FW: RHB FIC Credit Markets Update - 8/3/18

 

 

 

8 March 2018

Credit Markets Update

           

BNM Held OPR Steady At 3.25%; 30y GII 05/47 Reopening Watched

MYR Credit Market:

¨      30y GII Reopening Watched. In its MPC, BNM maintained the OPR at 3.25%, as it sees the current degree of monetary accommodativeness consistent with its policy stance. Looking forward, we believe BNM would likely pen in another hike of 25bps in 2H18 given the strong economic performance, inflation remaining elevated and rising external pressures from the monetary tightening of major global central banks. The MGS yield curve ended mixed, supported in the long end, but saw weakening in the belly of the curve. The 3y MGS remained unchanged at 3.39% while the 10y MGS rallied -1.9bps to 3.98%. Underperforming the rest of EM Asia, the MYR weakened against the greenback to 3.9048/USD (-0.03%). To be watched later today will be the reopening of the 30y MGII 05/47.

¨      Govvie bonds saw trading volume rise further as MYR5.3bn changed hands. Trading was largely focused on benchmark securities. The 5y and 7y benchmarks saw increased trading activity as the MGS 03/22 and MGS 09/24 weakened to 3.58% (+1.9bps) and 3.87% (+0.1bps) on trades worth MYR269m and MYR355m while the GII 04/22 and GII 08/25, on trades of MYR791m and MYR330m respectively, rallied to 3.82% (-2.3bps) and 4.02% (-3bps). The 10y benchmarks GII 07/27 and MGS 11/27 both closed at 4.15% (-4.8bps) and 3.98% (-1.9bps) on trades of MYR220m and MYR485m while the 15y benchmark MGS 04/33 crossed the day at 4.42% (-0.9bps) on MYR231m trades.

¨      Secondary flows for corporate bonds/sukuks picked up as well to record MYR555m trades. A large proportion of trades were surrounding GG issuance. DANAINFRA 05/32 and DANAINFRA 03/32 saw MYR 90m and MYR 40m respectively change hands weaker at 4.86% (+1bp) and 4.85% (+4.7bps). MDV 01/22, PASB (GG) 25s and TPSB 25s each saw trades worth MYR20m and ended the day at 4.11% (+3.9bps), 4.41% (+2.8bps) and 4.40% respectively. Other notable trades include AAA rated CAGAMAS 08/18, RANTAU 19s, DANGA 20s and DANGA 33s which saw which saw yields move between -2bps and +2.6bps on trades of MYR80m, MYR20m, MYR40m and MYR10m respectively.

¨      In the primary space, tapping the market for the first time this year, Prasarana Malaysia Berhad issued a further MYR3bn from its GG MYR6.0bn sukuk murabahah programme bringing total outstanding from the facility to MYR5.0bn. The sukuks were issued in five (5) tranches with maturities of 7y, 10y, 15y, 20y and 25y with coupons of 4.39%, 4.62%, 4.94%, 5.12% and 5.25% respectively. The coupons had spreads between 53-70bps over the last traded corresponding benchmark securities. SunREIT Unrated Bond Berhad, on the other hand, issued MYR200m 1y bonds at 4.05%.

¨      Over in economic news, Malaysia’s international reserves as at end Feb was reported at USD103.7bn, unchanged from its level as at end Jan. This is sufficient to finance 7.2 mths of retained imports and 1.1x short term debt. The foreign holdings of the Malaysian bond market saw outflows of -MYR3.9bn for the month of Feb 18 (Inflows of +MYR4.5bn in Jan 18). This brings total foreign holdings in MGS to 45.4% from 45.7% the previous month, and total foreign holdings of govvies at 27.5% (28.0% previously).

APAC USD Credit Market:

¨      US Treasuries little changed; Focus on ECB policy meeting today. The 2y and 10y USTs largely unchanged at 2.25% (+0.2bps) and 2.88% (-0.4bps) respectively. The USTs started off the day stronger, amid renewed global trade war concerns following the departure of President Trump’s chief economic advisor, Gary Cohn, but retraced following mixed results of economic data. ADP employment change Feb 18 exceeded estimates with 235k added jobs (consensus: 200k), lower from revised figure of 244k recorded previous month. Trade balance, however, widened further to USD56.6bn (consensus: USD55bn) from revised reading of USD53.9bn. Elsewhere, the latest release of Fed Beige Book highlighted tighter labour market conditions helped to lift wages across the US while inflation was perceived as moderate. The USD traded flat as DXY paused at 89.6 (+0.02%).

¨      The iTraxx AxJ IG credit spreads retreated as it widened to 69.9bps (+1.2bps). South Korean players largely dominated the rally with POSCO leading the tightening which saw CDS levels drop nearly -4.1bps. This was followed by Korea Electric Power Corp. and Samsung Electronics Co. Ltd. where spreads declined about -3.8bps and -3.6bps respectively while SK Telecom Co. Ltd. contracted close to -3.3bps. South Korea’s sovereign also rallied, closing the day approximately -3.2bps lower. Over in financial space, Woori Bank, Kookmin Bank and Industrial Bank of Korea saw levels decline between -1.4bps and -3.7bps. Other notable players include KT Corp. and Hyundai Motor Co., shedding nearly -2.6bps and -2.5bps respectively. Leading the widening, on the other hand, PCCW-HKT Telephone Ltd. saw CDS levels increase close to +2.5bps, trailed by Chinese Fis Industrial Bank of China, Bank of China Ltd. and China Development Bank where spreads rose between +2.1bps and +2.3bps while Export-Import Bank of China deteriorated around +1.8bps. Indian corporates Reliance Industries Ltd. and State Bank of India/London saw CDS levels edge up about +2.1bps and +2bps respectively, followed by Bank of India and ICICI Bank Ltd. with similar spreads increase of approximately +1.4bps. Over in sovereign space, CDS levels for Indonesia spiked up around +3.2bps, trailed by China, Philippines and Malaysia in the range of +1.9bps and +2.5bps.

¨      Fitch has assigned a BBB/Sta rating on Qingdao China Prosperity State-owned Capital Operation (Group) Co. Ltd. (QCPS). QCPS, wholly owned by Qingdao Municipality through Qingdao SASAC, is an asset manager mandated to reform the city’s state-owned enterprises (SOEs) and economy while Qingdao government lessens direct involvement in the city’s economic activity. As per Fitch’s GRE ratings assessment, QCPS’ rating is credit-linked to the Qingdao Municipality. Fitch strongly expects QCPS to receive extraordinary support in the event of financial distress given its strategic importance and high level of control by Qingdao government. Qingdao is a semi-provincial-level city and its finances are integrated with those of the central government. Holding an administrative status, Qingdao is allowed to directly issue municipal bonds. Support track record is rated as ‘moderate’ though assessment based solely on project basis of which QCPS did receive capital injections, subsidies, project funds and equity-stakes in SOEs. QCPS has weak standalone profile given its large capex, negative FCF and high leverage, reflecting its B rating.

¨      Moody’s has downgraded Lippo Malls Indonesia Retail Trust (LMIRT) from Baa3/Neg to Ba1/Neg. Following the review for downgrade initiated on Dec 17 driven by worsening credit metrics within the Lippo group, of which LMIRT’s total revenue accounted for approximately one-third to the group. Moody’s forecasts contribution likely to continue at this level over the next 12-18 months, especially after master lease agreement extension at Lippo Mall Kemang with Lippo Karawaci until end 2019. As at Dec 17, adjusted debt/total deposit assets breached past Moody’s downward threshold rating of 40% as it jumped to 41% on the back of highly active debt-funded acquisitions and depreciating IDR vs SGD. During the same period, Moody’s also notes that debt/assets of 34% was well below requirement level by MAS of 45% given the fact its perpetual security was classified as equity instead of debt. Refinancing risk also on the rise following LMIRT utilisation of short-term credit facility of SGD80m to partially finance acquisitions of two (2) retail malls in Dec 17. Short-term debt/ total debt soared from about 28% in 30 Sept 2017 to 39% in Dec 17. LMIRT will also be required to finance debt maturities worth nearly SGD270m in 2018.

¨      Moody’s revised upwards the outlook of Beijing Capital Group (BCG) from Baa3/Neg to Baa3/Sta. The rating of BCG reflects its diversified portfolio with major businesses that exhibit different industry cyclicality, stable water services and infrastructure businesses which provide strong and stable cashflow and diversified funding channels and good access to domestic funding. In addition, it enjoys a rating uplift from Moody’s assessment of high likelihood of receiving extraordinary support from Beijing Municipal Government in times of need. In 2017, BCG made substantial progress in disposing non-core assets with proceeds of RMB3.6bn, announcing it will further be selling its entire stake in the Beijing-Tianjin Expressway which is expected to reduce its balance sheet by a further RMB5.5bn in debt. Moody’s believes BCG will adopt a more prudent approach in business growth and will continue its efforts to deleverage over the next 12-18 mths, slowing its debt-funded expansion with total adjusted net debt rising 7% Jun 17 from 21% growth in 2016. BCG’s adjusted net debt/EBITDA fell to 8.1x 12-mths Jun 17 from 9.1x 2016. Adjusted net debt/EBITDA is expected to further fall below 7.5x over the next 12 mths. In addition, Moody’s expects BCG’s EBITDA to grow 20% YoY over the next 12 mths, supported by improvements in its property arm and stable performances of its other core operations. These credit strengths are counterbalanced by BCG’s high debt leverage, a result of aggressive debt-funded expansion before 2017 and its exposures to the cyclical property market.