Credit Market Watch: Summary for week ending 13-May

·         MYR Credit:

Ø  MGS yield curve lowered 2-5bps WoW on strong buying flows that included foreigners. In PDS, quasis and AAAs followed suit at a smaller magnitude as yields were down 1-4bps, while the AA space had mixed results with 15y AA2/AA +5bps, 15y AA3/AA- -9bps.

Ø  1Q16 real GDP growth moderated to 4.2%, marginally higher than 4.1% forecast by our economic research and 4.0% market consensus. Deceleration in private investments was a key drag as it slowed to a 2.2% YoY in 1Q16 (4Q15: 5.0%), but the impact was buffered by an improvement in private consumptions growth to 5.3% YoY in 1Q16 (4Q15: 4.9%) which might imply that GST blue on consumer spending may be over. Our real GDP growth forecast in 2016 is kept at 4.3%.

Ø  UEM Sunrise priced its MYR500m IMTN at 5.00% or approx. 120bps spread over MGS. Secondary market should see the bond trading stronger possibly to the 4.85-4.90 region based on current market pricing as our AA3/AA- fitted line indicates a yield 4.88% at the 7y.

Ø  Relative value: Khazanah 32 offered value last trading at 4.73% which is 8bps above our fitted line. EKVE 30, 31 and 35 which are BG offer some yield pick-up, last dealt 18-24bps outside our fitted line.

·         Asian USD Credit:

Ø  UST curve bull-flattened along the 2y10y WoW. 10y UST yield declined to 1.70% and has strengthened 57bps YTD. Comparatively, the 10y UST still yields 158bps which is also the 1-year mean over the 10y Bund. In Asian credit, spreads moved tighter with JACI composite -5bps, JACI IG -3bps and JACI HY -13bps WoW.

Ø  Sovereigns overall traded stronger last week, although sentiment turned softer in the latter part of the week. INDON and PHILIP yields edged 5-10bps lower WoW; KOREA and MALAY were marginally stronger.

Ø  Rating changes: 1) IOI Corp's rating was put on review for downgrade by Moody's, citing the suspension by the RSPO has caused uncertainty on its operating performance especially the downstream business and this might result in significant deterioration in earnings and financial metrics although potential losses at this stage remains unquantifiable as measures are being taken to address the suspension. Despite so, IOI Corp's IG rating doesn't seem to be at risk for now, as Moody's has a higher Baa2 rating, meaning that an actual downgrade would bring the rating in line with S&P's BBB-/stable. 2) Baidu's outlook was reduced to stable from positive by Moody's, citing adverse impact from the controversial medical advertisement which resulted in the death of a college student who sought medical treatment based on search results ranking. Moody's expect Baidu's revenue growth to be trimmed from 35% in 2015 to 15-17% in 2016/2017 and slower growth in EBITDA which constrain improvements in metrics to levels that warrant an upgrade.

·         CDS: EM Asia 5y CDS spreads tightened WoW, led by Indonesia -6bps, followed by Malaysia -5bps, Philippines and Thailand -3bps each.