FW: Credit Market Watch: Summary for week ending 18-Aug

 

Dear all,

 

Credit Market Watch: Summary for week ending 18-Aug

·         MYR Credit:

Ø  MGS yields lowered 2-4bps WoW amid weak USD with buying flows from foreign real-money accounts on the belly of the curve for off-the-run bonds. Corporate bond yields tightened 1-2bps WoW at the front end but was flat elsewhere amid one of the more active weeks YTD with over MYR3b volume (previous week: MYR2.5b).

Ø  2Q17 GDP printed a strong 5.8% YoY growth that met our economic research’s expectation. It was primarily driven by resilient domestic demand of 5.7% (1Q17: 7.7%) on stronger private consumption and a rebound in external demand to +1.4% (1Q17: -14.5%). Meanwhile, 2Q17 current account surplus widened to MYR9.6b/2.9% of GDP (1Q17: MYR5.3b/1.6% of GDP). With a better-than-expected first half, our economic research raises full-year forecasts, expecting 2017 real GDP growth of 5.5% (from 5.1%) and current account surplus of MYR31.1b/2.3% of GDP (from MYR23.2b/1.8%).

Ø  Rating changes: 1) Kapar’s outlook from MARC has reverted to stable as cash flow and liquidity have improved and TNB has continued to provide support by allowing the reset of outage rates that has enabled Kapar’s better operating performance. 2) Hong Leong Financial Group’s outlook was raised to positive after MARC increased the outlook on the key subsidiary Hong Leong Bank. The bank’s prudent approach to risk and lending enabled it to maintain solid financial performance and strong asset quality.

Ø  UEM Edgenta: We believe UEME’s divestment of overseas asset consultancy business is credit positive for the company, strengthening balance sheet and improve financial performance. UEME plans to sell its 61.2% equity stake in Opus International Consultants Ltd (OIC) to WSP Global Inc (WSP) for NZD1.78/share; if a dividend of up to NZD0.07/share is declared, the net price could rise to NZD1.85/share. Total consideration is MYR500-520m, the bulk of which will be used to pare down debt such that gross gearing declines to 0.4x; we estimate UEME will shed MYR200-300m borrowings. While the OIC divestment will cut revenue by about 50%, it will mitigate losses that have pressured the company’s results in the past two years as performance in Canada, Australia and UK continue to be subdued. UEME will retain the Malaysia consultancy operations which has higher EBIT margins in the twenties and as such, consolidated margin is expected to improve to low mid-teen levels. The proposed divestment is expected to complete by year end.

Ø  Relative value: UEME 2022 traded 10bps above our fitted AA3/AA- line. We also see value in FRL 2021 being 15bps wide from the AA2/AA fitted line. While FRL’s 2Q17 results were unimpressive, seasonally higher output should offset downside risks in CPO price and our plantation analyst expects better performance from FRL in 2H17.

·         Asian Credit:

Ø  UST curve was little changed, rising 1-2bps along the 2y10y in a week that feature the release of FOMC minutes, Barcelona bombing and Trump’s removal of his chief strategist Steve Bannon. Asian credit traded in firmer tone with JACI composite -2bps, JACI IG -2bps and JACI HY -5bps WoW. Sovereigns performed well, with INDON and PHILIP about 2-7bps lower, MALAYS and KOREA about 1-3bps lower WoW.

Ø  China: Housing market cools amid measures to curb runaway home prices as the number of cities that showed MoM gains slowed to 56/70 in July from 60/70 in June. Price growth in tier-2 and tier-3 cities outpaced those of tier-1, as the latter saw price declines in Beijing and Shenzhen, flat in Shanghai although with increases in Guangzhou. The gradual slowdown trend is expected to persist in 2H17 in efforts to defuse property bubble risk. On a YoY basis, house price growth remains elevated at 9.1% YoY in July albeit has eased from 10.5% YoY in Dec 2016.

Ø  SGD new issues: 1) F&N Treasury priced SGD200m 5y bonds at 2.80% yield on 1.25x book cover (good at reoffer). Allocations were banks/private banks/others 56% and funds/insurers/SWF 44%. 2) Singapore Airlines priced SGD700m 10y bonds at 3.13% on 1.57x book cover. Allocations were banks 41%, funds/insurers/agencies 40% and private banks 19%. 3) Wing Tai Properties raised SGD160m through PerpNC3 bonds on reportedly >4.0x book order with interest 70% from PB and the rest from funds/banks/insurers.

Ø  USD new issues: 1) CIFI Holdings (B1/-/-) priced USD300m PerpNC5 at 5.375% yield from 6% IPT on ~3.7x book cover (good at reoffer). Allocations were fund managers 71%, PB 25% and banks/corporates 4%. 2) Zhongtai Financial priced USD300 3y bonds at 4.25% from 4.5% IPT on ~3.0x book cover (good at reoffer). Allocations were banks 55%, asset managers 39% and PB 5%. 3) CK Infrastructure priced PerpNC5 bonds at 4.85% from 5% IPT.

Ø  Rating change: 1) Noble Group’s rating was cut by both Moody’s and S&P by 2 notches to Caa2 and CCC-, citing heightened default risks in the next few quarters as cash positions depleted amid widening cash outflows from operations and proceeds from asset sales may not be enough to cover cash outflows and debt maturities in the next 12 months. 2Q17 adjusted net loss jumped to USD1.8b on operating loss and write-downs. 2) Lippo Karawaci was put on negative watch by S&P as the previously expected recovery in Indonesia’s property market didn’t materialise. Operating environment remains challenging with a shift to launching lower-priced apartments, which lowers margins, EBITDA and therefore its interest cover. Failing to sustain EBITDA/interest cover ratio above 1.5x could threaten its existing B+ rating, with the negative watch implying a 50% of 1-notch downgrade in the next 3months.

·         CDS: EM Asia 5y CDS spreads tightened as the North Korea threat subsides, with Malaysia -9bps, Korea -5bps, Indonesia, Philippines and Thailand -4bps each while China -2bps WoW.