30 January 2018
Credit Markets Update
UST 10y Touched 2.73%; Sinar Kamiri Issued MYR245m.
MYR Credit Market:
¨ The MYR pared some gains but still below 3.9000/USD. Amid a global backdrop of improving growth outlook coupled pickup in inflation expectations, the MGS yield curve saw mixed trading mode, with long-end yields seen converging lower. The 3y MGS remained unchanged at 3.30% while the 10y saw yields ticked higher to close 1.1bps to end at 3.90%. The 15y and 30y MGS on the other hand, rallied -5.1bps and -2.3bps respectively to 4.39% and 4.89%. As the USD saw a paring back of losses against most major currencies yesterday, the MYR saw a pause in its rally, as it ended the day -0.29% weaker at 3.8818/USD.
¨ Govvies trading activity remained healthy recording just under MYR2.8bn trades. Trades in the short end dominated trading, accounting for 43.4% of total daily trades, though the 5y space remained actively traded. The 5y benchmarks GII 04/22 and MGS 03/22 recorded trades of MYR204m and MYR176m respectively closing the day mixed at 3.83% (-1.8bps) and 3.60% (+1.4bps) respectively. The 7y benchmark MGS 09/24 recorded trades of MYR255m, +2.4bps from its last traded at 3.93%. Off benchmark MGS 06/28 and MGS 11/21 saw MYR240m and MYR171m change hands at 4.05% (-1.2bps) and 3.49% (+2.2 bps).
¨ Secondary flows in the corporate bond/sukuk space saw worth MYR236m. Issuances of Southern Power Generation Sdn Berhad saw total trades of MYR65m as SPG04/24, SPG 10/24, SPG 04/33 and SPG 10/33 rallied between -1.9 to -5.9bps to end the day at 4.75%, 4.77%, 5.29% and 5.33% respectively. YTL Power International Berhad on the other hand saw YTL POWER 27s and YTL POWER 21s traded at 4.91% (-1.4bps) and 4.48% (-8bps) on MYR28m worth of trades. Other notable trades include short dated GOLDEN ASSET 19s which saw MYR30m trades at 5.14%, -196.9bps away from its last traded three (3) weeks ago, while MALAKOFF 19s were traded at 4.38% (+2.7bps). Longer dated UEMS 23s and PRASARANA 47s recorded trades of MYR20m respectively to end the day at 4.94% (-3bps) and 5.23% (+0.1bps).
¨ Over in the primary space, Rukun Juang Sdn Bhd issued MYR207m of FRNs in two tranches of 1.5yr sukuks, guaranteed by MRCB. This brings the total drawdown from its unrated MYR1.3bn sukuk murabahah programme to MYR400m. Sinar Kamiri Sdn Berhad issued MYR245m from its AA3 rated MYR245m Green SRI sukuk wakalah programme. The sukuks were issued in 17 tranches with maturities between 2yrs and 18yrs and coupons between 4.96% and 6.35%.
¨ Over in ratings, RAM Ratings downgraded Lafarge Cement Sdn Bhd (LCSB) to A1/Sta from AA2/Neg. LCSB is a wholly owned subsidiary of Lafarge Malaysia Berhad the largest cement manufacturer in Peninsular Malaysia by capacity. Given its importance to Lafarge Malaysia, LCSB's rating has been equated to that of its parent. The current downgrade is premised on the sharp fall in Lafarge Malaysia's financial performance. Depressed demand, industry overcapacity and intense price competition along with high operating cost resulted in three (3) quarters of operating losses (-MYR175.4m 9M 17). Consequently FFODC fell into negative 9M 17 from 0.59x FY 16. Although 2018 is expected to see a ramp up in major infrastructure projects, the rating agency opines the stronger demand is not expected to fully compensate the existing market overhang. Lafarge Malaysia's balance sheet still show gearing and net gearing at 0.19x and 0.16x, though debt load increased 62% 9M17 to fund cape and, working capital and additionally may increase to cover operations. Liquidity is expected to remain tight until sustainable levels of profits are reached though it still does have MYR509.3m available credit facilities. The rating agency also expects that Lafarge Malaysia may also draw support from its ultimate parent LafargeHolcim Ltd to help address financing needs. LafargeHolcim owns 51% of Lafarge Malaysia and is considered strategically important by the rating agency due to its position as the fourth largest market in LafargeHolcim's Asia Pacific portfolio.
¨ MARC Rating has affirmed the AAA/Sta rating on both Premier Merchandise Sdn Bhd's programmes which are guaranteed by Malayan Banking Berhad (Maybank) and Danajamin Nasional Berhad (Danajamin) respectively. The ratings reflect the credit strengths of Maybank and Danajamin respectively. Premier Merchandise's credit is underpinned by dividend flow from two (2) indirect key subsidiaries 7-Eleven Holdings Berhad (7-Eleven) and Singer (Malaysia) Sdn Bhd (Singer). Apart from dividend income, Premier Merchandise relies on repayment of advances from its holding company to partly meet its debt obligations. Premier Merchandise's net receivables from its related parties stood at MYR156.5m 2016. 7-Eleven saw improved sales 9M17 at MYR1.64bn (9M 16: MYR1.58bn) though pre-tax profit declined 25.3% YoY to MYR43.9m. Working capital increased, funded by higher borrowing MYR186m Sep 17 from MYR115.7m 2016. Singer recorded 33.3% YoY increase in pre-tax profit to MYR23.9m despite revenue decline of 2.0% YoY with reduction in the number of stores. Premier Merchandise received MYR193.4m in dividends entirely used to pay dividends to its shareholders.
¨ MARC Rating affirmed Jimah East Power Sdn Bhd at AA-IS/Sta. This rating incorporates predictable project cash flows, a manageable repayment profile that matches JEP's availability-based revenue structure under the power purchase agreement (PPA) and the credit strength of project sponsors Tenaga Nasional Berhad (TNB) (70%), Mitsui & Co., Ltd (Mitsui) (15%) and The Chugoku Electric Power Co., Ltd (Chugoku) (15%) though moderated by risks associated with ultra-supercritical technology as well as completion and construction cost overrun risks. The stable outlook reflects MARC's expectations that JEP will continue to deliver satisfactory construction progress on the project power plant within the allocated budget and the project sponsors will inject the capital requirement as per the financing structure in a timely manner. Transmission works and lines are behind schedule due to delays in the civil ground improvement works and land acquisition process though actual plant construction progress is at 67.68% against a planned progress of 66.05%. As Aug 17, the project sponsors have provided a total capital of MYR1.7bn against the total expected contribution of MYR2.7bn to achieve the scheduled project completion by end-2019 while project costs have marginally increased to MYR11.63bn. Under MARC's base case cash flow projection, JEP is expected to achieve minimum and average FSCR with cash balances of 1.25x and 1.33x during the sukuk tenure. The rating agency views the likelihood of a persistent unplanned outage as low given the participation of IHI and Toshiba as technical support providers to plant operator TNB Repair and Maintenance Sdn Bhd (TNB Remaco). Mitigating potential cash flow mismatch risk during the initial operating period due to a delay in the commencement of plant operations are the timely receipt of liquidated damages (LD) from the engineering, procurement and construction (EPC) contractor and pre-commission insurance claims.
APAC USD Credit Market:
¨ US Treasuries bear steepened ahead of first Fed meeting in 2018. The USTs extended its losses led by longer end of the curve. The 2y UST remained firm at 2.12% while the 10y UST touched as high as 2.725% before retreating back to 2.69% (+3.37bps overnight) ahead of FOMC meeting. The 5y and 30y USTs also weakened as yields elevated to 2.49% (+2bps) and 2.94% (+3.07bps) respectively. Focus for this week will continue to oscillate around Chair Yellen's final FOMC meeting though policy changes remained unlikely. Personal income rose slightly to 0.4% (consensus: 0.3%) while personal spending dropped from revised figure of 0.8% to 0.4% as estimated. PCE deflator fell to 1.7% from 1.8% YoY while PCE core was sustained at 1.5% YoY, both figures were within expectations. Meanwhile, the US federal government has announced that it may borrow less in the 1Q18 period. Elsewhere, investors will be keeping a close tab on the State of the Union address speech by President Trump to seek clarity on policies development of with special attention currently on the global trade direction of the US after possible trade retaliation between US and China sparked recently. Cautious sentiment is widely expected due to busy week ahead with a series of economic data towards the end of the week. The USD regained footing on the back of rising USTs yields as the DXY climbed to 89.3 (+0.27%).
¨ Asia ex Japan CDS edged lower. The iTraxx AxJ IG credit spreads fell slightly to 62.9bps (-0.4bps). Leading the rally in the CDS space was GS Caltex Corp as levels dropped approximately -1.3bps, trailed by Hutchison Whampoa Ltd. and SK Telecom Co. Ltd. with spreads reduction of -1.1bps and -1bp respectively. Leading the widening, on the other hand, was Singapore Telecommunications Ltd. as CDS spreads widened approximately +0.6bps. Over in sovereign space, CDS levels for China and Indonesia rose slightly to about +0.6bps and +0.5bps each.
¨ S&P has upgraded Metallurgical Corp. of China (MCC Ltd.) from BBB/Sta to BBB+/Sta. The upgrade reflects on stronger credit profile of its parent, China Minmetals Corp., and the expectation that MCC Ltd. will remain a core subsidiary of the group over the next 12-24 mths. MCC Ltd. contributed nearly 40-50% of the group's EBITDA in 2016 and 2017 and S&P believes it will continue to be a major profit and cash flow contributor to its parent. New contracts for MMC Ltd. rose 78% YoY 1H17. S&P opines that MCC Ltd. may have benefitted from the recent cyclical recovery of in the steel industry and upgrade demand prompted by stricter regulations. MCC Ltd. remains firm with its deleveraging plans and has been generating positive operating cash flow since 2013. Despite leverage remaining relatively high, S&P expects that credit metrics will likely to improve contributed by careful working capital management as depicted by 25-30% new contracts in the form of PPP occurring in 2017, as estimated by S&P.
¨ S&P has assigned China Minmetals Corp. with BBB+/Sta. The rating reflects on its strong linkages with central government of China as a government-related entity (GRE), where extraordinary support is broadly expected, along with the merger with Metallurgical Corp. of China (MCC Ltd.). The largest metallurgical engineering and construction (E&C) services provider is wholly owned by the Chinese government via State-owned Assets Supervision and Administration Commission of the State Council (SASAC). Minmetal's position in the business is enhanced by the smooth ramp-up of the Las Bambas mine and commencement of production and the Dugald River production commencement. S&P believes these factors will boost EBITDA in 12-24 mths. Leverage remains high and forecasted debt/EBITDA to hover around 6-7x and EBITDA interest coverage to maintain between 2.5-3x over the next two (2) yrs though S&P sees Minmetals possibly utilising operating cash flow than debt for capex as part of its stringent financial policy.
¨ Fitch has downgraded Global Cloud Xchange Limited (GCX) from B-/Sta to CCC/Sta. The downgrade is driven by possible excessive financing risk of approximately USD350m secured notes, with current YTM of about 11-12%, maturing Aug 19 on the back of uncertain trading conditions and the break-up of its 100% parent Reliance Communications Limited (Rcom). Fitch opines that refinancing may be difficult buttressed by an unstable relationship with Rcom. GCX cash balance as of Dec 17 is estimated to remain below the USD40m (Sep 17: USD37m) due to a lower-than-expected indefeasible right of usage (IRU). GCX is likely to sustain negative FCF FY18 as Fitch estimates cash flow from operations of USD10-15m may not be on par with capex estimate of about USD25m (1HFY18: USD13m) even if the company pays no dividend and is unlikely to recover in FY19 if working-capital outflows persists on non-payment by Rcom. Fitch also projects that GCX's FY18 cash EBITDA to remain between USD75-80m (FY17: USD78m) on IRU sales of approximately USD55m (FY17: USD51m). Net receivables due from Rcom have increased steadily where it recorded USD120m as at Sep 17 and USD94m as at FY17 with which it has an annual relationship worth about USD30-35m.
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