Ø Foreign demand for government bonds continued, especially for GII after its inclu

Credit Market Watch: Summary for week ending 19-Aug

·        MYR Credit:

Ø  Foreign demand for government bonds continued, especially for GII after its inclusion into the GBI-EM Global Diversified Bond Index. MGS yield curve bull flattened with the 5y lower by 2bps WoW and the 10y lower by 3bps WoW. Corporate bond yields were mixed while trading volume was decent at MYR3.0b.

Ø  Kapar Energy Ventures: Outlook was changed to negative by MARC, citing low liquidity buffer to cover short term debt. Operational issues and increased working capital needs almost halved its operating cash flow in FY8/15 and cash balance decreased to MYR29m (FY8/14: MYR229m). In FY8/16, Kapar continued to encounter operational problems, and FSRA balance of MYR242m (end-Feb 2016) was used to pay debt service of MYR218m in July 2016. The company has MYR267m due in July 2017.

Ø  Relative value: Sepangar Bay 25 seem to have value last trading 4.54%, which is 3bps above our AA1/AA+ fitted line and 25bps more than its 2022 paper for an additional 5y in tenor.  

·         Asian Credit:

Ø  UST curve moved upwards and steepened along the 2y10y with the 10y UST yield up by 6bps WoW to 1.58%. This week, Fed Chair Yellen will speak at the Jackson Hole Symposium on 26 Aug.

Ø  Asian USD credit spreads tightened, with JACI composite, JACI IG and JACI HY all down by 4bps WoW. On sovereigns, Malaysian and Indonesian sukuk papers outperformed following their inclusion into global bond indices.

Ø  Rating update: 1) Five Australian banks’ outlooks were cut to negative by Moody’s which is expecting profitability and asset quality to deteriorate in a more difficult business landscape; 2) Noble Group’s rating was lowered to B2 from Ba3 by Moody’s because of weaker profit and cash flow necessitating a waiver of financial covenants. Negative outlook was maintained on weak liquidity and uncertainty in credit metric improvement given still low commodity prices.

·        CDS: EM Asia 5y CDS spreads tightened further, led by Indonesia -9bps, followed by Malaysia -8bps, while Philippines and Thailand -4bps each and China -3bps.