FW: RHB FIC Credit Markets Update - 14/11/17

 

 

14 November 2017

 

Credit Markets Update

           

Focus on the GII 09/24 Reopening, UST Flattening Once More

MYR Credit Market:

¨      MGS bear flattened amid the increasing prospect of a rate hike as benchmarks MGS 5y-10y saw yields pick up across the curve ranging from +3bps to +10bps. The benchmarks MGS 5y, 7y and 10y saw yields ended higher at 3.80%, 4.01% and 4.11% respectively while benchmark 3y MGS remained unchanged overnight at 3.52% (-0.2bps). The MYR remained firm below the 4.20/USD level as it ended flat against the greenback at 4.1915/USD (+0.01%). The MYR continued to be resilient as performance was slightly above par among regional peers. Market participants remain cautious ahead of the reopening of the GII 07/27 as yields rose 6bps to 4.31%. The WI is currently trading close to 4.33/31. Also focusing attention are recent statements by Deputy PM Zahid Hamidi who hinted expectations of the 14^th General Election over the next 6 months.

¨      The week started off strongly as MYR2.1bn of total transactions recorded in the govvies segment with short dated securities accounting for 76% of the total trade. Continuing from previous week's momentum, off-benchmark MGS 03/18 remained as top traded security which saw MYR911m changed hands settling -0.2bps lower at 2.80% while the off-benchmark MGS 02/18 transacted MYR155m with yield declining -9.4bps to 2.75%. Meanwhile, benchmark 7y MGS 09/24 recorded MYR126m in total transactions gaining +5bps at 4.06%.

¨      Slow trading activities in the corporate space as volume recorded just under MYR266m. AAA-rated BPMB 3/22 saw the highest demand as MYR90m recorded closing at 4.42% (+4.4bps). UMWH 21s and 26s recorded MYR10m each to settle at 4.62% (-0.3bps) and 4.98% (-0.2bps) respectively. Other notable trade was the CAGAMAS 10/18 which saw MYR15m changed hands at 3.79% (+14.7bps).

¨      Over to ratings, RAM downgraded the ratings of three media players; Star Media Group Bhd to AA2/Neg from AA1/Neg; Media Prima Berhad to AA3/Neg from AA1/Neg; and Media Chinese International Limited to AA1/Neg from AA2/Neg. The downgrade reflects the deteriorating operating performances as a result of declining advertising expenditure (adex) and the on-going structural changes as the industry shifts towards digital platform. Digital advertising continues to be a threat as the traditional media players saw real adex on print and TV declining sharply YoY with the latest report of -14% drop as at 1H17 compared to -10% and -7% in 2016 and 2015 respectively. As a result, profit was heavily affected which saw their revenue fell by 8% to 19%  and operating profit before depreciation, interest and tax plummeted by 47% to 82% as at 1H17. The steeper downgrade on Media Prima was largely contributed by weak operating performance of its TV segment which consisted 44% of total revenue. RAM has forecasted that the increase in debt for Media Prima to fund capex and investments would further increase its gearing by 0.5x-0.6x from the 0.31x as at 1H17. The negative outlook on all 3 media players would remain firm given the possibility of further decline in adex in the coming years

APAC USD Credit Market:

¨      UST continues to flatten once more. Following the first weekly negative return in the equities market since the rally two (2) months back, the equity markets in the US continued to improve. The USTs too continued to revert as the yield curve continued to flatten once more as the super long end of the curve continued to be supported. The 2y USTs weakened +2.7bps to 1.68% while the 10y USTs weakened +0.7bps to 2.41%. The 30y USTs were well supported (-0.9bps to 2.87%). Driving the market continues to be the pricing in of the reconciliation of the tax reform bills from both the House of Representatives and the Senate. The USD as seen by the DXY Index rallied +0.1% to 94.49. With lack of key speeches nor news flow, the market may take risk off the table ahead of a suggestion by US President Trump on possible changes in policy announcements in relation to trade and North Korea to be announced Wednesday.

¨      IG credit spreads underperformed HY credit. The Asia ex Japan IG credit spreads tightened -0.6bps to 162.9bps, following the strong widening that occurred on Friday with the strong rally in USTs. The Asia ex Japan HY bond yields widened to 6.74% (+4bps) overnight. The iTraxx AxJ spreads tightened slightly to 80.6bps (-0.71bps). Leading the CDS rallies were Malaysian names Petroliam Nasional Bhd and Telekom Malaysia Bhd with rallies of close to -2.1bps and -1.8bps respectively, despite the Malaysian sovereign widening near to +0.5bps. The CDS widening was led by Export-Import Bank of China, CapitaLand Ltd,  Kookmin Bank, Export-Import Bank of Korea, and Korea Development Bank, as CDS levels rise +0.5bps to +3.1bps.

¨      S&P revised its outlook on Challenger Life to A/Pos from A/Sta. This positive outlook reflects S&P expectations in the medium term regarding the strengthening business profile as Challenger expands its leading position in the Australian annuities market. Fitch assigns B/Sta on Xinyuan Real Estate Co Ltd. The rating of the China based homebuilder is predicated on its strong sales, which has seen a 38% YoY increase to CNY7bn 1H17, from better sentiment in core Tier-2 cities and satellite cities around Tier-1 cities. This is supported by a large scale measured by EBITDA, more contract sales average selling price of USD1,564 per sqm in 2016 (aggregate USD1,387) and stable profitability when compared to its peers. Constraint by tight liquidity due to the high operating costs, especially the selling, general and administration cost, though this has tapered to 15% YoY growth in 1H17. Higher leverage estimated at 45-50% in 2016-17 remains a concern and is a drag to acquisition pace, in addition to concerns of low land bank by the company due its large churn model, and rising land prices amid fierce competition. S&P assigns B-/Sta on Xinyuan Real Estate Co Ltd. S&P assigns a B-/Neg to China South City Holdings USD debt, one notch lower to the issuer rating on subordination risk. The real estate company is on track to achieve its annual sales target of HKD11-12bn in financial year ending Mar-18. The company debt is expected to grow at a moderated HKD35bn, not expected to be greatly affected by new USD issuances. The operating environment for the company over the next 12months remains a concern, amid weakness in trade centre sales in China. Moody's assigns Baa3/Sta to Hunan Xiangjiang New Area Development Group Co Ltd. The rating is supported by expectations of high likelihood that the company will receive extraordinary support from the Changsha Municipal Government in times of need rendering it a four (4) notch uplift in rating. The company is responsible for primary land and infrastructure development in the Xiangjiang New Area, linked to the public policy goals of the Changsha government. Sizable capex plans of RMB6-7bn annually, debt funded, is expected to increase leverage and debt/capitalization is expected to fall to 50-60% over the next 12-18months from 41% in 2016. The FFO/interest cover is expected to fall to 1.0x over the next 12-18 months from 2.2x in 2016. The group is expected to benefit from periodic capital injections and grants from the Changsha government, subsidies and funding allocation from the government bond issuances.

 

 

 

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