FW: RHB FIC Credit Markets Update - 9/2/18

 

 

 

9 February 2018

Credit Markets Update

           

UST supported by flight to safety; continued inflows to MYR bonds with net +MYR4.5bn for month of Jan.

MYR Credit Market:

¨      MGS weaken on the front end. Higher trading activities in the govvies also saw the weakening of the MGS in the front end of the curve. The 3y MGS weakened to 3.42% (+4.9bps) while the 10y MGS remained largely unchanged at 3.95% (-0.1bps). The spike in short-end yields were in tandem with recent upwardly movement in global bond yields. The belly of the curve remained supported as the 5y MGS eased -1.7bps to 3.58%. As the USD continued to rally against EM Asian currencies, the MYR softened by circa -0.46% to 3.9268/USD.

¨      Trading activity picked up for govvies as activity recorded was just under MYR3.5bn. Trading was largely concentrated on the belly and short end of the curve. Benchmark 3y, 5y and 7y MGS 02/21, MGS 04/22 and MGS 09/24 saw increased activity with MYR315m, MYR137m and MYR113m of trades each. Benchmark 5y GII remained active with MYR153m trades done at 3.88% (+2.6bps). Other notable trades include off benchmark MGS 07/21 and MGS 09/25 which saw yields rally -1.7bps and -0.8bps to 3.50% and 2.99% on trades worth MYR507m and MYR178m respectively.

¨      Trading on corporate bonds/sukuks on the other hand saw volume plummet as only MYR160m was recorded. Short dated BGSM 19s weakened +1bps at 4.35% on MYR30m of trades. MALAKOFF POW 25s and PTPTN 12/24 on the other hand rallied slightly to cross at 4.77% (-0.6bps) and 4.35% (-0.1bps on trades totalling MYR20m each. Recent issuer Sinar Kamiri Sdn Berhad saw issuances SINAR KAMIRI 01/20, SINAR KAMIRI 01/23 and SINAR KAMIRI 01/28 traded between -4bps and +0.2bps from last traded and issued coupon to close at 4.94%, 5.17% and 5.56% respectively

¨      Latest reports on foreign holdings in Malaysian bonds showed foreign inflows gained +MYR4.5bn for the month of Jan 18. Recall, net inflows gained MYR2.7bn inflow a month before. This brings the total foreign holdings in MGS to 45.7% from 45.1% the previous month, and total holdings of govvies to 28.0% (27.7% previously). On the macro front, investors will be watching closely the industrial production data for Dec.

¨      Over in primaries, Sunway Treasury Sukuk Sdn Berhad issued MYR200m 1y FRNs from its unrated MYR10bn sukuk programme, while West Coast Expressway further issued another MYR26.6m 38y bonds with 10% coupons.

¨      In ratings, MARC affirms Putrajaya Holdings Sdn Bhd (PJH) at AAAIS/Sta premised on its cashflows derived from stable and sizeable rental income from the Malaysian government for subleasing government buildings in Putrajaya under long-term lease-and-sublease agreements; the credit strength of PJH’s government-linked major shareholders; and its developmental track record as the master developer of Putrajaya. PJH constructed and delivered 38 government buildings with a total gross built-up area of 37.5 million sq ft under the build-lease-transfer (BLT) model. Currently, PJH only has one (1) ongoing government building construction project expected to be completed by 2018. As government building construction projects declined, PJH increased non-government related projects, exposing it to market risk. PJH’s residential projects have recorded lower-than-expected take-up rates (average take-up rate of 37.3% 9M 17). Low land cost for its ongoing projects in Putrajaya provides tolerance for the lower take-up rate. MARC views that exposure to property market risk could exert pressure PJH’s working capital requirement although PJH’s sizeable sublease rental income of about MYR1.4bn p.a. and large cash buffer provide strong counterweight to this concern. The annual rental income is more than sufficient to meet its financial obligations that range between MYR480-810m p.a. over the next five (5) years. PJH registered an increase of 6.8%YoY and 8.1%YoY in revenue and pre-tax profit 9M 17 to MYR2.0bn and MYR818.5m respectively, supported by construction revenue. Total borrowings at Sep 17 was MYR6.4bn with DE ratio increasing to 0.82x (2016:0.8x). Over the near term, its leverage position would remain elevated as borrowings are likely to rise to meet working capital requirements. PJH has increased dividend payments 9M 17 to MYR242m (2016: MYR110m) and MARC views that further increases in the dividend could moderate PJH’s liquidity. MARC notes that PJH has considerable financial flexibility from unutilised credit lines of MYR1.6bn, and from shareholders KLCC Holdings Sdn Bhd and Khazanah Nasional Berhad

APAC USD Credit Market:

¨      US Treasuries rallied supported by safe have flows following selloff in risk assets. The day began with USTs weakening as the latest BoE communiqué expressed rate increases may be needed earlier, leading to a fall in global rates. As markets continue to await the resolution of the latest US Senate two (2) yr bipartisan Spending Bill, which would include USD300bn over current limits on defense and domestic spending, markets have also been pricing in the increased potential bond issuances, which also saw the weaker than expected 30y UST auction demand. Adding to this mix was comments by Fed’s Dudley who also signaled support for a March rate hike, despite concerns on volatility in the market. The end of the day saw a rebound in USTs as the US equities market saw another tumble, leading to an end of the day rally in the USTs. UST yields fell  across the curve as the 2y USTs saw yields fall -2.0bps to 2.10% while the 10y USTs ended the day at 2.82% (-1.2bps). The 30y UST yields continued to edge up +1.5bps to end the day at 3.13%. The USD saw a halt to its rally, as seen by the DXY which was maintained at 90.229 (-0.03%).  In economic news, the initial jobless claims for the week ending Feb 3rd, fell to 221k vs consensus 232k. With little economic data to look forward too, markets will be focused on the resolution of the spending bill in the US legislature once more as a potential second government shut down for the year looms.

¨      The iTraxx AxJ IG credit spreads to 71.6bps (+0.6bps). Leading the widening in spreads was the sovereign of Indonesia, which saw CDS levels widen near to +3.27bps while the sovereign of China saw CDS increase around +2.54bps. Malaysia and the Philippines saw sovereign CDS increase approximately +2.33bps and +2.30bps respectively. Chinese corporates such as China Development Bank, CNOOC Ltd, Export-Import Bank of China, Industrial & Commercial Bank of China and Bank of China Ltd saw CDS spike up between +2.51bps to +2.98bps. On the other side, CDS tightening was led by Singaporean names. Singapore Telecommunications Ltd saw CDS improve close to -4.35bps, while United Overseas Bank Ltd subdebt and DBS Bank Ltd subdebt pared some of the widening the previous day as CDS levels edged down around -1.35bps to -1.39bps.