Moody’s Concerns on Rising Leverage of Power Construction Corp of China; Tan Chong Motor Was Downgraded to A1/Sta

1 July 2016

Credit Markets Update

Moody’s Concerns on Rising Leverage of Power Construction Corp of China; Tan Chong Motor Was Downgraded to A1/Sta

¨      APAC USD Credit Market: The iTraxx AxJ IG tightened for the 3^rd consecutive day to 140.9bps (-1.8bps) while we expect the Asian credit markets to remain on the sideline today given Hong Kong’s Establishment Day public holiday. Meanwhile, Treasuries strengthened as benchmark yields declined by c.3-6bps with 5y and 10y at 1.00% and 1.47% respectively following Mark Carney’s statement indicating that the BOE will probably have to ease its monetary policies further to counteract the impact of Brexit. On rating actions, Power Construction Corporation of China’s A3 rating was placed on review for downgrade by Moody’s over concerns of its rising leverage whereby adjusted debt/EBITDA jumped from 6.4x in FY14 to 8.0x in FY15 while it continues to expand its investment programs. Elsewhere, China United Property Insurance was assigned an A-/Sta by Fitch to reflect its profitable business, competitive edge in agricultural insurance and ownership linkage with China Orient Asset Management Corporation.

¨      SGD Credit Market: REIT issuances from CapitaMall and First REIT. There was a steepening in the short-to-mid curve, with the 5y rising by 5bps to 1.75% while the 2y rose 1.6bps to 1.40%. Some REIT papers such as FIRTSP, SBREIT and SSREIT traded wider by 5-10bps (according to Bloomberg), with similar movements in EZISP as Ezion announced that it has formalized a joint-venture with a Chinese company to explore China’s offshore wind farm market. In the primaries, CapitaLand Mall Trust (A2/-/-) issued a collective SGD200m 15y at 3.35% while First REIT (NR) issued a SGD60m Pnc5 at 5.68%.

¨      MYR Credit Market: RAM downgraded Tan Chong Motor to A1/Stable, from AA2/Negative, as its credit profile weakened amid tightening margin and challenging macroeconomic environment. At the same time, RAM also views that Brexit has no immediate rating impact on YTL Corp (YTLC, AA1) and YTL Power International (YTLPI, AA1) despite the significant exposure to UK via Wessex Water Services (46% and 82% of YTLC’s and YTLPI’s pretax-profit respectively in 9M FY Jun-16). The rating agency indicates that Wessex’s dividend payment capability remain strong despite the depreciation of GBP against MYR. Secondary flows were thinner at MYR499m yesterday, after the strong trading activity of average MYR1.3bn over the previous 3 days. Notably, yields for Cagamas ‘18s fell 8-24bps to settle at 3.68-3.69% on combined MYR145m trades. Govvies continued the rally with 3y-7y MGS benchmarks slipping 2-3bps lower at close, although the 10y MGS inched 2bps higher to 3.75%. Elsewhere, BNM has announced that that it will be performing a partial redemption for MGS 9/16 with amount of MYR820m on 1-Jul. MYR strengthened 0.2% to 4.0315/USD.