FW: RHB FIC Credit Markets Update - 12/12/17

 

 

 

12 December 2017

Credit Markets Update

           

All Eyes on US FOMC…Investors to Stay Sideline Ahead of Policy Decision; UEM Sunrise Issues MYR600m

MYR Credit Market:

¨      Trading volumes head towards slower trades ahead of the US Fed FOMC. Investors have begun to display seasonally slower secondary trades in Dec. In addition, apprehension may be keeping investors at bay ahead of the upcoming Fed FOMC, with expectations largely united on an upcoming rate hike. The 3y MGS and 10y MGS remained unchanged at 3.41% and 3.96% respectively. The MYR saw a rally of close to 0.30% stronger at 4.0765/USD.

¨      Govvie trading volume reduced to MYR1.5bn. Beginning the period of seasonally slower trading in the market, govvie bond trading saw a fall in volume. Trading was mainly concentrated on two benchmarks, namely the benchmark 7y MGS 09/24 and the 15y GII 08/33. The MGS 09/24 rallied -1.7bps to 3.92% while the GII 08/33 rallied -0.3bps to 4.67%/ Both saw trades of MYR474m and MYR140m respectively.

¨      Secondary trading in the corporate bonds also fell to MYR275m. Mimicking the trend seen in the govvie space, the corporate bond space saw a reduced trading volume. ALLIANCE 10/25 subdebt callable 10/20 saw MYR40m change hands at 4.89%, weakening +4bps. YTL POWER 27s on the other hand saw MYR30m trades recorded at 4.91% (-1bps). Other notable trades included the long-dated PRASARANA 09/47 and TENAGA 37s which saw trades worth MYR20m and MYR15m done at 5.30% (+12bps) and 5.18% (-1.4bps) respectively.

¨      In the primaries, UEM Sunrise Berhad issued a total of MYR600m from its AA- rated MYR2bn ICP and IMTN Programme. This brings the total drawdown from the programme to MYR1.2bn. The sukuks were issued in three (3) tranches of 3y, 5y and 7y, with coupons of 4.80%, 5.06% and 5.32% respectively, spreads between 139-144bps above the corresponding benchmark MGS at issuance.

¨      RAM assigns AA3/Sta to Maybank Islamic Berhad's proposed Islamic Additional Tier-1 (AT-1) Capital Securities Programme of up to MYR10bn. Maybank Islamic Berhad's is deemed highly strategic to its parent Malayan Banking Berhad (Maybank) and therefore its rating includes an expectation of ready support from Maybank if needed. The AT-1 capital securities are subordinated with fully discretionary profit payment in addition to carrying a loss-absorption feature linked to Maybank and its group of companies in the event any of their common-equity tier-1 capital ratios fall below 5.125%.

APAC USD Credit Market:

¨      USTs bear flattened ahead of Fed decision on rates. Central Banks meetings this week remained a key motivation as market participants anticipate the potential interest rates changes by the US Fed FOMC, with the ECB, BOE, BI and BSP to meet the following day. USTs continued its flattening as yields were seen rising across the curve despite rallying earlier on suspected terrorist attack following the explosion occurred during mid-day at a New York commuter hub. As expected, the 2y USTs continued to weaken as the final FOMC meeting fast approaching with yields rising to 1.82% (+2.4bps). The 10y USTs also saw yields inching higher to 2.39% (+1.3bps). The DXY Index saw a slight uptick of +0.05% to close at 93.9. Elsewhere, investors will also be keeping a close watch on the CPI data later this week.

¨      Asia credit spreads widened despite unchanged USTs the day before. Credit spreads saw a widening in both the IG and HY space as the IG credit spreads widened to 163.3bps (+1.3bps) whereas the Asia ex Japan HY bond yields ended higher at 6.73% (+1bp). The iTraxx AxJ IG edged slightly lower to 72.4bps (-0.7bps). Sovereign Indonesia led the tightening in the CDS space with spreads closing approximately -1.8bps lower. Other top performers were China Fis which include ICBC Ltd and Bank of China Ltd which saw levels for both issuers falling about -1.4bps. Leading the widening was PCCW-HKT Telephone Ltd which saw spreads increase nearly by +0.6bps while South Korea Fis Industrial Bank of Korea and Korea Development Bank saw levels rising about +0.5bps for both entities.

¨      Moody's downgrades Reward Science and Technology Industry Group Co Ltd to B2/Neg from B3/Neg. This follows a notice issued by the China Securities Regulatory Commission (CSRC) regarding regulatory violations, misappropriation of funds from onshore bond proceeds, inadequacies on information disclosure and weak financial management and poor accounting quality. It has been given three (3) months to resolve the issuers and reply the regulator. Reward is in the process of selecting a new auditor for its 2017 annual report. Reward is expected to have sufficient liquidity for the next twelve (12) months, with RMB 5.5bn in cash reported versus RMB2.4bn in short-term borrowing. Regulatory issues if unresolved with improved internal controls may result in actions by the regulators and difficulty in accessing the debt markets. Fitch has placed Reward Science and Technology Industry Group Co Ltd on Ratings Watch Negative from its current B/Sta on similar grounds.

¨      Moody's has affirmed the ratings of three Korean banks; KEB Hana Bank at A1/Sta with a revised outlook from negative to stable; Shinhan Bank Co. Ltd at Aa3/Sta with a revised outlook from negative to stable; Kookmin Bank remained firm at A1/Sta. Concurrently, Moody's has placed Woori Bank under review for upgrade. This was largely driven by the improving operating environment of for the banks partly contributed by positive economic growth posted for the year as well as structural changes the banks have achieved. Total loans from vulnerable industries have been reduced quite significantly, from 9.5% recorded in Dec 2013 to 5.1% as at Jun 2017. This is expected that the asset quality and profitability on the four banks to improve which may also be supported by further cost reduction which have seen the banks reducing the number of branches and employees by 15% and 12% respectively, from the highest figures in Dec 2012 and June 2017 respectively. Government played a significant role as well by implementing policies to control the growth of household debt level with low loans-to-value ratio of system-wide mortgage loans, mostly at about 50% means that the equity buffer built into system-wide mortgage loans is good. The outlook for Shinhan Bank, which has the highest BCA of a3, and KEB Hana Bank was changed to stable because of the absence of deterioration in asset quality or profitability that was initially the main concern by Moody's when it was revised to negative. Kookmin Bank's rating is reflected on its status as the most well capitalised bank in Korea. Despite Kookmin Bank's credit metrics improving to similar levels with that of Shinhan Bank, its BCA of baa1 and long-term deposit and unsecured debt ratings of A1 are one notch lower than Shinhan Bank as its credit metrics performance was mostly less consistent throughout the cycle. Woori Bank's ratings benefits from four-notches of government support which is higher than the three-notches applied to its peers such as KEB Hana Bank, Kookmin Bank and Shinhan Bank. Woori Bank has made structural changes to its asset risk, by reducing exposures to large corporates with low credit ratings and to cyclical sectors such as shipbuilding. The improvement in its capitalisation was especially pronounced, with Woori Bank's tangible common equity to risk-weighted assets rising by 1.4pp to 12.2% as of Sept 2017 from the level registered at the end of 2015. It also completed an early retirement program in 3Q17 which reduced its work force by 6%. The bank has also continued to shrink its network branch network. As a result, its BCA of baa3 may be supported well from its improved financial metric.

¨      S&P has upgraded Indosat Tbk PT to BBB-/Sta from BB+/Sta. The rating upgrade is underpinned by its solid cash flow adequacy and the expectation of debt reduction over the next 12-14 months period with FFO/debt looking to maintain above 40% level until 2019 due to prudent investments and dividend distributions. Indosat's performance for 9M 2017 exceeded expectations recording EBITDA of IDR10trn and operating cash flows of IDR7.7trn, 80% and 76% of Fitch's full-year forecast respectively. Balance sheet has been improving contributed by debt reduction over the past two (2) years, from IDR26.9trn to IDR20.6trn recorded as at end-Sept 2017. As the second largest wireless provider in the country, it is expected that its subscriber market share and revenue market share of 30% and 20% respectively remained firm. In addition, its position in the industry is forecasted to strengthen following the extra 2x5 MHZ of 2100MHz spectrum, which it won at the auction in Nov. 2017. Fitch expects Indonesia's wireless industry revenue to grow at a steady 5%-6% over the next 24 months.

 

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