FW: RHB FIC Credit Markets Update - 02/03/18

 

 

2 March 2018

Credit Markets Update

           

MGS Supported; Trump Announced Tariffs on Imported Metals.

MYR Credit Market:

¨      MGS yields eased further, 10-year benchmark converging back nearer towards 4%. The MGS, led by longer end of the curve, ended the trading session mostly stronger amid slower trading activities and falling global yields. The 3y MGS largely unchanged at 3.40% while the 10y MGS see converging closer to the 4% mark as yields dropped to 4.01% (-1.6bps).  Meanwhile, the longer tenure 30y MGS rallied steadily to settle the day at 4.77% (-4.6bps). The MYR continued to trade lower against the greenback, closing at 3.9285/USD (-0.29%). The USD weakening provided little support for the local currency as Brent crude oil prices continue to decline for 3 consecutive days, settling at USD63.8/bbl (-2.96%) at the time of writing versus USD67.5/bbl seen at the start of the week.

¨      Govvies trading volume plummeted to MYR3.7bn. The benchmark 10y MGS 11/27 attracted stronger trade demand as volume surged to MYR743m, last traded yields at 4.01% (-1.6bps). Trade interest also picked up for the 5y, 7y, 20y and 30y benchmarks MGS. The 5y MGS 03/22 and 7y MGS 09/24 transacted MYR133m and MYR115m respectively, rallying to 3.60% (-2.2bps) for the former and the latter to 3.93% (-1.2bps). Meanwhile, the longer tenured benchmark 20y MGS 04/37 recorded trade amount of MYR107m, last traded yields lower at 4.60% (-1.6bps), while 30y MGS 03/46 rallied to 4.77% (-4.6bps) with MYR92m of total trades. Focus was also seen on the off-the-run MGS 06/31 with MYR109m changed hands, closing the day at 4.42% (-4bps). The benchmark 5y GII 04/22 remained actively traded with amounts of MYR241m where yields declined to 3.87% (-1.3bps) while 7y GII 08/25 and 10y GII 07/27 recorded MYR130m and MYR290m in volume, dealt at 4.10% (-0.9bps) and 4.20% (-2.8bps) respectively.

¨      Modestly lower secondary flows as trade volume for corporate bonds/sukuk just under MYR190m. One of the most actively traded securities were PUTRAJAYA 12/21, last traded yields -6.2bps lower at 4.24%. This was followed by SPG 4/24, 10/24, 4/34 and 4/35 with combined transactions of MYR40m, which saw yields ending the day between -2bps and -3.1bps at 4.70%, 4.73%, 5.32% and 5.38% respectively. CAGAMAS 10/20 and 11/20 totalled MYR25m changed hands, last traded yields +9.2bps and +4.3bps higher at 4.09% and 4.11% respectively.

¨      MARC has affirmed the corporate credit ratings on Tenaga Nasional Berhad (TNB) at AAA/Sta. This, along with the sukuk rating of AAA/Sta on its outstanding MYR2bn Al- Bai’ Bithaman Ajil Bonds. The ratings incorporate a 2-notch uplift from TNB’s standalone corporate credit rating of AA/Sta to reflect MARC’s assessment of a high likelihood of government support premised on the company’s critical role as the country’s principal energy provider. The support assessment also considers the government’s indirect majority ownership in TNB which provides considerable leeway to influence the utility company’s strategic direction. MARC expects that government support will be sustained in the next 12-18 months in view of TNB’s strategic importance to the nation’s energy distribution while weakening in TNB’s debt protection measures and/or liquidity buffer would pressure its standalone profile.

APAC USD Credit Market:

¨      US Treasuries rallied further on risk-off sentiment. Buying interest for the USTs picked up following announcement from US President Trump to impose tariffs on imported metals. While economic data revealed little surprises, the 2y, 5y, 10y and 30y USTs saw yields falling to 2.21% (-3.83bps), 2.58% (-6.04bps), 2.81% (-5.28bps) and 3.08bps (-4.08bps) respectively. The USD snapped 2-day streak of strengthening as the DXY fell -0.32% to 90.3. Over in economic data, PCE core Jan 18 YoY stayed at 1.7% YoY along with PCE deflator at 1.5% YoY, both within expectations. ISM manufacturing Feb 18, however, showed better-than-expected results as it climbed to 60.8 (consensus: 58.7) from 59.1.

¨      The iTraxx AxJ IG pared gains as credit spreads inched higher to 68.8bps (+1.5bps). Over in CDS space, financial space largely dominated tightening with Bank of China Ltd. leading the rally which saw spreads fall approximately -3.5bps. This was followed by ICICI Bank Ltd, Industrial and Commercial Bank of China Ltd, and Export-Import Bank of China with spreads reduction between -1.9bps and -2.9bps. Other notable players include Reliance Industries Ltd. where CDS levels dropped nearly -2.2bps and a further decline for State Bank of India/London around -1.2bps. Leading the widening, on the other hand, was Singapore Telecommunications Ltd. with spreads increase of about +2.3bps. Over in sovereign space, South Korea saw CDS levels edge up approximately +1.6bps, trailed by Malaysia and Indonesia with spreads growth about +1.1bps and +1bp respectively. 

¨      Fitch has upgraded Tenaga Nasional Berhad from BBB+/Pos to A-/Sta. The upgrade follows the publication of Fitch's GRE Rating Criteria on Feb 18, which has been applied in the assessment of Tenaga's ratings. Tenaga's credit profile is equalised to that of Malaysia's (A-/Stable) to reflect its strong linkages with the sovereign. The ratings were placed on Rating Watch Positive in Nov 17 after the release of the exposure draft of the GRE criteria. Fitch considers the 60% sovereign-owned entity’s status, ownership and control linkages as ‘moderate’ while expectation of extraordinary support as ‘strong’ given the current track record. Given Tenaga’s ability to adjust tariffs every six (6) months, as permitted by the government, under the IBR framework has further strengthened Tenaga’s financial profile, with standalone credit profile currently stands at BBB. Fitch estimates cash flows from operations to generate approximately MYR15bn annually, and be able to fund the majority of the capex and investments through internal cash generation.                   

¨      Moody’s has upgraded China Resources Gas Group Limited (CR Gas) from Baa1/Pos to A3/Sta. This upgrade is driven by the expectation that CR Gas will maintain healthy financial profile, supported by steady FCF generation and manageable capex level coupled with solid track record of organic growth in gas sales volume. Moody’s projects sales to reach around 10% annually in 2017-2018. Moody’s also forecasts that annual capex to be about HKD5.5bn over the same period which is expected to be covered operating cash flows. FFO/debt is expected to be hover between 40-45% and RCF/debt of approximately 30%. 

¨      S&P has revised upward the outlook on Health and Happiness International Holdings Ltd. (H&H) from BB/Sta to BB/Pos. This is driven by Moody’s expectation that H&H will likely see further improvement in debt leverage on the back of healthy growth and operating cash flows while maintaining cautious capital investment over the next 12 months following the integration of Swisse. After recording sturdy growth of 22% the first nine (9) months of 2017, Moody’s expects revenue to grow further between 7-12% in 2018 and 2019 contributed by more aggressive marketing efforts for its products, though, may result in lower profitability as Moody’s forecasts that EBITDA margin to fall from estimated 30% in 2017 to between 24-27% in 2018-2019 due to rising expenditure on marketing. Moody’s opines that limited capex and acquisition over the next 12-24 months should support debt leverage reduction. Moody’s believes that H&H’s current market position, revenue diversity and decent operating efficiency is likely to be maintained over the same period. EBITDA interest coverage is projected to improve over the next 12 months though may continue to hover above 6x.

¨      Fitch has upgraded COFCO (Hong Kong) Limited from A-/Pos to A/Sta (COFCO HK). This reflects an upgrade in Fitch's internal assessment of COFCO HK's sole owner, COFCO Corporation, following the publication of the GRE Rating Criteria on Feb 18 as part of the top-down internal assessment of the entities. In 2016, the wholly owned subsidiary of COFCO contributed nearly 80% and 60% of COFCO’s total revenue and total assets respectively. During the same period, COFCO HK’s EBITDA rose by approximately 50% as a result of better trading performance, commodity prices and lower losses from Agri unit. Nonetheless, Fitch sees steady performance in 2017. Leverage has also declined in the past two (2) years from double-digit levels to about 7x in 2016. Fitch also does not see liquidity as a concern COFCO HK strong relationship with commercial banks and policy banks in China, access to offshore funding sources and support from the parent's central treasury practice.

¨      Fitch has downgraded Korea District Heating Corp. (KDHC) from A+/Neg to A/Sta. The downgrade follows the publication of Fitch's new GRE Rating Criteria based on the four factors assessment that influence a government parent's likelihood to extend support to a GRE. The ratings were placed on Rating Watch Negative in Nov 17 after the release of the exposure draft of the GRE criteria. Fitch view state control over KDHC as ‘strong’ though support is regarded as ‘moderate’ given the lack in evidence of direct tangible support. Fitch sees this as potentially weaker government support compared to other entities within the same industry. Fitch, however, opines Korean government’s incentive to provide extraordinary financing backing as ‘very strong’ due to the fact that KDHC is a large borrower in the local bond market. KDHC's total debt rose to KRW2.6trn as at Sep 17 of which long-term debt accumulated around 90% of total debt, and has a well spread-out maturity profile while short-term debt amounted to KRW410bn, compared with a cash position of KRW208bn. Although KDHC's cash and cash equivalents and available credit line are insufficient to cover its short-term obligations, its liquidity profile continues to be supported by its strong access to the local bond market as a key SOE in Korea. Fitch has also downgraded Greenland Holding Group Company Limited (Greenland) from BB/Neg to BB-/Neg following the publication of the GRE Rating Criteria.  Greenland is assessed to have a support score of 10 under the new GRE criteria, which means its ratings do not receive further notching uplift from parent support. Previously, Greenland's ratings were lifted by one notch from its standalone credit profile based on the bottom-up approach under Fitch's Parent and Subsidiary Rating Linkage criteria that took into account a moderate operational and strategic linkage with its parent, the State-owned Assets Supervision and Administration Commission (SASAC) of Shanghai municipality. The rating also reflects Greenland’s weak leverage, continuing to exceed past 60% amid active expansion of its land bank and picked up more debt for its non-property businesses. Net debt to adjusted inventory touched 77% as of Jun 17 which Fitch sees this as an added downward pressure to its ratings should it continue to hover at this level over a 12-month period. Leverage will remain a concern despite cash earned from sold commercial properties increased 32% YoY to CNY108.7bn in 1H17 while residential-commercial property ratio in terms of contracted sales largely unchanged from 2016 at 69:31.