FW: RHB FIC Credit Markets Update - 16/1/18

 

 

 

16 January 2018

Credit Markets Update

           

Brent Crude Surged Past USD70/bbl; MGS Continues to Rally.

MYR Credit Market:

¨      MGS rallies on stronger secondary trading. The MYR bond market continued to see strong activity and a rally in the MGS (US financial markets closed yesterday). The 3y MGS rallied a further -1.7bps to 3.30% while the 10y MGS closed at 3.84% (-1.2bps). The long end of the curve on the other hand saw some weakening as the 20y MGS and 30y MGS saw yields inched +0.4 bps and +2.0bps to 4.59% and 4.84% respectively. Oil prices continued to see a rise, especially in light of the strong risk on mood in global markets the week before and the weakened USD, as Brent crude hit USD70.26/bbl (+0.56%), a level not seen since Dec 14. The MYR continued to rally to 3.9555/USD (+0.42%).

¨      Govvies maintained a healthy volume of MYR2.5bn. GIIs saw another day of strong trades once more as the 5y and 10y benchmarks GII 04/22 and GII 07/27 saw total transactions of MYR 580m and MYR331m respectively, ending the day at 3.82% (+1.8bps) and 4.13% (-0.1bps). The 7y benchmark MGS 09/24 also saw strong trades as it rallied -1.7bps to 3.82% on MYR257m of trades. Off the run MGS 07/21 saw MYR520m change hands at 3.44%, -1.56bps from the last traded level.

¨      Active secondary flows in the corporate bond/sukuk space as volume surged to MYR571m. AAA and GG rated papers CAGAMAS 03/18 and PRASARANA 09/24 accounted for MYR95m and MYR60m trades each, dealt at 3.55% (+15bps) and 4.34% (-0.4bps). After issuance last week, the Segi Astana Sdn Berhad complex saw, SEGI ASTANA 25s, SEGI ASTANA 26s, SEGI ASTANA 27s and SEGI ASTANA 28s, with combined transactions of MYR100m, traded at 5.12%, 5.30%, 5.40% and 5.50%, traded between -20bps and -28.1bps more expensive than the issued coupons. The Southern Power Generation Sdn Berhad complex on the other hand accounted for another MYR68.8m of trades. SPG 04/22, SPG 04/23, SPG 10/23, SPG 04/25, SPG 10/25, SPG 10/28, SPG 04/31 and SPG 10/33 changed hands at 4.64%, 4.73%, 4.76%, 4.85%, 4.87%, 4.99%, 5.18% and 5.39% respectively which saw yields rally between -1.4bps and -4.2bps from the last traded yields and issuance profit rates.

¨      Over in ratings, RAM Ratings affirmed Samalaju Industrial Port Sdn Bhd at AA1/Sta. The rating is premised on the unconditional and irrevocable corporate guarantee extended by its parent Bintulu Port Holdings Berhad. Since commencement of operations at Phase 1 of Samalaju Port Jun 17, the port saw a gradual build-up in cargo throughput, with 1.67m tonnes handled 9M17 vs 0.45m tonnes in 2016. Due to slower than expected take up, full-year utilisation rate is forecasted to come to 12% in 2017 (maximum holding capacity 18m tonnes). With FFODC of 0.05x (expectations 0.10x), debt-servicing capacity is expected to remain weak, while gearing ratio is projected to peak at 3.77x over the next five (5) years. RAM Ratings has also reaffirmed the AA1/Stable ratings of Bintulu Port Holdings Berhad (BPHB). This mainly reflects the rating agency's view of BPHB as a government-linked entity and the high likelihood of extraordinary support from both the federal and Sarawak governments. Given Bintulu Port's function as a key import and export gateway in Sarawak and in Malaysia, it continues to enjoy a stable stream of income from port operations. In 9M17, LNG throughput surged 10.3%YoY to 19.98m tonnes (9M16: 18.11m tonnes) due to strong demand from China and additional capacity from Petronas's new LNG Train 9. Average volume growth of LNG in Bintulu is expected to remain in single digit following a rise in global LNG supply. Meanwhile, non-LNG throughput growth at Bintulu Port was largely supported by increased palm oil throughput and rising raw material imports by Samalaju Industrial Park users in 9M17. At 9M17, BPHB's adjusted gearing was at 0.80x while FFODC at 0.39x, better than RAM's previous expectations, due to delayed tariff revisions and deferred capex plans. The numbers are expected to deteriorate to 1.65x and 0.21x respectively, over the next five (5) years, with future capex requirements at the port and at Samalaju Industrial Port Sdn Bhd.

¨      RAM Rating affirmed Gamuda Berhad and Bandar Serai Development Sdn Bhd at AA3/Sta. The reaffirmation reflects Gamuda's position as a leading local contractor, with a strong niche in large-scale civil-engineering projects, and its order book remaining robust at MYR7.8bn Jul 17. Gamuda's revenue was better than expected FY Jul 17 as it surged 37%YoY to MYR5.7bn, while pre-tax profit rose 16% YoY. To fund the rollout of various large new township projects locally, Gamuda has seen an increase in debt levels to MYR6bn FY17 (MYR5bn FY16), with gross gearing ratio at 0.77x and net gearing ratio at 0.56x. RAM expects Gamuda's debt load to taper off on account of stronger construction and property earnings and as capex for land acquisition eases. Gross gearing is estimated to reduce to 0.7x in 1-2 years, while FFODC is projected to recover to above 0.15x after incorporating additional debts to be incurred for new construction and property projects (FY17: 0.13x).

¨      RAM Ratings has reaffirmed the AA2/Neg rating of Bright Focus Berhad. The reaffirmation of the rating is premised on the stronger-than-anticipated traffic performance of the Maju Expressway (MEX), which led to healthy cash generation of Maju Expressway Sdn Bhd (MESB), thereby translating into a projected FSCR post distribution of at least 2.25 x throughout the tenure of the Sukuk. MESB continued to register higher-than-expected operations and maintenance (O&M) expenses 2016 and 2017, causing the negative outlook on Bright Focus to remain. The sukuk rating may come under pressure, should future O&M expenses come in higher than expected to the extent that Bright Focus' minimum FSCR is weakened. MEX continues to benefit from a favourable alignment and strong increases in average daily traffic (ADT), though RAM expects ADT to average 136,400 over the next five (5) years as some traffic contraction is expected following the steep tariff hikes slated for 2018.

APAC USD Credit Market:

¨      The US market closed yesterday for holiday. Concerns were seen rising on the impending US government shutdown following reports that Republicans may not be able to pass a long-term spending by the 19^th Jan deadline. GOP leaders have shifted to push for a short-term funding measure while Democrat party leaders were mostly reluctant to support a deal without the protection on young illegal immigrants. The US government will cease funding at midnight Friday, first time since 2013, should they fail to agree. The USD continued to slip despite the market closing for the Martin Luther King Jr. Day holiday as DXY plunged -0.53% to 90.5. Later today, focus will be on the release of Empire Manufacturing data for the month of Jan 18 as it is estimated to rise from 18.0 to 19.0.

¨      Malaysian corporate led the rally in AxJ IG CDS. The iTraxx AxJ IG credit closed at 60.6bps. Over in CDS space, Petroliam Nasional Bhd led the rally as CDS levels fell about -0.8bps. Meanwhile, leading the widening for the day was Swire Pacific Ltd. of about +2.3bps. This was followed by South Korea corporates, notably SK Telecom Co. Ltd., Hyundai Motor Co. and GS Caltex Corp as spreads increased between +1.8bps and +2bps. Chinese Fis such as Bank of China Ltd. and Export-Import Bank of China saw identical rise in spreads of about +1bp.

¨      S&P has revised outlook Adani Transmission Ltd. (ATL) from BBB-/Sta to BBB-/Neg. This was driven by deteriorating leverage due to delays in the collection of compensatory tariffs over the past two (2) years. Fitch opined that leverage surpassed initial estimates and may worsen on the back of possible cash outflows. ATL's FFO/debt recorded in 2017 stood at 14%, slightly below the downgrade trigger of 15%. ATL is expected to receive a one-time recovery payment from Central Electricity Regulatory Commission (CERC) of about INR9.3bn in FY18 expected to bring FFO/debt up to 15%. Fitch viewed that future leverage hinge primarily on ATL's ability to balance its use of cash for acquisitions, capex and dividends in line with its common terms deed (CTD) such that it maintains an FFO/debt ratio of at least 15%.

¨      S&P has assigned ABJA Investment Co. Pte. Ltd. (ABJA) with a BB-/Sta rating. ABJA is expected to benefit from Tata Steel's support given its status as a core subsidiary to the group mainly to help raise funding. Tata Steel group is expected to generate EBITDA per ton of INR11k to INR11.5k and USD60 respectively from its Indian and European operations as forecasted by Fitch. Tata Steel is entering a joint venture (JV) with Thyssenkrupp AG for its European operations of which EUR2.5bn of debt to be transferred to JV. Fitch projects that FFO/debt should increase to 17% in FY20 from 12% recorded in FY17. Besides that, it is expected that Tata Steel's leverage to improve by reducing debt from its positive FCF occurring in FY18. Tata Steel also plans to raise about USD20bn in the form of an equity rights issuance. S&P has assigned B/Sta to Jiangsu Zhongnan Contruction Group Co. Ltd. (Zhongnan). The rating reflects Zhongnan's growing contracted sales and established position in the market though high financial leverage and moderate concentration in lower-tier cities capped its rating. Zhongnan recorded decent growth in contracted sales from RMB22.5bn 2015 to RMB37bn 2016 and estimated to rise between RMB55-65bn in 2017 and 2018 contributed by fast sales execution and aggressive land acquisitions. Zhongnan's gross profit margin from property sales fell from 24% in 2015 to approximately 18% in 2016 due to the recognition of the lower-margin projects from the acceleration of destocking in tier-three and tier-four cities prior to 2015. Moody's expects gross profit margin from property sales to improve steadily to between 19% and 21% in the next 12-24 mths upon more project completions in higher-tier cities. During the same period, Moody's also expects profit margin from the construction business to maintain about 13-14% on the back of increasing new contracts. Large debt-funded acquisitions may elevate Zhongnan's financial leverage over the next two (2) yrs in order to support expansion, hence, high expenditure estimated about RMB30-36bn per annum from 2017 to 2019 is largely expected. This is equivalent to approximately 50-55% of contracted sales, surpassing the industry average of spending around 40-50% of contracted sales proceeds on land acquisition each year. Zhongnan's debt/EBITDA ratio is expected to increase to about 10x in 2017-2018, then slightly drop to about 9x in 2019 with the expectation that revenue will increase upon project completions, slightly outpacing the increase in debt.

¨      Moody's has revised upwards the outlook on Malaysia Airports Holdings (MAHB) from A3/Neg to A3/Sta. This reflects on the sturdy traffic growth in Malaysia at 14.1% in 2017 which was also largely contributed by higher yielding international passenger segment. Growth is forecasted to remain steady led by international passengers who pay higher passenger service charge compared to domestic passengers. Given the ongoing negotiations with the Malaysian government for the extension of the Operating Agreement (OA), Moody's opines that the process may lengthen due to the complication of issues involved which is deemed as credit challenge. Nevertheless, a better credit position should be reflected on the improvement of its FFO/debt to above 16% or 17% level as well as interest coverage to sustain above 5x.

¨      Fitch has upgraded Parkson Retail Group Ltd. (Parkson) to B-/Sta from CCC/Pos*). The upgrade comes after Parkson successfully secured refinancing arrangements with Bank of Beijing for CNY3.5bn (USD540m) to repay or refinance USD500m 4.5% bonds maturing May 18. A tender offer for the outstanding bonds was made on 9 Jan 18 and Fitch expects that any amount not redeemed through the offer to be repaid upon maturity. Despite incurring losses in 2015 and 2016, Parkson's EBIT improved in 1H17 though Fitch opines that stronger recovery in sales is imperative to offset its high operating costs.  Same-store sales growth grew 0.4% in 9M16, indicating main concessionaire business and larger contribution from direct sales and rental income have offset loss of sales from store closures. Despite raising CNY1.9bn in net proceeds from the sale of a store in Beijing and EBITDA generation improve slightly in end-2016, leverage remained a concern. Fitch expects FFO payables-adjusted net leverage to range between 6x and 7x in the coming two (2) to three (3) yrs and FFO fixed-charge coverage at around 1x, assuming no significant interest and rental cost increases.

 

 

 

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