FW: RHB Credit Markets Update - 1/11/17

 

 

1 November 2017

 

Credit Markets Update

                                               

Sime Darby Slashed 2-Notches to Baa3; MGS Rallies Sharply

MYR Credit Market:

¨      Fitch shares concerns over Malaysia's revenue projections and growth projections owing to external demand headwinds and the volatility in oil prices. Despite this the MGS curve saw a strong bull flattening as the 3y-10y benchmark yields fell -4.8bps to -12.2bps to 3.45% and 3.90% yesterday. The MYR, on the other hand, continued to drive higher to 4.232/USD (+0.14%) as Brent oil prices surged to USD61.4/bbl (+0.8% overnight) on expectations that major oil producers would continue on the extension of output cuts beyond March next year. Elsewhere on economic release, Oct Nikkei manufacturing PMI came in slightly lower at 48.6 compared to 49.9 printed in Sept.

¨      Govvies trading activities picked up significantly with volume recorded at a healthy MYR3.6bn on the back of strong rallies. Higher volume can be seen at the shorter end of the curve with 53% recorded for trades under 3y. GII 04/20 and 04/22 were the top traded benchmark securities with amounts of MYR390m at 3.49% and MYR250m at 3.55% which saw yields falling -1.6bps and -9.1bps respectively from previous trades. Off-benchmark security GII 08/20 saw MYR210m changed hands closing at 3.795%. Benchmark MGS 11/27 was also active recording trade volume of MYR232m settling at 3.9% with yields dropping by -12.1bps. On the other hand, off benchmark securities MGS 02/18 and 03/18 saw combined trades of MYR398m.

¨      Corporate bonds volume gained slightly though remains quiet with MYR208m changed hands. CTX 10/27 and 08/26 saw combined volume of MYR30m across two tranches to settle at 5.04% (+4bps) and 5.02% (+3.9bps) respectively. ECO CAPITAL 08/22, GAMUDA 10/18 and PKNS 10/18 transacted MYR20m each to close at 6.4% (-6.3bps), 4.12% (-3.4bps) and 4.3% (-0.4bps) respectively.

¨      Over to primaries, Southern Power Generation Berhad (AA-), issued MYR3.7bn sukuk across 28 tranches with sizes ranging between MYR90m and MYR170m and maturities ranging from 5y to 18y. MARC has assigned a final rating of AA-_IS to Southern Power Generation Sdn Bhd's proposed Sukuk Wakalah of up to RM4.0 billion. The outlook on the rating is stable.

¨      Over to rating, Moody's has downgraded Sime Darby Berhad to Baa3 from Baa1 following its review; rating outlook is stable. The 2-notch downgrade reflects Sime Darby's demerger plans of its plantation and properties businesses which will reduce the benefits of diversification. Moreover, both businesses contribute to a larger share of profits to the group       

APAC USD Credit Market:

¨      UST ends the month bear flattening. Ahead of the FOMC meetings and a rebalancing of USTs saw a bear flattening of the yield curve with the 2y UST and 10y UST falling +1.1bps and +2.6bps to end at 1.60% and 2.38% respectively.  Investors will be looking for this meeting for changes in the Fed statements, with expectations of a more hawkish statement but no expected changed in the policy rates. Also focusing the market's attention were the Conference Board Consumer Confidence Index and the Chicago PMI both beating expectations at 125.9 (Prior: 120.6) and 66.2 (Prior: 65.2). The long end of the curve continued to be supported following the Treasury Secretary's comments on reducing earlier plans to increase ultra-long bond issuances, with market participants now fascinated on the funding plans of the government, especially as the Fed begins to cap its repurchase of bond holdings. The USD as seen by the DXY index was largely unchanged at 94.55, as the market continues to await further clarity on the tax reform bill and the future Fed chairperson.

¨      Asian credit spreads switch course. IG credit spreads fell -0.9bps to 157bps, whereas the HY bond yields saw the opposite with a widening of +4bps to close at 6.64%. This on the back of a risk appetite unwinding the day before. The iTraxx AxJ IG spreads widened +0.22bps to end the month at 75.18bps. CapitaLand Ltd reversed its gain the previous day as CDS levels widened +7.1bps. HK corporates saw CDS widen as PCCW-HKT Telephone Ltd, Sun Hung Kai Properties, HongKong Land Co Ltd, and Swire Pacific Ltd edged up +2.8 to +6.1bps. CNOOC Ltd also saw CDS widen +3.8bps. Kookmin and Woori Bank, on the other hand, saw spreads compress -0.5 to -0.6bps.

¨      In the primary market, China Huarong Finance 2017 Co Ltd (NR/A3/A), guaranteed by China Huarong International Holdings Ltd and enjoys a Keepwell agreement with China Huarong Asset Management Co. issued USD3bn of bonds across four tranches while issuing another SGD400m notes. The four tranches were of USD700m Pnc5 at 4%, USD500m 5y FRNs at 3mL+115bps, USD1.1bn 10y bonds at 4.25% while the remaining USD700m were 30y bonds at 4.95%. This follows an issuance of USD5.57bn in Jan and Apr 17.

¨      Over to ratings, S&P lifts Agricultural Bank of China Ltd (ABC) from credit watch negative affirming it at A/Sta. The negative watch was placed following the downgrade of China's sovereign rating and elevated debt leverage and risk overhangs from possible price corrections would subject China's banking sector to heightened credit risk. This follows the bank management's commitment to improve asset quality and clean up problem loans (NPL and special mention loans 1H17 are 5.81% vs industry average of 6%). Despite its large exposures to county and economically disadvantaged rural communities, ABC slowed its credit growth to 9-10% while limiting higher risk industry exposures. S&P expects credit costs of ABC to stabilise as seen by its calculated risk adjusted capital while it expects ABC to maintain its superior franchise and network in the domestic market. Further supporting this is ABC's designation as a globally systemically important bank since 2014 and expectations of receiving extraordinary support from the Chinese government in the event of financial distress. S&P removes Shriram Transport Finance Co Ltd from negative credit watch affirming it at BB+/Sta. This is after the termination of merger discussions between Shriram group's financial services business and the IDFC group. On the other side of the rating moves, S&P downgrades Shanxi Road & Bridge Construction Group Co Ltd (SXRB) to BB-/Sta from BB/Sta. The Shanxi government has set up a new entity that will hold all toll roads currently owned by the government as part of a transport reform plan. SXRB will not take on the role of consolidating the road infrastructure but will instead now be a subsidiary of the new holding company focusing on road construction. Despite this, SXRB's role will be important to road infrastructure development in Shanxi. S&P now believes SXRB will benefit from a high likelihood of receiving extraordinary government support instead of very high likelihood.

¨      Moody's assigns Baa2/Sta on Boral Finance Pty Ltd, an Australian based construction materials manufacturer with operations in Australia, US and Asia. With expectations remaining for a recovery in the US housing market and expected increase manufacturing activity in Australia, the rating of Boral is expected to remain stable in the near term. This also prices in the inherent cyclicality in the building and construction material industry.

 

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