 298 outlets as at end-November 2016. It has also established a strong following among its targeted low to middle-income customers and carved a niche in the Muslim consumer segment by offering fully halal products and an array of goods manufactured by local players not typically carried by its foreign-owned competitors.

That said, Mydin Holdings’ credit profile also reflects risk management and internal control issues which have resulted in huge losses and a very weak financial profile. We further note that the Group’s small retail and premium outlets are still loss-making. Additionally, Mydin Holdings faces an increasingly competitive environment in the local mass grocery retail sector while its expansion plans expose it to execution and construction risks.

Notably, the Group’s inability to adjust prices following the implementation of the GST due to technical issues from a system migration exercise and anti-profiteering measures by the Government had led to a pre-tax loss of RM170.67 million in FY Mar 2016 (FY Mar 2015: +RM29.37 million). The losses can also be attributed to a lagged response to the mispricing of products at the Group’s mini-markets and convenience stores. These factors, along with rising costs and poorer sales amid the sombre consumer sentiment, wiped out Mydin Holdings’ margins, leading to losses across most of its operating segments.

In line with its poor performance, Mydin Holdings’ financial metrics also weakened, resulting in the breach of financial covenants under the Al-Kafalah (guarantee) agreement with Danajamin. Given an increased debt load and the erosion of the Group’s equity base, its adjusted gearing ratio came in higher at 4.66 times as at end-March 2016 (end-March 2015: 3.52 times). Meanwhile, the Group’s adjusted FFO and OCF debt cover deteriorated to 0.06 and 0.07 times, respectively, in FY Mar 2016 (FY Mar 2015: 0.13 and 0.07 times).

While Mydin Holdings’ performance is anticipated to improve in FY Mar 2017 following a gradual increase in prices since June 2016, it is expected to continue to deliver weak earnings, considering that price adjustments were mostly completed only in September 2016 and the Group recorded operating and pre-tax losses for 1H FY Mar 2017. The Group’s liquidity profile is deemed tight while its balance sheet and cashflow protection metrics are envisaged to remain pressured in view of high debt levels. Nevertheless, the Group is expected to recognise a one-off gain of around RM98.72 million from the sale of its Seremban mall, which should help cushion its weak performance and tight liquidity position.

Analytical contact                                            Media contact
Chan Yisze                                                        Padthma Subbiah
(603) 7628 1111                                                (603) 7628 1162
yisze@ram.com.my                                          padthma@ram.com.my