FOMC Leads Bond Sell-Off; SMART and Mudajaya Placed on Negative

19 December 2016

Credit Markets Weekly

FOMC Leads Bond Sell-Off; SMART and Mudajaya Placed on Negative

                                                                       

APAC USD CREDIT MARKETS

¨      The Fed finally delivered another rate hike, raising the Fed funds rate by 25bps (0.50%-0.75%), as expected. The main highlight was the upward shift of the median dotplot for the next 3 years, which is now signaling 3 rate hikes in 2017 (instead of 2), while maintaining 3 rate hikes for 2018 and 2019 with Fed Chair Yellen highlighting the shift reflects lower unemployment rate of 4.6% and bigger fiscal stimulus. UST yields continue to surge higher YTD; 10y and 2y UST yields leapt 12bps WoW to 1.25% and 2.59% respectively. Asian bond were largely dictated by surging UST yields. IG credit spreads tightened 4.2bps WoW to 181.7bps whereas average HY bond yields widened to 6.84% (+5bp). On the other hand, the iTraxx AxJ IG widened 5.7bps to 123.8bps propped up by wider spreads in high grade Asian credits (KT Corp, Bank of China and Kookmin Bank). Meanwhile, Brent oil strengthened 1.6% WoW to USD55.2/bbl despite the US DXY index surging to 14-year high (+1.36 to 102.95; please view chart of the week).

¨      Turning to ratings, Moody’s slashed Lifestyle International’s rating to Ba1/sta from Baa3 following deterioration of the company’s credit profile as a result of its new project development in Kai Tak (costing approximately HKD14bn), which exposes the group to higher debt and development risk and reduced cash buffer. Furthermore, S&P revised the outlook of China’s Bank of Communications and its subsidiaries to stable from negative; affirmed A- rating on the back of improved capitalization to buffer against the down-cycle economic trends in China and a potentially weaker capacity for the Chinese government to provide extraordinary support. Moreover, S&P revised China Huarong Asset Management’s outlook to negative from stable; affirmed at A- with S&P citing rising pressure from risk asset expansion, especially at its bank subsidiary and a shift in its credit exposure to equity, subordinated, and mezzanine investments.

¨      APAC primaries stayed cautious as Fed hikes. New issuance plunged during the week to USD2.2bn compared to USD4.5bn in the earlier week with Chinese issuers dominating this segment yet again.

SGD CREDIT MARKETS

¨      SG banks standalone credit strength downgraded. The primary space continued to stay quiet, with similar movements in the secondary bond space ahead of the much awaited Dec FOMC meeting on Thursday. Rickmers, which announced in the previous week that it was seeking consent to reverse its bond default, is using the proceeds from the sale of a vessel towards the partial repayment of a Commerzbank loan, with the bank agreeing to waive the remaining unpaid amounts. EMAS Offshore Ltd (a 75% owned Ezra subsidiary) is currently in dispute with Perisai Petroleum Teknologi Bhd with regards to the put option that requires EMAS to acquire a 51% stake in SJR Marine for USD43m. Moody’s downgraded the Baseline Credit Assessments (BCA) for the 3 Singaporean banks to A1/Sta from Aa3/Neg due to concerns on asset quality and profitability. This has impacted its subordinated debt instruments via a 1-notch downgrade, while its senior debt ratings have been maintained at Aa1, reflecting high expectations of Government support.

¨      Bear steepening in SOR curve post-FOMC. The short-to-mid SOR curve widened again, with the 2y rising 11.8bps to 1.71% while the 5y rose 18bps to 2.39% after the FOMC Dec rate decision was deemed to be more hawkish-than-expected due to the dot plot now depicting 3 hikes instead of the initial 2 hikes. Looking ahead, investors will be eyeing the Singapore November CPI and Industrial Production (23-Dec).

MYR CREDIT MARKETS

¨      Smart Holdings (AA2) and Mudajaya (A2) placed on negative outlook. RAM revised the outlook for Smart Holdings to negative, the concessionaire of SMART Tunnel, premised on lower projected traffic volume after the toll rate hike on Oct-15. Monthly traffic volume was also trending downwards between Feb to Sep-16 partly due to temporary road improvement with the average traffic volume dropped 18.7% YoY to 24,960 vehicles as at Sep-16, almost 28% lower than RAM’s estimation of 34,500 for full year 2016. Mudajaya was maintained on negative outlook, concerning on the repayment of the MYR240m due on 23-Jan-17 amid low cash balance of only MYR81m as at Sep-16. While Sun Hung Kai Investment Services Ltd has agreed to underwrite the proposed issuance of USD60m MTN, the rating agency views that there is still possibility of the deal to be terminated given the current rising financial market volatility and risks aversions to emerging market. RAM added that rating would remain under pressure given the Group’s weak performance, even after the successful issuance of the USD60m MTN.

¨      TRIplc Medical assigned with AA1 rating. RAM assigned AA1/sta rating to TRIplc Medical’s proposed MYR639m Senior Murabahah, which will be utilized for the construction of University Teknologi MARA’s teaching and medical academic complex in Shah Alam. Meanwhile, over the primary market, Valuecap (NR) issued MYR1bn 5y at 4.55%, about 44bps higher than the similar issuance in Jun-16. Valuecap has already issued MYR5bn to date from its MYR20bn programme. Elsewhere, CIMB Group printed MYR400m A1-rated Pnc5 AT1 at 5.50% coupon, compared to 5.80% for the similar tenure issuance in May. The new issuance was subsequently traded lower at 5.269% on odd-lot MYR1m. The corporate market was muted last week on daily average of merely MYR269m.

¨      MGS yields spiked, MYR weakened on hawkish FOMC. The 3y MGS rose 19bps WoW to 3.69% and 10y MGS increased 18bps to 4.28% as yields for UST jumped after the hawkish FOMC. MYR weakened 1.2% last week to 4.478/USD on the back of the greenback strength.