FW: RHB FIC Credit Markets Update - 14/2/18

 

 

 

14 February 2018

Credit Markets Update

           

All eyes on Malaysia’s 4Q17 Today; US CPI Another Key Watch.

MYR Credit Market:

¨      MGS and MYR largely unchanged ahead of 4Q17 results later today. The MGS ended relatively unchanged amid quieter trading session where investors were mostly seen on the sidelines anticipating for Malaysia 4Q17 GDP data to be released today. The benchmark 3y MGS held at 3.42% while 10y MGS saw yields ended unchanged at 3.97%. The MYR ended the day flat at 3.9392/USD (-0.02%).

¨      Govvies trading activities slowed with volume just under MYR1.9bn ahead of Malaysia’s 4Q17 GDP release and shorter trading week. Trading continued to focus on the belly and long end of the curve, representing c.63% of total trades. Demand for benchmarks 7y GII 08/24 and 15y GII 08/33 picked up, with decent amounts of MYR236m and MYR205m respectively, last dealt at 4.16% (-1.6bps) for the former while the latter at 4.65% (+0.9bps). The benchmark 15y MGS 04/33 drew decent trade interest with total transactions of MYR126m, closing the day at 4.45% (-2.3bps). Other notable trades include off-benchmark GII 07/22 with MYR90m changed hands, last traded at 3.95% (-2.3bps).

¨      Stronger secondary flows as trade volume for corporate bonds/sukuks rose to MYR847m. AA rated issuers accounted nearly 53% of total trades. Top traded security was CAGAMAS 9/20 which saw MYR310m change hands, ending the day at 4.12% (+3.3bps). This was followed by SEB 8/25 and 12/32 with combined transactions of MYR130m where last traded yields were at 4.67% (-0.4bps) and 5.25% (-0.2bps) respectively. Other notable trades include BUMITAMA 3/19 and BGSM 8/25 with volume of MYR65m and MYR50m each, dealt at 4.47% (+5.7bps) and 4.76% (-3.7bps) respectively, while AAA rated MACB 8/20 recorded MYR60m in volume where yields settled 4.28% (+5.7bps). 

¨      MARC has affirmed ratings on Inverfin Sdn Bhd’s (Inverfin) MYR185m Tranche A notes and MYR15m Tranche B notes at AAA/Sta and AA/Sta respectively under its MYR200m MTN programme of which the notes are secured by a first legal charge on the Menara Citibank building. Inverfin, the owner of the 50-storey Menara Citibank on Jalan Ampang, plans to issue MYR160m Tranche A notes to redeem the outstanding Tranche A notes maturing on Feb 18. At the same time, MARC has assigned AAA rating to this new issuance under Tranche A. Upon completion of the refinancing, MARC will withdraw the ratings on the existing Tranche A Notes and the unissued Tranche B Notes. The ratings affirmation reflects the MTN Tranches’ LTV ratios that are on par with the MARC’s benchmarks despite significant reduction in occupancy level over the years, which stood at 79.3% as of 2017 (2016: 90.5%). NOI also worsened YoY due to falling rental rate from MYR6.11psf to MYR5.99psf, recording a lower NOI of MYR33.4m (2016: MYR36.8m) though actual NOI for 2017 is used as the revised stabilised NOI. Applying a long-term capitalisation rate of 7.5% to the actual NOI has yielded a MARC-determined value of the building of MYR445m. At this value, the maximum tranche limits for Tranche A of MYR185m and Tranche B of MYR15m remain within the LTV benchmarks that MARC applies for the AAA and AA rating levels of 43% and 51% respectively. However, any deterioration in the performance of the collateral property below MARC’s benchmarks would result in negative rating action.

APAC USD Credit Market:

¨      US Treasuries ended mixed as investors brace for inflation readings today. The USTs ended mixed yesterday despite softer trading session where market participants continued to concentrate on the release of Jan 18 CPI data later today. The 2y UST weakened which saw yields touch the 2.10% (+2.87bps) mark once again while the 10y UST rallied 2.83% (-2.91bps). The longer tenure 30y UST extended gains as yields fell further to close at 3.11% (-3.28bps) while the 5y UST pared losses from previous day as yields declined to 2.54% (-1.69bps). Market consensus expects US CPI for Jan 18 to rise 0.3% MoM and 1.9% YoY basis. The USD continued to trade lower against major currencies which saw the DXY drop below the 90 level once more, ending the day at 89.7 (-0.56%). On the macro front, White House has reportedly considering Cleveland Fed President Loretta Mester as one of the candidates to fill in the seat of new Fed Vice Chair.

¨      The iTraxx AxJ IG credit spreads rallied to 74.2bps (-1.3bps). Over in CDS space, leading the rally for the day was Chinese Fi Industrial and Commercial Bank of China Ltd which saw spreads tightened further of about -5.5bps, while Export-Import Bank of China and China Development Bank as both shed around -2.9bps and -2.6bps respectively. This was followed by PCCW-HKT Telephone Ltd., Hutchison Whampoa Ltd., Sun Hung Kai Properties Ltd. and Hongkong Land Co. Ltd. with spreads reduction between -3.1bps and -3.2bps. Over in sovereign space, Indonesia extended rally with falling CDS levels of close to -3.1bps, trailed by South Korea, Philippines, China and Malaysia which saw spreads contract in the range of -1.5bps and -2.1bps. Reliance Industries Ltd. seen paring gains as spreads grew nearly +1.5bps to lead the widening. GS Caltex Corp also saw CDS levels deteriorate slightly as spreads rose about +1bp.

¨      Moody’s has upgraded GS Caltex Corporation from Baa2/Sta to Baa1/Sta. This reflects on stronger financial position in 2017 compared to 2016 while Moody’s expects it to retain healthy financial profile over the next 1-2 yrs on the back of low debt levels and steady earnings. Moody’s estimates that GS Caltex’s RCF/adjusted debt has improved to around 35-36% in 2017 (2016: 28%) along with adjusted debt/capitalisation, declining to around 28% in 2017 (2016: 34%). Moody’s believes this improvement is due to reducing debt level to about KRW4trn as at 2017 (2016: KRW5.1trn) despite deteriorating operating income to about KRW2trn (2016: KRW2.1trn) during the same period. Moody’s also notes that it has utilised excess cash balance and FCF to repay maturing debt. Despite operating income is likely to worsen in 2018 to around KRW1.7-1.8trn on lower inventory-related gains, Moody’s views GS Caltex’s deleveraging capacity remains robust given the fact that projected level of operating income is still significantly higher compared to 2012-2015 period. In addition, its investment plan, of which it has proposed to build a new facility amounting to more than KRW2trn and possibly be in full operations by 2022, is unlikely to pressure its ratings as Moody’s attributes sufficient financial buffers it currently has will cushion its weakening financial metrics in 2020-2021. Fitch has upgraded Yanzhou Coal Mining Co. Ltd. from B/Sta to B+/Sta (Yanzhou). This upgrade is based on Fitch’s assessment of the consolidated credit profile of parent Yankuang Group Ltd. under the GRE criteria released recently, equalising ratings on both entities through a bottom-up approach. Despite parent’s consolidated standalone credit profile being weaker than Yanzhou due to less profitable coal mines and high debt burden, Yankuang Group’s linkage with Shandong SASAC is expected to remain strong given the fact that it is one of Shandong province’s two (2) key principal coal suppliers. Fitch assesses Yankuan Group’s governmental support, which includes annual subsidies of CNY200-400m as well as zero-cost land injections, as moderate on the back of persistently weak credit metrics. Yanzhou, which is 52.9% owned by Yankuang Group, has contributed about 55% of the group’s coal production and 75% of its EBITDA in 2016. During the same period, Yankuang Group has also guaranteed CNY10bn of Yanzhou’s CNY16bn in outstanding bonds.

¨      S&P has downgraded Pactera Technology International Ltd. from BBB/Neg to C+/Neg. The 2-notch downgrade reflects on the expectation of high debt leverage and deficit cash flows over the next 12 mths. S&P opines that Pactera will be required to raise new funds to finance upcoming debt obligations.  Increasing working capital outflows have deteriorated Pactera's liquidity while falling profitability has pressured its leverage. Pactera’s reported operating cash outflows expanded to USD82.7m for the 9M17 from USD56.4m in 2016. The lengthening of the revenue collection period is one of the main causes for the cash flow deficit. Account receivable days outstanding rose to 150 days as of Sep 17, from 128-130 days in 2014-2016. This signals risks in continued working capital investments to support revenue growth.