Credit Market Watch: Summary for week ending 23-Mar
· MYR Credit:
Ø MGS yields largely moved sideways, ending flat to about 1bp lower WoW, with the 5y yield down 1bp to 3.63%. Corporate bond yields were also mostly unchanged, except for the AAA space where yields overall declined 1bp WoW. Trading activity remained strong with MYR3.1b volume for the week, mostly concentrated in Quasi and AAA credits.
Ø Macro: Malaysia inflation rate decelerated to 1.4% YoY in Feb 2018 (Jan: 2.7%) due to a decline in transport costs because of high base and slower increase in food prices from a year ago. Core inflation, which strips out both food and energy prices, also registered a slower pace of 1.8% YoY (Jan: 2.2%). This is line with our economic research’s expectation of inflation slowing to 2.8% for 2018 (2017: 3.7%), underpinning the view of no change in OPR (3.25%) till year end.
Ø Rating changes: UMW Holdings (UMWH) AA2 rating was placed on Positive Watch by RAM on the back of UMWH’s proposed stake increase in Perodua and MBM Resources Bhd to a controlling level which are expected to strengthen the former’s business and financial profiles, according to the rating agency. RAM sees UMWH becoming the largest automotive player domestically after adding Perodua’s leading market share of 36% to Toyota’s 12%. RAM also estimates UMWH’s gearing will decline to 0.50x in 2019 (2017: 0.66x) and OPBDIT debt cover to improve to 0.30x (2017: 0.15x).
Ø Relative value: WCE 2030 last traded at 4.96%, or 15bps wider than our fitted AAA line, appear to offer value over EKVE 2030 and 2031 dealt at 4.89% and 4.93% respectively. As both are facing highway construction delays and may require financial support from shareholders within next 2 years, we take more comfort in WCE whose ultimate shareholder is IJM (41% stake) which has stronger balance sheet compared to Ahmad Zaki Resources.
· Asian Credit:
Ø UST curve lowered 3-4bps WoW along the 2y10y with the 2y yield -4bps to 2.25% and 10y yield -3bps to 2.81%. Unwinding of bets on a 4th rate hike this year and US-China trade conflict concerns drove UST yields to pull back. The Fed raised Fed Funds Rate by 25bps, kept dots plot unchanged for 2018 indicating 3 rate hikes and signalled additional hikes in 2019 and 2020, in line with our view. Implementation of US tariffs on China goods remain preliminary as the US remains open to negotiations with China, but trade headlines are likely to dominate this week and could increase volatility.
Ø Asian USD credit spreads widened further, with JACI composite, JACI IG and JACI HY up +7bps, +6bps and +13bps WoW respectively. Sovereign yields generally widened, with INDON, KOREA and MALAYS up 2-10bps WoW, PHILIP mixed -2bps to +5bps WoW and CHINA’27 lower by 1bp WoW.
Ø Rating change: Tencent’s rating was raised to A1 from A2 by Moody’s, citing consistently strong credit profile, underpinned by solid revenue and EBITDA generation. Tencent has been able to maintain EBITDA margins of 35-40% attributed to its growing business and increasing diversification of revenue sources. Despite spending RMB50-90b/year in the last two years, Tencent’s leverage remained steady with debt/EBITDA ratio around 1.4-1.5x and the company is in net cash position of RMB16b as of end-2017.
· CDS: EM Asia 5y CDS spreads increased sharply led by Indonesia +16bps, followed by Philippines +13bps, China and Malaysia +11bps each, Korea +10bps and Thailand +8bps WoW.
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Regards,
Winson Phoon, ACA
(65) 6231 5831
Se Tho Mun Yi
(603) 2074 7606
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