Asian Credit Spreads Tighten; Malaysia 2Q GDP Growth Eases to 4.0%

15 August 2016

Credit Markets Weekly

Asian Credit Spreads Tighten; Malaysia 2Q GDP Growth Eases to 4.0%

                                                                      

APAC USD CREDIT MARKETS

¨      Upbeat Asian Bond Markets. IG credit spreads and average non-IG bond yields extends rally to tighten 7-12bps WoW to 188.8bps and 6.29% respectively as investors scramble in search of better yields, while Asian credit protection cost tightened 3.7bps to 114.7bps. In the US, benchmark Treasuries yields bull flattened 2-8bps WoW mainly on Friday driven by the weaker-than-expected set of economic data such as the disappointing July PPI at -0.4% (consensus: 0.1%) and the slump in July retail sales to -0.3% MoM (consensus: 0.1%) despite the rebound in Brent oil prices to c.USD47/bbl (6.1% WoW).

¨      Moving to ratings, there were 25 rating upgrades for the week with Korean SOEs’ representing the bulk of the upgrades following S&P’s upgrade of the Korean sovereign to AA/Sta from AA. On the other hand, China’s Yuexie Real Estate Investment Trust’s BBB rating has been placed on negative watch due to its delayed deleveraging plans, whereas, Moody’s reviews Sunac China’s B1 rating for downgrade on its weaker credit metrics and results as it issued profit warning for 1H16.

¨      Primaries climbed to USD6.8bn compared to USD2.2bn in the previous week, with new issuances mainly from the banking segment as observed with Westpac (Aa2/AA-/AA-)’s USD5.0bn 5-part bond deal and Bank of Communication (A2/A-/A)’s USD550m bond deal via its Hong Kong branch.

SGD CREDIT MARKETS

¨      O&G financial results remain weak; Olam weighed down by lower food commodity prices. There was a lone issuance from the primary space, with Suntec REIT (Baa2/-/-) printing a convertible SGD300m 5y at 1.75%. YTD issuances are around SGD15.7bn, or 2.7% higher compared to a similar period in 2015. Investor interest appeared in quasi/IG names such as HDBSP, LTAZSP, CHEUNG and STSP as well as yielder names likes GALVSP and ASPSP. HY O&G names released their end-June results, with Nam Cheong and Ezion unsurprisingly announcing lower net profits, with YoY declines of -75% (to MYR2.7m) and -31.5% (to USD19.8m) respectively. In addition to lower topline revenue from shipbuilding/ chartering activities, their underperformance has been exacerbated by margin squeeze. Otto Marine (NR) announced that it has commenced legal proceedings for USD6m amounts owing for unpaid chartering services. Meanwhile, Olam International (NR) saw its 2Q16 revenue rise by 3.5% YoY to SGD4.98bn despite sales volumes rising 20% due to weaker prices in some of its tradable commodities (almonds, tomato paste, cotton).

¨      SOR bull flattened. The short-to-mid SOR benchmark bull flattened, with the 2y falling by 2bps to 1.45% while the 5y dipped 3.6bps to 1.69%. Looking ahead, investors will be eyeing the Singapore July NODX numbers (consensus: -1.80%; June: -2.3%).

MYR CREDIT MARKETS

¨      MGS curve bull-flattened post-GDP data with the 3y MGS falling 3bps WoW to 2.92% while 10y dropped 11bps WoW to 3.51% following the encouraging MYR3bn 15y GII Reopening auction last Friday. The auction came out at average yield of 4.16% (BTC: 2.49x), or about 30bps above the average yield of 15y MGS auctioned in previous month. Foreign players were seen searching for yields in the domestic market amid the falling USTs. Furthermore, the slower Malaysia’s 2Q16 GDP growth of 4.0%, which declined for the 5th straight quarters since 1Q15, supported the speculation for another monetary easing from BNM. MYR weakened 0.17% WoW to 4.0285/USD despite the higher Brent prices of USD46.97/bbl. Meanwhile, the country’s current account surplus narrowed to MYR1.9bn in 2Q16, from MYR5bn in 1Q16, driven by lower merchandise trade surplus.

¨      MISC Bhd was upgraded to BBB+/Sta by S&P premised on its steady cash flows, moderate capital spending and prudent financial policies. Moody’s concluded IOI Corp’s rating at Baa2/Neg (from review for downgrade) after RSPO lifted its suspension on IOI’s palm oil. In the primary market, Ziya Capital (NR), the ABS vehicle under Bank of Tokyo-Mitsubishi, issued MYR630m senior sukuk coupled with MYR270 subordinated sukuk. Secondary flows improved 20% WoW to MYR3.0bn. Top traded was Cagamas with tranche maturing 10/16-7/20 declining 4-40bps to 2.892-3.651%. Elsewhere, Sarawak Hidro 8/21 and 8/26 closed 5bps lower on its debut trade at 4.16% and 4.38% respectively.