FW: RHB FIC Credit Markets Update - 6/2/18

 

 

6 February 2018

Credit Markets Update

           

Risk-off Led by US Equities; New GII 08/25 to be Auctioned.

MYR Credit Market:

¨      New benchmark GII 08/25 to be auctioned. MGS took a cue from UST yields edged up at the end of the previous week, mirrored a steepening for the first day of the week. The 3y MGS yields pushed up +1bp to 3.38% while the 10y MGS saw yields head north +3bps to 3.94%. The MYR consolidated further to 3.900/USD (-0.37%). Up next is the auction of the new benchmark 7.5y GII 08/25 with a planned MYR3bn print size.  In the wake of the strong rally in global yields, on flight to safety, amid risk emanating from the US, MGS are expected to be well supported in trading today.

¨      Govvies trading activity weaker with just under MYR2bn trades recorded in the start of the week. Trading was largely centred on the benchmark 7y, 10y and 20y MGS which recorded trades of MYR293m, MYR103m and MYR124m respectively. The benchmark 5y GII 04/22 fell +2.9bps to 3.91% on MYR128m trades. Off benchmark MGS 11/21 continued to see strong interest of MYR177m as it traded at 3.48% (-1.4 bps). 

¨      Secondary flows in the corporate bond/sukuk space saw trades worth MYR251m. TENAGA 37s fell +1bps to 5.10% whereas KESTURI 26s weakened +4.5bps to 4.78% both on trades of MYR30m and MYR20m respectively. The GG PASB 02/21 and PASB 02/26, on the hand, saw trades totalling MYR40m as yields moved -0.2bps and +0.4bps respectively to 3.95% and 4.40%. Issuances of Edra Energy Sdn Berhad, EDRA ENERGY 01/22, EDRA ENERGY 07/23, EDRA ENERGY 01/24 and EDRA ENERGY 07/24 all saw yields move between -43.9bps and +0.2bps on trades worth MYR35m in total.

¨      Over in the economic space, the reserves of Malaysia as at end Jan will be published later today.

APAC USD Credit Market:

¨      Fed Chairman sworn in; Risk-off takes hold in global markets. Jerome Powell was officially sworn in as the new Chair of the Fed Board on Monday, reiterating the Fed’s view on good economic performance, and low unemployment and inflation while maintaining that transparency of Fed policy moves will be maintained. In the financial world, a rout in the equities markets, led to a risk-off sentiment that permeated through the markets, leading to a rally in the bond markets. Part of it was attributed to inflation concerns, leading to growing expectations of more aggressive moves by the US Fed, leading to a flight to safety. After the lows USTs saw especially in the long end last week, the USTs yields declined across the curve as the 2y and 10y USTs rallied -11.72bps and -13.55bps respectively to 2.02% and 2.71%. The 30y USTs rallied -8.08bps to 3.01%. Oil prices saw a similar risk off as Brent crude oil prices fell -1.4% overnight to USD67.62/bbl. The USD continued to push upwards as the DXY Index rose to 89.55 (+0.4%). In economic news, the ISM services saw record highs, now at 59.9 for Jan 18 (Dec 17: 56.0) vs 56.7 consensus expectations. Trade balances for Dec will be announced later today.

¨      Asia ex Japan CDS edged higher. The iTraxx AxJ IG credit spreads rose to 67.1bps (+1.9bps). Corporates mostly recorded deteriorating CDS levels overnight. Leading the widening was Petroliam Nasional Berhad as spreads increased about +6.3bps, trailed by Hutchison Whampoa Ltd. which saw levels rise approximately +5.9bps. This was followed by Sun Hung Kai Properties Ltd. and Hongkong Land Co. Ltd. which saw similar rate increase of around +5.7bps. Fis such as Bank of India, China Development Bank, State Bank of India/London, Export-Import Bank of China, Export-Import Bank of Korea as well as Industrial Bank of Korea also ended the day with higher CDS levels, as spreads grew in the range of +1.9bps and +4.5bps. Other notable players include Swire Pacific Ltd., SK Telecom Co. Ltd. and POSCO with spreads widening between +5bps and +4.6bps.  Over in sovereign space, CDS levels for South Korea rose close to +2.6bps.This was followed by Malaysia, Indonesia and Philippines where spreads widened nearly +2.5bps, +2.2bps and +2.0bps respectively.

¨      Moody’s has revised the outlook on Beijing Energy Co. Ltd. (BEH) upward from A3/Neg to A3/Sta. The better outlook reflects stable financial performance with the expectation that BEH’s credit metrics and business profile will be managed accordingly over the next 12-18 mths, thus, easing the possibility of complications that may arise from the acquisition of Beijing Jingmei Group (Jingmei) back in 2014. Supporting the credit profile includes the lower planned capex over 2018-20 as Moody’s estimates it to average approximately RMB12bn compared with RMB14bn annually over the last three (3) yrs. Meanwhile, adjusted FFO interest cover will range approximately 2.5-2.7x while FFO/debt should be around 7-9% for 2018-2019. BEH, wholly owned by the Beijing State-Owned Assets Supervision and Administration Commission (SASAC), is also expected to receive support from Beijing municipal government though Moody’s opines that neither deterioration in sovereign nor Beijing municipal rating would unlikely pressure BEH’s credit profile. Moody’s also believes that the increasing thermal coal capacity from Jingmei will allow BEH to achieve 20-30% self-sufficiency in coal supply. Prior to the merger, it was approximately less than 5% self-sufficiency. S&P has revised upward the outlook on Mitsui & Co. Ltd. from A/Neg to A/Sta, along with its overseas subsidiaries and insurer Insurance Company of Trinet Asia Pte. Ltd. S&P forecasts that a recovery in commodity markets will elevate its net profit beyond JPY400m FY17, higher than initially estimated of JPY300m. Concurrently, S&P expects that profit is unlikely to deteriorate in FY18. Mitsui has been trying to restore the risk buffer to shore up its capital which has resulted material deterioration in FY15. In FY16, Mitsui managed to secure subordinated loans of about JPY555bn which S&P regards as having intermediate equity content. Nevertheless, S&P sees Mitsui’s efforts in securing cumulative positive FCF over three (3) years through FY19 should create a more resilient credit metrics. Mitsui should be able to position its financial standing comfortably of which S&P projects that 3-year RORA, as measured by ratio of pretax net income to risk based capital, from FY17 will exceed 10% on the back of possibly strong pretax income. From this, S&P sees its steady capital adequacy on a 3-year weighted-average basis from FY17 in terms of adjusted capital will approach levels in line with the requirement for risk-based capital under S&P’s ‘A’ stress scenario.

¨      Moody’s has revised downwards on the outlook of PT Lippo Karawaci Tbk from B1/Sta to B1/Neg. This is driven by execution and financing risk, of which it concurrently sells and constructs Meikarta instead of pre-selling the residential property project prior to construction. Moody’s opines that this strategy may deteriorate its debt leverage and interest coverage ratios on possible mismatch in cash flows and funding requirements for construction. The situation worsens for the fact that it depends on asset sales quite significantly. Moody’s believes the completion of the developer’s targeted sale of Puri Mall over the next two (2) years to Lippo Malls Indonesia Retail Trust as uncertain given the necessary equity funding by LMIRT to complete the acquisition. Moody’s has changed the outlook on QBE Insurance Group Limited (QBE) lower from Baa1/Sta to Baa1/Neg. The downward revision reflects on weaker earnings performance due to natural disaster losses coupled with goodwill write-downs following downward revisions in the profitability assumptions for the group’s North American businesses. The possibility of lower profit along with estimated capital reduction is believed to deteriorate the group’s financial leverage and weaken its earnings coverage. Nevertheless, Moody’s opines that financial leverage metrics and profitability will improve in 2018 following the announcement made by QBE to improve its operations while at the same time review its Latin American operations, prioritising risk reduction and group consolidation. Moody’s sees this initiative will stabilise QBE’s credit profile over the next 12 mths.

¨      Fitch has assigned Jiangyin Chengxing Industrial Group Co. Ltd. (Jiangyin Chengxing) with a B/Sta rating. The China-based chemical company is the world’s largest producer of yellow phosphorus and refined thermal phosphoric acid. Jiangxin Chengxing has decent economies of scale due to its size and vertical integration with other business components that it owns. Its higher margin and more stable phosphorus production process are held through 25.8% -owned Jiangsu Chengxing Phoph-Chemicals Co. Ltd. (JSCX). Its shares in JSCX have been pledged as collateral for a bank loan leading Fitch to deconsolidate JSCX for their analysis. Impact, was limited given JSCX’s small size accounting for 22% of EBITDA while accounting for 33% of total borrowing. Jiangyin Chengxing’s liquidity ratio as of end-2016 was below 1x with short-term debt of CNY8bn due in 2017 in comparison with total liquidity of CNY5.5bn. Its debt structure is relies heavily on short-term financing, which accounted for 67% of its total borrowings. The company has CNY900m of notes due 2018. Despite owning CNY4.5bn in credit facilities, only CNY1.6bn is available to be drawn.

¨      Moody’s assigns A3/Sta to Shandong Hi-speed Group Co Ltd (SDHG). SDHG is 100% owned by the provincial government and has hybrid public policy and commercial public roles in the railway and toll road sectors in Shandong Province. SDHG is Shandong Provincial Government’s sole platform for railway investment. Moody’s expects a high likelihood that the company will receive extraordinary support from the Shandong Provincial Government in time of need, which confers an uplift to the rating of SDHG. As at Dec 17, SDHG has a 30% market share of Shandong's toll road sector, and 989km expressway under planning and construction. In addition, SDHG consolidates Weihai City Commercial bank, in which it owns only a 47.15% stake, and engages in other businesses, including construction engineering, port and marine transportation, trading and logistics and real estate. Moody’s expecting public policy activities expected to grow significantly over the next three (3) years, underpinning the company’s very high strategic importance. SDHG has a track record of financial support from the Shandong Provincial Government, receiving equity injections, grants and subsidies exceeding RMB16.3bn 2014-2016. Moody's estimates that SDHG will incur average annual capex of RMB63bn 2017-2019, with more than half of such spending for the investment in the railway business segment. Credit metrics are expected to remain weak over the next 12-18 mths, with adjusted FFO to debt between 2-4%, from the high capex spending.

¨      Moody’s assign B2/Sta to Sunriver Holding Group Co Ltd. Property development is Sunriver's largest business segment, contributing 60%-65% of its total gross profit of RMB1.4-2.1bn 2015-16. Sunriver operated nine (9) residential real estate projects Sep 17, with a focus in Anhui Province. The company achieved high gross development margins of 32%-40% in the last two (2) yrs because of low-cost land bank and strong average selling price. Strong average selling price continues to support expectations of Moody’s of gross profit margins of 33-34% over 12-18 mths. Sunriver's infrastructure construction segment provides modest business diversification and does not negatively impact the company's credit profile, as it does not have material debt funding needs. Sunriver is however expanding another core business by developing and acquiring tourism attractions, raising both its debt funding needs and execution risk. Capex and investments for the segment estimated at RMB2.5bn per yr for the next 2-3 yrs. Revenue to adjusted debt was 74% 2016 (117%: 2015)  expected to trend lower to 65-70% over 12-18mths in the absence of aggressive land acquisition spending. Sunriver's liquidity is adequate, seen by its cash/short-term debt of 193% Jun 17. The company has raised corporate onshore bonds of around RMB2.85bn since 2013. Interest coverage, measured by adjusted EBIT to interest is expected to weaken to 1.6x over 12-18mths (2.4x: 2016), as the company's gross profit margins will partly offset an increase in interest expenses arising from its increasing debt level. The rating is constrained by the company’s scale which is small, high geographic concentration risk, and private company status, which affords less diversified funding access and weaker corporate governance when compared with listed companies. Fitch assigns B/Sta to Sunriver Holding Group Co Ltd.