FW: RHB FIC Credit Markets Update - 19/9/17

 

 

19 September 2017

 

 

Credit Markets Update

                                               

Asia CDS Hits New Lows; IOI Corp on Stable Outlook with Moody's

 

MYR Credit Market:

¨      Govvies trading saw a mere MYR1.6bn changing hands following the recent uptick in govvies yields. Top traded was the benchmark 7y and 5y MGS on combined MYR379m transacted. Elsewhere, off-benchmarks were well traded as MGS 2/18, MGS 10/20 and MGS 9/18 saw trade volumes of MYR145m, MYR134m and MYR129m respectively. Benchmark govvie yields were mostly higher particularly at the belly of the curve with the 5y and 7y adding 1.7 and 2.1bps to 3.50% and 3.78% respectively. The 10y MGS was a tad lower at 3.85%, while the 3y was slightly higher at 3.32% on thin trading. MYR, meanwhile, continued to push lower to 4.1888/USD (+0.02%) amid a rally in commodity prices. Brent crude oil prices ended at USD55.5/bbl yesterday (+3% WoW).

¨      Corporate trading slowed to MYR437m. Prasarana remained the top traded with 2/23 and 3/24 tranches recording a combined MYR95m trades. Yields of Danainfra 3/47 inched marginally higher to 5.13% on MYR60m transacted. In the AAA space, interest was observed in Telekom 11/25 and Danga 9/27 with the former tightening -10bps to 4.38%, while the latter added 2bps to 4.50%. Elsewhere, UEMS 5/23 on MYR30m trades ended marginally higher at 4.08%.

¨      Primary market expected to remain active as GovCo Holdings Berhad (GG) plans to tap the primary market with a total issue size of up to MYR1.2bn from its MYR8.8bn IMTN programme.

¨      IOI Corp's rating was affirmed at Baa2 while its outlook has been revised to stable from negative. The revision in outlook is largely premised on its favourable position to be removed from the watch list of the Roundtable of Sustainable Palm Oil (RSPO) and the 70% divestment of IOI Loders Croklaan to Bunge Limited for a cash consideration of MYR4bn. Moody's was comforted by IOI Corp's swift actions in: a) addressing complaints lodged by Aidenenvironment (the environmental organization which filed for complaint against IOI); b) adding more stringent commitments to its sustainable palm oil policy (SPOP); c) IOI's ability to manage its business with minimal loss of customers, revenue and profitability despite the RSPO suspension to its downstream operations, mostly aided by higher crude palm oil prices recorded and certified inventory which minimized disruptions of its downstream production. Furthermore, the proceeds from the divestment of IOI Loders Croklaan is earmarked for debt repayment and is expected to be completed in the next 12-months. IOI Corp's debt/EBITDA stood at 3.8x as at FY17 from 3.9x in FY16. Moody's expects this to improve to 3.6x in FY18 through debt repayments and improvements in EBITDA

APAC USD Credit Market:

¨      Risk on maintained as the market look towards the FOMC. The risk on in the market remained as equities continued to rally, gold continues to weaken and the USTs continue to give back. This despite the upcoming FOMC Meeting which will be watched for the balance sheet unwinding and a coming rate hike. The 2y UST continued to weakened as yields gained +1.4bps to 1.40% while the 10y UST yields rose another +2.6bps to 2.23%. The USD pared back some of its gains, as the DXY Index fell overnight to 91.928 (-0.13%).

¨      HY credit continues to underperform. The average Asian ex Japan IG spreads rallied -1.1bps to 170.8bps whereas the average yield on HY Asian ex Japan remained at 6.56% on a back of still weakening USTs the day before. The average IG Asia ex Japan CDS continues to hit new lows now at 72.72bps (-0.83bps). This occurred despite the CDS spread widening back again from tights the previous week seen in IDBI Bank, Samsung Electronics, SK Telecom, Industrial Bank of Korea, Korea Development Bank, and Reliance Industries Ltd which saw spreads rise +1.6bps to +5.8bps. The sovereigns of South Korea, Indonesia, Thailand, China, Malaysia and the Philippines saw CDS levels drop -2.5bps to -1.6bps, while China Development Bank and Bank of China Ltd saw levels tighten -2.0bps respectively.

¨      Primaries saw Mirvac Group Finance Ltd (A3/BBB+/NR) issue USD400m 10y bonds, priced at T+147.5bps vs the IPT of T+170bps. Kookmin Bank (A1/A+/A), on the other hand, printed USD500m 5.5y bonds at T+115bps vs IPT of T+135bps. In the HY space, KWG Property Holdings Ltd (B1/B+/BB-) issued USD250m 5nc3 bonds with a coupon of 5.2%. Among the issuance in the pipelines that may tap the market over the week include Ever Dragon Properties Ltd (NR), Hanjin International Corp (Aa2/AA/AA-) and Shougang Group Co Ltd (NR/NR/A-), expected to issue USD bonds.

¨      In ratings, Moody's upgrades Yanzhou Coal Mining Company Ltd to B1/Sta from B2 on review for upgrade with the completed acquisition of Coal & Allied Industries funded by equity. Concerns of liquidity arising from high short term debt is reduced by continued strong access to the bond and loan markets and its parent's status as a key state-owned enterprise in Shandong Province. With the additional contribution of the new acquisition, the debt/EBITDA is expected to decline from 7.4x in end 2016 to close to 6.0-6.5x. In addition, the improvement in coal prices on the back of China's supply-side reforms further improve the rating prospects of the company. Moody's assigns a first time rating of Baa2/Sta to Auswide Bank Ltd. This mutual bank has reported assets of AUD3.3bn as at June 2017, a small sized bank with geographical concentration in the state of Queensland (83% of total loans) and a home loan focused business model. Problem loans made up only 0.4% of gross loans as at Jun 17, which now brings asset quality in line with its bank peers following the degradation that occurred as a result of the Queensland floods in 2013. In addition, efforts to tighten underwriting policies and reduction in the share of risker investor loan and interest only loans (34% of loan books) are expected to improve the rating if the loan mix and performance improves. The bank has common equity tier 1 capital ratio grew to 12.2 in Jun 17, above the average for peer mutual banks, following its dividend reinvestment plan (DRP) and its slower loan growth following its underwriting policies. Liquidity cover has improved with the issuance of an internal RMBS which can utilise repo facilities with the RBA and a change in funding mix which saw a reduction of wholesale funding to 32% end 2016.

 

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