FW: RHB FIC Credit Markets Update- 7/2/18

 

 

7 February 2018

Credit Markets Update

           

USTs Retreated on Risk Recovery; New GII 08/25 Issued At 4.128%.

MYR Credit Market:

¨      The new benchmark 7.5y GII 08/25 issued at 4.128%. The auction of the new 7.5y GII 08/25 saw a BTC of 1.78x, compared to a BTC of 2.10x for a 7y GII auction in Aug 17. The GII was issued with an average yield of 4.128%, -4.8bps over the last traded yield of the previous benchmark 7y GII 08/24. Despite the major shifts in global yields globally, the MGS yield curve was largely spared the volatility. The 3y and 10y MGS remained unchanged at 3.38% and 3.95%. The belly of the curve saw yields push up as the 5y and 7y MGS rise +3.4bps and +1.2bps to 3.61% and 3.92%. The MYR further weakened -0.42% to 3.9165/USD.

¨      On the back of the new GII auction, govvies trading activity strengthened to see over MYR2.8bn trades. Trading on the short end of the curve accounted for a majority (44.6%) of the trades. The newly auctioned GII 08/25 on the other hand, accounted for MYR701m of trades. Other notable trades included the 5y benchmark GII 04/22 which garnered MYR225m trades and gained -0.5bps while the 10y benchmark MGS 11/27 remained unchanged at 3.95% on MYR102m trades. Issuances of Edra Energy Sdn Berhad remained actively traded as EDRA ENERGY 01/25, EDRA ENERGY 07/25, EDRA ENERGY 07/30 and EDRA ENERGY 01/31 all saw yields move -41 to -44.1bps lower to trade at 5.35%, 5.38%, 5.68% and 5.71% respectively on MYR25m trades.

¨      Over in economic prints, the foreign reserves of Malaysia as at end Jan 18 amounted to USD103.7bn from USD 102.4bn Dec 17. The reserves position is sufficient to finance 7.2 mths of retained imports and covers 1.1x the short term external debt. Trade data is expected later today.

¨      In ratings, RAM affirmed the rating of UEM Group Berhad at AA2/Sta. The issuer utilises the funding vehicle United Growth Berhad. Wholly owned by Khazanah Nasional Berhad, underpinned by its holdings of concessions in strategic local tolled roads and large tracts of land in Iskandar Puteri, RAM views the likelihood of government support of UEM in times of need moderately high. Moderating the credit is its substantially lower profit in FY 16 (-77% y-o-y), led by losses sustained by its construction arm and its Indonesian highway asset as well as reduced profits at its asset and facility management (AFM), property and cement businesses, while sustaining high debt levels, leading to FFODC less than 0.1x FY 16. 1H FY 17 saw UEM report a stronger pre-tax profit (+55% y-o-y), largely attributable to the stronger profit showing of its property and AFM operations which offset the weak bottom line of its cement business. RAM further expects the FFODC to improve in FY 18 if debt load is pared down with proceeds anticipated from the disposal of its stake in Opus International Consultants Ltd, the completion of its first Australian property project and the disposal of lands in Johor. The rating is also moderated by the regulatory risks relating to toll-road assets. The government has decided against rate increases in local toll roads since Jan 16. In addition the discontinuation of toll plazas in the North-South Expressway 1 Jan 18, still has PLUS in discussion with the government on compensation for toll surrendered. Principal repayments on the heavy debt load residing at PLUS’s subsidiary, which started in January 2017, may affect future distributions to UEM.

APAC USD Credit Market:

¨      US Treasuries pared gains amid recovery in risk sentiment. The USTs retreated following a performance rebound in the equity market. Despite rallying strongly on the back of flight to safety trades the previous day, the 10y USTs once again touched the 2.80% level as yields jumped +9.6bps while the yields on 2y UST reversed +10.3bps to close the day at 2.11%. Losses were steeper at the belly of the curve which saw yields on 5y UST climbed +10.3bps. The longer tenure 30y UST also weakened as yields surged +6bps to 3.07%. The 10y30y spreads contracted to about 27bps. The DXY remained flat at 89.6 (+0.03%). Over in economic prints, the US trade deficit Dec 17 had deteriorated more than initially estimated, widening from revised data of -USD50.4bn to -USD53.1bn (consensus: USD52.1bn). Meanwhile, another potential US government shutdown continues to make headlines after President Trump threatened to cease funding operations should Congress fails to resolve issues on illegal immigrants. The US House of Representatives has already approved a temporary stopgap funding bill though expectations are high it may not pass the Senate.

¨      Asia ex Japan CDS edged higher. The iTraxx AxJ IG credit spreads rose to 69.9bps (+2.8bps). Asian corporates continued to record deteriorating CDS levels. Leading the widening was CNOOC Ltd as spreads increased about +7bps. This was followed by Korea Electric Power Corp., Export-Import Bank of Korea and Korea Development Bank where CDS levels were seen rising between +4.2bps and +4.6bps. Other notable players include Oversea-Chinese Banking Corp. Ltd. as CDS spreads gained about +3.6bps while spreads grew in the range of +2.1bps and +2.2bps for Sun Hung Kai Properties, Hongkong Land Co. Ltd. and GS Caltex Corp. Over in sovereign space, CDS levels for Indonesia climbed approximately +4bps, trailed by Malaysia and Philippines where spreads expanded close to +3bps and +2.6bps respectively. Meanwhile, China’s sovereign saw CDS levels inch higher of nearly +2.5bps.