FW: RHB FIC Credit Markets Update - 13/12/17

 

 

 

13 December 2017

Credit Markets Update

           

Malaysia IP 3.4% YoY Oct; Fed Decision Later Tonight

MYR Credit Market:

¨      Trading volumes remained weak as investor position for the FOMC. Investors have remained on the side-lines, especially in the govvie space ahead of the FOMC meeting results and on further expectations of a strong primary market in Malaysia. The 3y MGS rallied -1.0bps to 3.40% whereas the 10y MGS weakened +0.8% to 3.97%. The 20y benchmark MGS saw a rally of -1.6bps, now yielding below the 30y benchmark MGS once more. The MYR on the other hand saw a slight pullback as it closed at 4.0765/USD (-0.27%) in line with the fall in regional EM Asia currencies against the greenback. BNM announced the final government bond auction of the year, the new benchmark 15.5y GII 06/33 to be issued on 15^th Dec with a small planned auction size of MYR2bn, with MYR500m to be privately placed.

¨      Govvie trading volume plummets to just above MYR1.0bn. Following on from the trend the previous day, trading remained lacklustre in the government bond space. Trading was mainly seen on the benchmarks 15y MGS 04/33 and 3y MGS 02/21 where MYR113m and MYR78m were recorded at 4.42% (-0.5bps) and 3.40% (-1.0bps). Notably, off-benchmark GII 07/23 saw MYR130m trades done rallying -2.1bps to trade at 4.02%.

¨      Secondary trading in the corporate bonds saw a healthier MYR315m trades. Among financial names AFFINBANK 02/27 subdebt callable 02/22 and CIMB AT-1 perps callable 05/21 saw MYR20m change hands each at 4.845% (+0.1bps)  and 5.19% (+37.9bps) respectively. Power producers MALAKOFF POW 12/18, MALAKOFF POW 12/22 and YTL POWER 05/27 recorded MYR20m, MYR5m and MYR20m trades, last traded at 4.23% (+3.8bps), 4.58% (-0.2bps) and 4.90% (-1.5bps) respectively. MMC CORP11/27s saw MYR20m traded unchanged at 5.36%

¨      Over in economic news, Malaysia's industrial production for the month of Oct rose 3.4% YoY (4.7% YoY Sep). This was below the consensus expectations of 4.1% and signaled the second month of slower annual growth in IP. Maysia's Oct manufacturing sales grew 11% YoY Oct to MYR66.3bn especially from increases in electrical and electronic products, petroleum, chemical, rubber and plastic products, and non-metallic mineral products, basic metal and fabricated metal products. BNM, together with Bank Indonesia (BI) and Bank of Thailand (BoT) announced the launching of the local currency settlement framework, in accordance to the MoU signed between the central banks in Dec 16

¨      RAM affirms AAA/Sta rating of Citibank Berhad. As part of the larger Citigroup, the Bank leverages its parent's global franchise, connectivity and technical expertise, allowing it to carve a strong foothold in cash management and treasury solutions. As credit cards account for 24% of its total loans and 35% of its gross income, ongoing regulatory reforms in this segment have major implications on the Bank's business strategies and profitability. The Bank's slightly higher gross impaired-loan ratio of 2.3% as at end-June 2017 was primarily due to its contracting base. The Bank's proportion of low-cost current- and savings-account deposits made up 56% of its deposit base as at end-June 2017 among the highest in the industry. In addition, RAM affirms AA3/Sta rating of Bank Islam Malaysia Berhad. The rating encompasses expectations of ready financial support from its major shareholder Lembaga Tabung Haji in times of need. While Bank Islam has a well-established franchise in the Malaysian Islamic banking sphere, its market position is still limited relative to the larger domestic universal-banking groups. Its liquidity coverage ratio (113% 1H17), is also below the industry average, although it exceeds the minimum requirement.  The bank's asset quality remains strong with gross impaired-financing ratio of 1.0% as at Jun-17 and credit cost ratio at 20-25bps

APAC USD Credit Market:

¨      USTs bear steepened as FOMC begins 2-day policy meeting. Focus will be on this year's final FOMC meeting as market participants anticipate policy makers' decision to adjust interest rates where a possible +25bps rate-hike is widely expected. Concurrently, investors will also be keeping a close tab on the CPI data releases later today where inflation is forecasted to increase from the current level of 2% (consensus:2.2%). USTs resumed its weakening after PPI final demand data for the month of Nov showed better-than-expected results as it rose from 2.9% to 3.1% YoY despite the rally earlier following a healthy demand at the reopening of 30y USD12bn auction. USTs yields continued to climb across the curve which saw the 2y USTs inching higher to 1.83% (+0.82bps) while the yields for the 10y USTs increased further to 2.40% (+1.25bps). PPI recorded an increase of 0.4% MoM for three consecutive months while core PPI level rose by 0.4% resulting in a higher 12-month wholesale inflation rate at 3.1%, the highest level since January 2012. This was largely contributed by higher cost of energy while wholesale prices for a variety of goods continue to rise. The DXY Index closed the day +0.25% higher at 94.1. 

¨      IG credit spreads outperformed HY while USTs continued to weaken. IG credit spreads closed the day lower at 162.5bps (-0.8bps) while the HY bonds continued to inch higher at 6.74%. Meanwhile, the iTraxx AxJ IG spreads seen paring gains as it climbed to 74.3bps (+1.9bps). Fis from Singapore and China led the tightening in the CDS space with spreads closing between -2.0bps and -2.8bps, notably UOB Ltd, DBS Bank Ltd, ICBC Ltd. and Bank of China Ltd. Other top performers include sovereigns Indonesia and China with CDS declining about -1.5bps and -1bp respectively. Leading the widening for the day were Fis from Indian and South Korea as Bank of India saw CDS spreads increase close to +3.9bps, followed by Kookmin Bank with CDS levels climbing about +0.7bps

¨      Fitch has upgraded the ratings on PLDT Inc. to BBB+/Sta from BBB/Sta following the recent sovereign rating upgrade on Philippines to BBB/Sta. Despite amassing a significant 70% subscriber market share in fixed-line as well as 48% revenue market share in the telecommunication industry, the telco now prioritises profitability as PLDT targets to increase EBITDA from PHP61bn recorded in 2016 to PHP68bn this year through cost management and handset subsidy cuts. Fitch is also expecting double-digit growth in home and enterprise revenue to remain firm going forward which may support increases in EBITDA. In addition, FFO adjusted net leverage is forecasted to hover below or around the 2.5x level to in order to maintain its rating position of BBB+/Sta, currently at 2.6x as of 2016. PLDT is expected to sustain the current high level of capex following its rollout of the LTE network and fibre expansion with capex/revenue ratio to maintain around the 26% level recorded at 2016. PLDT, however, has made a revision to the capex guidance as there is a possible delay in network completion to early next year at PHP38bn, a reduction of PHP8bn. Annual capex is estimated to increase around PHP46bn for the next two years. Meanwhile, liquidity position remained sturdy as PLDT's unrestricted cash balance of PHP25bn recorded in end-Sep 2017 was sufficient to fully cover its short-term maturities of PHP16bn. During the same period, PLDT's total on-balance-sheet debt of PHP175bn was well spread out, with 78% of debt due after 2019. Fitch has upgraded Anton Oilfield Services Group's rating to B-/Sta from CCC/Sta. The upgrade follows the completion of the company's USD300m 2020 bond issuance, alleviating refinancing concerns for its USD243m maturities in Nov 18, albeit at a higher funding cost of 9.75% compared to 7.5% for its existing bonds. Anton's order-book rose to CNY3.7bn Sep-17 from CNY3.1bn end-2016. As a result, Anton's EBITDA generation improved to CNY288m with a margin of 33% in 1H17. Fitch estimates Anton's FFO net leverage at over 6.5x in 2017, which is aggressive for its B- rating, but mitigated by adequate FFO interest coverage estimated at about 1.5x. Fitch estimates that Iraq accounts for over 60% of Anton's order book. Anton's business in the country contributed 44% of its revenue in 1H17, up from 37% in 1H16, and this proportion is likely to rise, which increases its risk exposure. Moody's has upgraded ratings on Indika Energy Tbk Ltd (Indika) from B2/Pos to Ba3/Sta. The upgrade was driven by the successful additional 45% stake acquisition in Kideco Jaya Agung, the third largest coal producer in the country after obtaining all requisite approval resulting in an increase of Indika's shareholding in the coal producer to 91% from 46%. The USD575m of new notes at 5.875% due Nov-24 was issued to fund the acquisition. The upgrade was also supported by improving operating profile as Moody's opined that steady cash-flow generation from Kideco. Kideco generated approximately USD200m of operating cash flow recorded in first six months of 2017 which should account for over 70% of Indika's EBITDA as estimated by Moody's. In addition, Indika's long dated debt maturity profile with no material maturity until 2022 should ensure Indika's healthy liquidity profile. Rating changes would be largely pressured by the volatility in thermal coal prices as well as Kideco's ability to extend CCoW beyond its 2024 bond maturity with no material changes to existing terms. Fitch has also raised Indika Energy Tbk Ltd (Indika) to B+/Sta from B-/Pos on similar basis.

¨      S&P downgraded PT Lippo Karawaci Tbk to B/Sta from B+ resolving the credit watch negative placed on it in Aug. The subdued property market in Indonesia has seen residential property sales revenue fall to IDR1.3trn 1H17 and IDR2.9trn 2016. S&P expects Lippo's consolidated reported EBITDA margins to decline to 10%-16% in 2018 and 2019, from more than 20% historically. Consolidated EBITDA interest coverage is expected to stay slightly below 1.5x for the next 12 months at least, amid broadly stable consolidated debt levels. Hospital operator Siloam, Lippo's other major operating subsidiary, completed an IDR3.1 trillion rights issue Oct 17, resulting in Lippo diluting its stake in Siloam to 51.05%, from close to 60% before the transaction. With both LPCK and Siloam on expansion strategies, and with the reluctance of Lippo to reduce its stakes in LPCK, Siloam and listed REITS, this would in effect limit the upstream cash to the holding level where debt servicing requirement resides. In addition, S&P views Lippo increasingly dependent on sale of assets at the holding company for maintain adequate cash buffer for interest servicing. In addition Lippo has a history of aggressively reinvesting proceeds from asset sales in its operations to expand rather than setting funds aside for debt repayment. This has the risk of gradually depleting its asset base, and making future debt repayment contingent upon a successful development, completion, and ramp-up of the remaining assets

¨      Fitch has assigned Shangrao City Construction Investment Development Group Co. Ltd (SCID) with a BB+; carrying a stable outlook. The rating reflects its strong linkages with Shangrao municipality with the expectation of government support in the event of financial difficulties. In addition to the capital injections received on a regular basis, SCID has been receiving support from the municipal government, notably a debt swap programme which was structured to incorporate all debts before the year 2015 into the government's debt though the government does not incur the ultimate liability of SCID's debt under the China's company law. SCID was established as a sole land developer permitted by the Shangrao municipal government mandated to undertake most major public projects as well as businesses that serve the public which include construction of roads and pipe network in addition to public transportation service. As expected, leverage will remain a concern which saw SCID's debt integrated into the government debt accounted for around 26% of the total local government debt as at end-2016. As at end-2016, SCID saw net debt to EBITDA rise to 19.6x on rapidly increasing debt, expected to improve on expectations of land development revenue. The current CNY9.7bn cash equivalents reported end-2016, is sufficient to meet short term obligations of CNY3.4bn.

 

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