FW: RHB FIC Credit Markets Update - 17/11/17

 

 

17 November 2017

 

Credit Markets Update

           

3Q17 Malaysia GDP in Focus; House Republicans Pass Tax Reform Bill

MYR Credit Market:

¨      Focus on Malaysia's 3Q17 GDP release today. The MGS continued to bull flatten on the MGS 3y-10y space on potential bargain hunts following recent excessive rise in yields. 3y MGS tightened further circa -2.6bps to end at 3.47%. Meanwhile, MGS 7y-10y converged at 3.95% as the latter rallied strongly with yields narrowing sharply by -5.5bps. The MYR was well supported at 4.1760/USD (+0.04%), as market participants look forward to the release of 3Q17 GDP results (consensus: 5.7%; prior: 5.8%) as well as the figures for BoP current-account balance (consensus: MYR12.9bn; prior: MYR9.6bn) later today.

¨      Modest trading activities in the govvies segment with total volume circa MYR2.2bn. Benchmark 10y GII 07/27 saw volume surged higher to MYR410m while yields tightened -1bp to 4.30% as the benchmark 5y GII 4/20 which saw volume increase further to MYR210m closing -1.2bps lower at 3.57%. Trading interest picked up for the benchmark 7y MGS 09/24 with trades worth MYR297m where yields narrowed -1.4bps closing at 3.95% along with the benchmark 3y MGS 02/21 with trades amounted to MYR130m settling +2.3bps higher at 3.52%.

¨      Corporate trades rebounded strongly as volume amassed to MYR742m. Newly printed DANAINFRA 27s, 32s, 42s and 47s recorded combined trades of MYR115m to close between 4.50% and 5.35% (rising between +0.1bp and +3.7bps). Similarly, newly issued ACSB 11/18s' saw MYR110m change hands with yields of 5%. IJM 04/25 tightened -17.9bps to 4.72% with MYR80m transacted, last traded on Apr-15. Trade interest picked up for the infrastructure and utilities issuers with SPG 23s, 33s, 34s, and 35s saw combined transactions of MYR60m to close between 5.40% and 5.60% along with TENAGA 08/37, where yields compressed -3bps to 5.17% on MYR40m volume.

¨      Alpha Circle Sdn Bhd (ACSB), rated AA-, printed MYR55m senior Nov-18 sukuk from its existing MYR595m sukuk musharakah programme. The sukuk has a coupon rate of 5.0%.

¨      Over to ratings, MARC has affirmed the AAA ratings of Maybank Islamic Berhad's (Maybank Islamic) carrying a stable outlook. Maybank Islamic's gross financing portfolio growth of 14.3%, outpacing the domestic Islamic banking sector of 11.4% YoY as at end-2016. Maybank Islamic's financing growth was on par with the industry's performance despite slowing down to 3.1% recorded in 1H17. During the same period, Maybank Islamic's net profit rose 38.6% YoY to MYR777m attributed by a 13% increase in net financing income. Maybank Islamic's liquidity level remains healthy as reflected by the gross financing-to-fund ratio of 83.4% and CASA-to-total customer deposits ratio of 28.0%. MARC cited that bank's cost-to-income ratio remains low at 36.3% compared to its peers.  Besides that, investment accounts accounted for nearly 16% of the bank's total funding which increased to MYR27.8bn as at end-June 2017 compared to MYR17.7bn as at end-2015. Maybank Islamic is forecasted to strengthen its dominant position in the Islamic banking sector given the sturdy support by its parent, Maybank.

APAC USD Credit Market:

¨      USTs bear steepen, unwinding the gains for the past two (2) days. An unwinding of the risk-off trades since the middle of the week, saw USTs pressured downwards, especially at the end of the trading session, as profit taking and the passing of the tax reform bill took its toll on the market. The House Republicans passed the tax reform bill by a margin of 227 to 205. Markets saw some respite as a bear steepening dominated the UST yield curve. The 2y UST yields gained +2.5bps to 1.71%, whereas the 10y USTs rose +5.3bps to 2.38%. The 30y USTs were pressured as they saw yields spike up +6.2bps to 2.83%. The USD as seen by the DXY Index closed higher at 93.93 (+0.13%). With lack of economic data to look forward to focus is expected to shift towards housing starts data for Oct, and the debate on the tax reform bill before the Senate.

¨      Reliance leads the widening in Asia IG CDS. As the UST continues its bull flattening the day before, the Asia ex Japan IG credit spreads tightened -1.5bps to 161.5bps, while the Asia ex Japan HY bond yields remained unchanged at 6.75% (-0.2bps). The iTraxx AxJ was largely unchanged at 80.27bps (-0.2bps). The sovereigns of Indonesia and China saw CDS levels contract -2.4bps and -1.8bps respectively while Korean corporates POSCO, KT Corp, SK Telecom Co Ltd, Hyundai Motor Co and GS Caltex Corp all saw CDS levels tighten between -1.8bps to -2.0bps.  Leading the widening of CDS levels was Reliance Industries Ltd which edged up +3.8bps, following it's announced additional USD1.8bn planned bond issuance in an effort to reduce its current costs of debt.

¨      Moody's upgrades the outlook on Binhai Investment Co Ltd to Baa1/Sta from Baa1/Neg. This outlook change reflects the improved standalone credit profile supported by its stable growth in gas volumes and reduction in reliance on connected party gas sales. Its sales revenue to third party customers grew at 20% YoY, and Moody's continues to expect its reliance to connected parties and connection fees to continue to fall as its coal-to-gas projects, expansion in the city gas distribution business and supply to gas-fired power stations are expected to increase revenue contribution. In addition, Moody's expects the expansion of its gas distribution network to average HKD550m capex in 2017-19 annually, which it considers manageable for the company while FFO/debt of 11-14% and FFO/interest cover of 2.8-4.0x expected for 2018-19 is within the rating tolerance for its current rating. Moody's downgraded the outlook on Yuexiu Real Estate Investment Trust (Yuexiu REIT) and Yuexiu REIT MTN Co Ltd to Baa3/Neg from Baa3/Sta. This follow Yexiu REIT's announced acquisition plans of a 67% interest in a commercial complex in Wuhan from Yuexiu Property Company Ltd for RMB2.28bn. This will be funded via RMB1.22bn of new bank loans and the balance in deferred payments. The acquisition is expected to increase debt/EBITDA to 10.7-11.2x over the next 12-18 months form 9.7x Jun-17. There is also increased execution risk as Wuhan is a new market for the company, and has ample supply of office space, with average occupancy of 40.5% for office building and 86.8% in retail space. Moody's assigns B1/Neg to Tahoe Group Co Ltd. The rating reflects strong sales execution that gas enabled it to grow a scale larger than most B-rated Chinese property developers, with expectations that growth in contracted sales will be in excess of 100% in 2017. The group has a good track record in the development of residential and commercial properties in first and second-tier cities in China, establishing a premier brand name. In addition, the group enjoys good access to domestic debt and equity markets, with RMB18.5bn and RMB4bn raised in local debt and rights issuances in 2015. The group is constrained by its aggressive debt-funded land replenishment and construction spending for its expansion plans, with revenue/adj debt weak at 21-33% 2014-16 and interest coverage at 1.2-1.4x. The group's liquidity position is also considered weak by Moody's with cash balances of RMB16.6bn as at Jun 17 insufficient to cover the short-term debt of RMB31bn. Execution risk remains another concern with its expansion plans into China's southern region, where it is less experienced and where there is strong competition among developers.  Moody's have put the rating of the subordinated Tier-2 point of non-viability (Tier-2 PONV) securities of DBS Bank Ltd, DBS Group Holdings Ltd, Overseas-Chinese Banking Corp Ltd and United Overseas Bank Limited on review for upgrade. This follows the possible introduction of the Monetary Authority of Singapore (MAS)'s enhanced bank resolution regime. Moody's views that MAS the loss absorption triggers embedded in contractual PONV securities and in the proposed statutes are broadly similar in nature, and that the resolution will treat creditors of the same class of loss-absorbing Tier-2 instruments equally, likely allowing a bail-in at the same time. This would likely result in a one notch upgrade in all the Tier-2 PONV securities.

 

 

 

 

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