FW: RHB FIC Credit Markets Update - 7/3/18

 

 

 

7 March 2018

Credit Markets Update

           

Focus on BNM MPC Today; US Trade Concern Moderates Lower Leading to Risk Rally

MYR Credit Market:

¨      Focus on BNM MPC today. The MGS curve was supported especially in the belly, where the 5y and 7y MGS rallied -3.2bps and -1.9bps to 3.56% and 3.87%. The 3y MGS remained unchanged at 3.39% while 10y MGS yields fell to 4.00% (-1.2bps). The USD continued to weaken against EM Asia currencies. Though underperforming many of its peers, the MYR reversed its losses against the USD the previous day gaining +0.08% to end the day at 3.9035/USD. To be watched later today will be the foreign reserve numbers as at the end of Feb while the focus will be on the BNM MPC to give colour on the policymaker’s views moving forward. The reopening of the 30y MGS 05/47 has been scheduled for Friday with a planned auction size of MYR1.5bn with an additional MYR1bn privately placed

¨      Govvie bonds saw trading volume of MYR3.8bn from a weak MYR1.0bn the previous day. The MGS benchmarks saw increased trading activity as the benchmark 3y, 5y, 10y and 15y MGS 11/21, MGS 03/22, MGS 11/27 and MGS 04/33 rallied on trades worth MYR332m, MYR534m, MYR451m and MYR100m respectively. Among GII benchmarks the 5y GII 04/22 rallied -0.8bps as it ended at 3.84% on MYR120m trades. Other notable trades include the off-benchmark issues of MGS 10/20 and MGS 07/24, both crossing the day at 3.35% (-5.8bps) and 3.85% (-5.4bps) respectively on recorded trades of MYR221m and MYR301m.

¨      Secondary flows for corporate bonds/sukuk, strengthened as MYR496m changed hands. GG issuer DANAINFRA, on MYR60m of trades saw yields pick up +0.2bps to 5.25%, while DANGA 30s was traded at 4.90% (+0.1bps) on MYR100m of trades. RANTAU 19s saw MYR60m traded weaker at 4.03% (+1.5bps). Financial name CIMB 04/60 subdebt callable 04/20 further rallied to 4.756% (-1.2bps) recording trades of MYR30m.

APAC USD Credit Market:

¨      US trade concern moderates lower leading to risk rally. The large issuance of USD40bn bonds by CVS especially in light of sizeable tranches in the long end and the large hedged IRS positions saw an initial rally in the UST markets. Risk assets were supported following investors’ ease as senior members of the Republican Party continue to dissuade the US President from his tariff plans suggesting plans to target China’s exports instead, while close allies reveal that the administrations minds could be changed. USTs ended the day weaker on the rally. The 2y UST yields rose +1.2bps to 2.25% while the 10y USTs ended slightly weaker at 2.89% (+0.6bps). The DXY retraced below 90.0 again to end the day at 89.6 (-0.51%). Over in economic data, factory orders for the month of Jan fell for the first time in five (5) mths at -1.4% (+1.8% prior). The recent announcement of the resignation of Gary Cohn, a major economic advisor of the US Administration may have a negative influence on the price of USTs over the day

¨      The iTraxx AxJ IG credit spreads tighten -0.87bps as it ended the day at 68.64bps. Indian names led the CDS tightening as ICICI Bank reversed its widening the day before to close around -2.56bps tighter, while the State Bank of India, Bank of India and Reliance Industries Ltd saw CDS levels move between -1.27bps to -1.45bps. Corporates Swire Pacific Ltd and POSCO both saw CDS levels edge down close to -1.61bps and -1.30bps respectively; while the sovereign of South Korea saw CDS levels tighten about -1.90bps. Leading the widening of the CDS space on the other hand were the sovereigns of China, India, Philippines and Malaysia where CDS levels edge up between +0.75bps and +1.08bps. Malaysian corporates Petroliam Nasional Bhd and Telekom Malaysia Bhd saw CDS widening of nearly +0.43bps and 0.37bps respectively.

¨      S&P moved the AA-/Sta rating of AXA Insurance Group and its entities on credit watch with negative implications. This follows the announcement from AXA on plans to acquire the commercial non-life insurer XL Group Ltd for USD15.3bn, to be funded by the IPO of 20-35% stake of its US life and asset management operations. S&P views that this transaction, if completed, would materially weaken AXA’s capital adequacy, attributed to increase in good will, market valuation risks from a volatile financial market, and the risk of the loss of client base from a buying of a competitor. S&P considers the acquisition of XL could, in the medium term, be strategically positive due to XL’s strong position in specialty commercial lines and client focus on mid-sized and large corporates, exposures to commercial property and casualty, and from revenue and cost synergies. The replacement of the US life and asset management assets with XL would have little effect on earnings, though it would reduce balance sheet by EUR100bn, resulting in lower capital requirements. The successful and timely IPO, progress of AXA’s debt plans and the reaction of clients of AXA and XL to the proposed transaction would resolve the current credit watch placed.  Fitch placed AXA entities on credit watch negative

¨      Moody’s raised JSW Steel’s rating to Ba3/Sta from Ba2/Sta. The upgrade reflects Moody’s expectations JSW will continue to show improving credit metrics following the benign operating environment, and higher steel sales from brownfield expansions. Moody’s expects India’s steel consumption to grow 5.5-6.5% as the government pushes for infrastructure projects, housing construction, power transmission and railway investments while the automotive sector sees improved demand. This occurs while Indian steel producers consolidate operations with five (5) stressed assets accounting for 17% of India’s crude steel capacity. Moody’s opines the wide slate of long and flat products of JSW, increased value added products, alongside a favorable pricing environment is expected to improve the company’s earnings growth, though capex to develop brownfield expansions will likely lead to negative FCF. The company’s large scale, strong market shares in west and south India, and competitive conversion costs are credit positive for JSW, supported by JSW’s wide range of furnace technology and coastal locations of its operations. In addition, JSW’s recently added five (5) iron-ore mining licenses. The strengths are counter balanced by the cyclical nature of the steel industry and JSW’s lack of raw material integration, which increase supply and price risks.