Treasuries yields rose overnight, reversing some gains following the rally last week mostly on the back of the underwhelming US employment print last Friday. Services PMI and ISM services were both slightly below expectations at 53.6 (consensus: 54) and 56.9 (consensus: 57.1) respectively, while April durable goods orders declined -0.8% MoM (expectations: -0.6%). UST2y settled at 1.30%, while the 10y closed at 2.18%. Looking ahead, we expect market participants to stay on the side-lines this w

6 June 2017

Credit Markets Update

                                               

Malaysia April Trade Surplus Widened; Middle East Squabbles

MYR Credit Market:

¨      Middle East squabble spill into markets. Following a few days of weakness, the MYR saw a second day of strength as it closed at 4.2633/USD, gaining 0.40% from Friday’s close. The MGS curves were supported as the 3y MGS rallied -5.9bps to 3.23% and the 10y MGS was unchanged +0.2bps to 3.87%. The market is digesting news that Saudi Arabia, Bahrain and the UAE cut diplomatic ties with Qatar, causing concerns on the stability of an OPEC pact, causing oil prices to retrace -0.96% to USD49.47/bbl.

¨      Govvie trades picks up while corporates weaker. Trading of Malaysian govvies saw a resurgence as MYR3.1bn was traded yesterday. As usual, a large portion of trades occurred in the short end with 17s maturities making over MYR1bn of trades. Interest remains strong in the 7y maturities as MYR536m of trades occurred in the 24s maturities, mostly in the new benchmark 7y GII and 7y MGS. Trading in corporate bonds however saw a weaker MYR253m being traded. Trades were concentrated in names such as the short-dated Cagamas where the 09/17, 08/17 and 03/18 were traded 0bps to -14.6bps stronger to trade between 3.54%-3.78%, and BKB which was traded at 4.48 (-0.3bps). Over in the primaries, Pengurusan Air SPV Berhad (PASB) is to issue three tranches of GG sukuk with maturities of 3y, 5y and 7y of MYR700m, MYR900m and MYR500m respectively. This occurs while the reopening of the 20y MGS is expected to close today. 

¨      Malaysia April trade surplus widened supported by commodities and E&E. The exports expanded at 20.6% YoY April as imports slowed down faster to 24.7% YoY. The growth in commodity exports and E&E exports have supported the strength of exports, though this is expected to moderate into 2017 as the lowered base effect and as export growth begin to normalize. The trade balance of Malaysia rose to MYR8.8bn April compared to MYR5.4bn in March. Looking forward, the market will monitor the release of BNM Statement of Accounts which is expected to be released later today

APAC USD Credit Market:

¨      Treasuries yields rose overnight, reversing some gains following the rally last week mostly on the back of the underwhelming US employment print last Friday. Services PMI and ISM services were both slightly below expectations at 53.6 (consensus: 54) and 56.9 (consensus: 57.1) respectively, while April durable goods orders declined -0.8% MoM (expectations: -0.6%). UST2y settled at 1.30%, while the 10y closed at 2.18%. Looking ahead, we expect market participants to stay on the side-lines this week given the looming key events such as the ECB meeting and UK General Elections both on 8-June.

¨      The iTraxx AxJ IG was again quoted lower at 87.2bp (-1.4bp) driven by tighter CDS spreads seen across the board. The biggest movers in the constituents were IDBI Bank, TELMAL, State Bank of India and PETMK (-5 to -9bps).  Asian credit markets were mixed; HY bond yields compressed 3bps to 6.55%, whereas IG credit spreads were mostly unchanged at 175.4bp.

¨      In the primaries, China Merchants Bank (expected rating: NR/BBB+/NR) via its Ney York branch sold USD3y FRN at 3mL+82.5bp area compared to IPT at 3mL+105bp.  Korean Air Lines (NR) received USD900m orders for USD300m Pnc3.5y bonds priced at 6.875% against IPT at 7.125% area. Elsewhere, GS Caltex (Baa2/BBB/NR) sets final guidance for its USD400m 5y bonds at T+130bps, 25bps inside of IPT area.

¨      Moving to rating actions, China Evergrande’s outlook was revised to stable by Moody’s; affirmed at B2, to reflect improved liquidity position from strong contracted sales and active debt maturity management. Moody’s expects its adjusted debt leverage and interest coverage ratio to improve to 55-60% and 2.0x-2.5x over the next 12-18 months, from the low levels of 32% and 1.4x respectively as at end Dec-16. Moody’s placed Agile Group Holding’s Ba3 ratings on positive outlook from stable driven by expectations of sustained growth in the Group’s presale and revenues and improved margins, which should improve its credit profile. Agile’s revenue/adjusted debt is expected to remain around 90-95%, while EBIT/Interest around 3.5-4.0x in the next 12-18 months from 90% and 3.1x in 2016. On the flipside, Moody’s cut Nan Fung International Holding’s outlook to negative from stable; affirmed at Baa3 following the company’s decision to acquire a lot of land for the development of a commercial complex in Kai Tak District, Kowloon East, Hong Kong for HKD24.6bn. The concerns stems from the impact of the Kai Tak project on Nan Fung’s cash buffer, which is a key driver for its IG rating. Moody’s estimates that the project could reduce up to 50% of Nan Fung’s cash balance which stands at HKD21.2bn as at end-Sept 16. The decision to raise debt to fund the land acquisition and cost of construction will also see a material increase in the group’s leverage profile with adjusted debt/capitalization rising to 30-35% in the next 12-18months from 25% as at end-Sept 16.

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