MGS encountered selling pressure and yields rose 7-11bps WoW, along with the higher USDMYR pair. Corporate bond yields tracked govvies though to a lesser extent, moving 1-7bps higher WoW. Some foreign selling was reported in regional local currency government bond markets with higher frequency data.

Credit Market Watch: Summary for week ending 14-Oct

·         MYR Credit:

Ø  MGS encountered selling pressure and yields rose 7-11bps WoW, along with the higher USDMYR pair. Corporate bond yields tracked govvies though to a lesser extent, moving 1-7bps higher WoW. Some foreign selling was reported in regional local currency government bond markets with higher frequency data.

Ø  Celcom Networks: Outlook was cut to negative, though rating was affirmed at AA+ by MARC, citing narrowing margins from intense competition and possibly higher borrowings to cover capex and spectrum fees as credit concerns. Celcom’s EBITDA margin has declined to 40% in 2015 from 44% in 2011. Spectrum fees are anticipated to amount to MYR820m in 2016 and capex to average MYR1.4b/y until 2018. Celcom’s cash flow generation is strong, averaging MYR2.1b in the past 3 years, a factor that underpins its rating. But free cash flow will depend on dividend levels which was MYR1.1b in 2015 and MYR2.9b in 2014. MARC cited downgrade triggers are EBITDA margin below 30% and adjusted cash/debt ratio below 45%.

Ø  ABHC Sukuk (Al Bayan): RAM placed the A1 rating on Negative Watch on 13 Oct as the company did not have sufficient cash in the FSRA account to meet the MYR100m sukuk due on 16 Dec 2016. Not only has the company failed to clarify the breach, the supposedly 16 Oct deadline to remedy it has passed. Failure to replenish the FSRA and explain its liquidity position will lead to multiple-notch downgrade from RAM, and possible rating suspension on lack of critical information.

Ø  Relative value: MAHBMK’22 senior bonds offered value last dealt 17bps above our fitted line. MAHB reported strong double-digit passenger traffic growth in Oct, after the 4.5% growth in 9M16 surpassed its initial 2.5% target. The company is also expecting to see a better 4Q16, including its Istanbul airport.

·         Asian Credit:

Ø  UST curve bear-steepened for the 2nd week in a row, with the 10y UST yield rising 8bps WoW. Speaking at Boston Fed’s economics conference, Fed Chair Yellen said “policymarkers may want to aim at being more accommodative during recoveries”, but balanced with comment that “accommodative monetary stance, if maintained too long, could have costs that exceed the benefits by increasing the risks of financial instability or undermining price stability”. Market continued to slowly price in a US rate hike in December as the probability of FFR increase edged up to 66% from 64% last week.

Ø  In Asian USD credit, spreads widened with JACI composite +5bps, JACI IG +4bps and JACI HY +9bps. Sovereigns traded wider, INDON and PHILIP generally rose 8-13bps, while KOREA and MALAYS rose 3-8bpsbps WoW.

Ø  New issues recap: MEXIM received USD1.4b orders or 2.8x book cover for its USD500m 5y bonds, which was priced at T+120 from +140 IPG. Allocation by region was 8%/80%/12% to Malaysia/Other Asia/EMEA. Meanwhile, TNB raised USD750m from 10y sukuk at T+145 from +170 IPG. Orders was USD2b or 2.67x book cover. Allocation by region was 77%/14%/9% to Asia/Europe/Middle East.

Ø  Sime Darby: Rating outlook was revised back to stable from negative by Fitch following a series of de-gearing exercise: share placement through accelerated bookbuild on 4 October that raised MYR2.4b, monetisation of industrial properties in Australia and land swaps with PNB; with plantation a major cashflow generating segment, higher CPO prices also helped. If Sime Darby continues to show prudence in managing its leverage position and current credit metrics sustained/improved, its domestic rating outlook should equally be revised back to stable by MARC, possibly in December.

Ø  Rating update: Cheung Kong Property was upgraded by Moody’s to A2 from A3 on expectation that the company’s financial profile to remain solid with adjusted net debt/net capitalisation <15% and EBIT/interest around 12x in the next 2 years, coupled with its strong cashflow generation, market position and prudent financial profile.

·         CDS: EM Asia 5y CDS spreads widened WoW led by Thailand +15bps due to political risks, while other regional countries were between 1 to 4bps wider WoW.