Government bonds mostly firmer with the 5y and 10y yields lower by 4-5bps WoW. Activity in the corporate bond space picked up with vo

Credit Market Watch: Summary for week ending 21-Oct

·         MYR Credit:

Ø  Government bonds mostly firmer with the 5y and 10y yields lower by 4-5bps WoW. Activity in the corporate bond space picked up with volume totalling MYR4.3b. High grades saw some yield tightening, but moving down the credit curve yields widened at the lower AA rating bands, especially at the long end.

Ø  Budget 2017: Reiterate fiscal discipline and maintaining budget deficit target at 3.1% for 2016. On government bond supply, our forecast for 2016 is lowered marginally to MYR86.5b (previously MYR87b), but no change to our forecast for 2017 at MYR104b on an expected 3.0% deficit/GDP ratio in 2017.

Ø  ABHC Sukuk (Al Bayan): Rating downgraded to BB2 from A1 and remains on Negative Watch due to significantly weaker liquidity. Al Bayan has failed to build the minimum FSRA balance, missing 2 monthly payments of MYR25m each in Sep and Oct. Recall that MYR100m is due on 16 Dec. RAM has been made to understand that the payment source is solely government receivables, which the payments have continuously been delayed. The rating will be lowered further if Al Bayan does not satisfy the sukuk requirements, provide sufficient information to RAM or its liquidity position deteriorates. Helping to avoid a possible default is Saudi Finance Minister’s statement of increasing payments to the construction sector.

Ø  Relative value: We continue to think MAHBMK’22 senior bond offers value, last traded 13bps wider than our fitted line.

·         Asian Credit:

Ø  Upward adjustment of UST yields took a breather. 10y UST yield declined by 6bps to 1.73%. The ECB left its key policy rates and asset purchase programme unchanged, but maintained a dovish-bias tone that the existing EUR80b monthly asset purchase, which is scheduled to end by Mar 2017, may be extended if necessary.

Ø  In Asian USD credit, spreads was a tad wider, with JACI composite +2bps, JACI IG +1bps and JACI HY +3bps WoW. Sovereigns overall tracked the UST lower in yields with INDON, PHILIP, KOREA and MALAYS generally down by 2-8bps WoW.

Ø  China: 3Q16 GDP growth was stable at 6.7% (2Q16: 6.7%, 1Q16: 6.7%), aided by property market boom and government fiscal stimulus measures. New loan growth in September rebounded to RMB1.22t from RMB0.949t in August. Further monetary easing seems unlikely this year, as government tightened measures to control property prices in major cities.

Ø  Rating update: PowerChina, with monopolistic position in hydropower construction sector in China, was downgraded to Baa1 from A3 by Moody’s, citing high leverage with adjusted debt/EBIDTA of 8.0x in FY2015 (FY2014: 6.4x) and is expected to remain at ~7.0x in the next 2 years. With a well-established business profile, increasing revenue and earnings base and the agency’s expectation of high likelihood of government’s support, PowerChina continues to benefit from 3 notches uplift from its ba1 standalone rating.

·         CDS: EM Asia 5y CDS spreads were unchanged to 5bps narrower, with Philippines -5bps, Thailand -4bps, Indonesia -1bps while other countries flat for the week.