The MGS yield curve bull flattened last week along the 5y15y on strong buying interest in long ends, with the 10y down by 6bps and the 5y down by 1bps, but market tone

Credit Market Watch: Summary for week ending 9-Sep

·         MYR Credit:

Ø  The MGS yield curve bull flattened last week along the 5y15y on strong buying interest in long ends, with the 10y down by 6bps and the 5y down by 1bps, but market tone turns softer as we write with MGS yields being quoted 2-3bps higher on elevated USDMYR and some catch up with the performance in UST.

Ø  OPR maintained at 3.00%: As expected, BNM kept the OPR unchanged. Our economics research team views that the language of the statement still sounded a bit dovish. Our OPR forecast is maintained at 2.75-3.00% for end-2016, not discounting a potential rate cut in Nov with BNM’s decision likely to be data-driven.

Ø  Industrial production (IP): Growth decelerated to 4.1% YoY in July 2016 primarily because of slower manufacturing activities which grew at the slowest place YTD at 3.2% YoY. On MoM basis, manufacturing activity declined 3.4% which dragged IP down to -2.2%, though this was partly due to the festive holidays in the month of July.

Ø  Media Prima: Outlook cut to negative by RAM which is concerned that the company’s low circulation may not recover, or deteriorate further, and the uncertainty regarding the migration to digital TV terrestrial broadcasting including the impact on margins. In 1H16, Media Prima’s EBITDA fell 26% YoY amid a 42% decline in print circulation. RAM will consider reverting the outlook to stable if 1) margins are not severely affected by keeping the free-to-air model, 2) circulation and advertising revenue improves and 3) financial profile is maintained.

Ø  DRB-HICOM: Senior rating downgraded to A+/stable from AA-/negative by MARC, which didn’t come as a surprise to us as we wrote previously that the credit is a weak AA3/AA-, and MARC cited deterioration in credit metrics to levels more in line with the A+ band with Proton’s losses being the main drag Meanwhile, the perpetual bond rating was lowered by one notch to A-, meaning the same two notches gap from senior, and we think this is generous, a point we argued before and now its lower senior bond rating should justify a wider senior-perpetual gap despite the absence of other more higher ranked debts in between.

Ø  Relative value: PTPTN 26 last traded at 4.20%, 8bps more than JKSB 26 and 14bps higher than our fitted quasi-govvy line. On toll road names, we continue to see relative value in MEX II papers over DUKE 3.

·         Asian Credit:

Ø  UST curve bear-steepened WoW along the 2y10y on renewed focus on the US Fed potentially raising the FFR as early as in the September meeting. Futures implied probability literally rule out a hike in September FOMC with only a 22% chance but the probability of hike by December is still more likely than not at 57%.

Ø  In Asian USD credit, spreads tightened moderately last week but widened back yesterday. For the week ending 9 Sep, JACI composite -3bps, JACI IG -3bps and JACI HY -6bps. Sovereigns overall were holding up well led by INDON 10-15bps lower in yield at the longer end, while KOREA, MALAYS and PHILIP were a tad wider.

Ø  Rating update: Beijing Automotive rating was put on review for downgrade by Moody’s, citing higher than expected leverage, with debt/EBITDA to remain above 5.0x which is weak for its Baa3 standalone rating. Sales and earnings growth was moderate but the absence of a bold deleveraging plan is a dampening factor. Currently the company enjoys 3 notches uplift due to expectation of support from the Beijing Municipal Government.

·         CDS: EM Asia 5y CDS saw narrower spreads, led by Indonesia -12bps WoW, followed by Malaysia -6bps, China -5bps while Korea, Philippines and Thailand was 2-4bps tighter.