OPEC Turning Point; KLK Potential Acquisition Credit Negative

5 December 2016

Credit Markets Weekly

OPEC Turning Point; KLK Potential Acquisition Credit Negative

                                                                       

APAC USD CREDIT MARKETS

¨      Investors cheered the OPEC deal to cut production levels by 1.3m bbl/day from the Oct output (33.8m bbl/day), to a target level of 32.5m bbl/day. The agreement is valid for 6 months starting January, with an option to extend by a further 6-months. As a result, the first production cut by the cartel since 2008 sent Brent price soaring 15.3% WoW to c.USD54.5/bbl. The sell-off in USTs’ took a breather after the Nov NFP jobs report as the dip in wage growth YoY helped eased inflation expectations. Short-dated 2-5y tumbled 1-2bps WoW, though longer-end 10-30y UST continued to extend higher (+3 to 6bps). Taking cues from the mixed USTs, Asian bond ended the week slightly wider. IG spreads and speculative bond yields added 1bp to 187bps and 6.81% respectively. Asian CDS traded c.2bps tighter to 125.4bps led by the rebound in oil-linked corporates/sovereign i.e. PETMK, GS Caltex and Malaysia.

¨      On rating action, Fitch slashed Lifestyle International to BB+/Neg from BBB-/Sta to reflect rising leverage after the acquisition of a commercial site in Kai Tak, Kowloon from the HK government for HKD7.4bn for a development of a large retail property which could adversely affect the company’s leverage ratios. Similarly, Moody’s placed Lifestyle International’s Baa3 rating on review for downgrade. Elsewhere. Fitch slashed Tower Bersama’s rating to BB-/sta from BB on the back of the weakness free cash flow generation from aggressive dividend policy, alongside capex requirements and higher financing costs, whereby Fitch expects its FFO-adjusted net leverage to be high at 5.8x over the next 3 years.

¨      Asian primaries remained active with USD4.9bn of new supply compared to USD5.64bn in the preceding week despite the rising UST yields as issuers rush to the markets ahead of the December holiday break.

SGD CREDIT MARKETS

¨      OPEC deal spurs some tightening in O&G names. This is the second consecutive week that the SGD issuance space has been quiet, with YTD issuances so far standing at SGD19.6bn. With the general consensus of a FOMC rate hike in Dec-2016 as well as the normally quieter seasonal period, we opine for a potential pick-up in the primary issuance space only from Jan-2017 onwards. Brent oil prices have rallied by over 15% after an OPEC production deal was announced on Thursday, with some commodity-related names such as NOLSP, EZISP and OLAMSP appearing tighter. Ezra Holdings (NR) FY8/2016 revenue declined by 8% to USD136m while suffering a net loss of USD419m due to margin compression and impairments totaling USD270m. In addition, it announced that the put option that requires the company to acquire a 51% stake in SJR Marine for USD43m is exercisable one month from 8-Dec, which is negative on Ezra’s tight credit profile. Ezra mostly recently sought consent solicitation to waive all its bond financial covenants in Oct-2016.

¨      SOR marginally tightened. There was a steepening in the short-to-mid SOR curve, with the 2y falling by 1bp to 1.625% while the 5y rose 3bps to 2.26%.

MYR CREDIT MARKETS

¨      MGS bull flattened, recovering from last month rout. The MGS curve shifted downward last week after the pick-up last month, with the 3y MGS declining 10bps WoW to 3.80% and 10y MGS reduced 7bps WoW to 4.36%. The USDMYR was stable last week, settling 0.1% firmer at 4.4532 amid higher oil prices. BNM, meanwhile, came out with more measures in order to enhance the liquidity of the FX market effective today. Among the measures taken include – liberalization and deregulation of the onshore MYR hedging market, streamlining treatment for investment in foreign currency assets and incentives and treatment of export proceeds.

¨      KLK’s (AA1) acquisition potentially credit negative. RAM views that the plantation company’s GBP415m (MYR2.3bn) proposed takeover of UK-based MP Evans Group PLC, if 100% debt-financing, would push its gearing ratio to 0.6x (above the downgrade trigger of 0.5x) and weaken its FFO debt cover to 0.2x (below the threshold of 0.3x). Nevertheless, the acquisition could benefit KLK operationally on the back of MP Evan’s young plantation profile. A total of MYR115m of KLK exchanged hands last week with tranche 9/22 realigning 45bps higher to 4.55%, compared to the previous traded level in Oct. Other top traded during the week were mainly financial names – Cagamas (MYR280m), IBK (MYR125m), Public Bank (MYR125m) and Sabah Development Bank (MYR115m).