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

 

 

 

18 January 2018

Credit Markets Update

           

US Spending Bill Unresolved; MRCB Southern Link Neg Rating Watch.

MYR Credit Market:

¨      MGS consolidated further while the USDMYR pushed lower. The MGS curve bear steepened in line with shifts in global govvie curves the day before. The 3y MGS weakened to 3.32% (+0.7bps) and the 10y MGS fell +3.0bps to 3.88%. Meanwhile the longer end of the curve continued to weaken as the 15y and 20y were pressured upwards by +1.2bps and +0.7bps respectively. The weakening of the USD during Asian hours saw the MYR rally further to close at 3.9535/USD (+0.10%), testing below 3.9500/USD over the trading day. Oil prices similarly saw a rally as Brent crude levels closed at USD69.38/bbl (+0.33%).

¨      Govvies trading activity picked up to MYR2.9bn. The GII space again saw increased interest especially among the 5y, 7y and 10y benchmark GII issuances which accounted for 31.6% of govvie trades, where the GII 04/22, GII 08/24 and GII 07/27 saw trades worth MYR580m, MYR110m and MYR233m, crossing at 3.84% (+1.6bps), 4.08% (+2.6bps) and 4.16% (+1bps).  Off the run GII 07/22 was traded at 3.93%, +0.4bps over the last traded. The 7y benchmark MGS saw increased activity as the MGS 09/24 saw MYR142m change hands at 3.82% falling +2.5bps. Off-benchmark shorter dated MGS07/21, MGS 11/21 and MGS 08/22 recorded trades of MYR275m, MYR134m and MYR190m, closing at 3.51% (+4.4bps), 3.44 % (unchanged) and 3.69% (+2.6bps

¨      Secondary flows in the corporate bond/sukuk space saw volumes remain strong as MYR553m changed hands. SEB 32s, issued last month, saw MYR150m traded at 5.26%, -2.1bps from its last recorded trade. The short dated CAGAMASMBS 05/19 fell +17bps to 4.08% while the BGSM 25s rallied -2.1bps to 4.78% on trades of MYR40m each. The Southern Power Generation Sdn Berhad complex saw MYR45m traded across the SPG 04/23, SPG 10/23, SPG 04/24, SPG 10/24 and SPG 04/25 as securities rallied between -3.8bps and -10.2bps from their last traded or issued profit rates.

¨      Over in ratings, RAM Ratings puts MRCB Southern Link Berhad BB3/ on negative rating watch from its current BB3/Neg. This follows the abolishment of toll collection for the Eastern Dispersal Link (EDL) and takeover by the government of Malaysia. Resolution to the rating watch is expected once the settlement amount between the concessionaire MRCB Lingkaran Selatan Sdn Bhd and the government of Malaysia is announced. MRCB Southern Link is a funding conduit for the EDL with financial commitments supported by back-to-back payments from MRCB Lingkaran Selatan Sdn Bhd. As at Dec 17, MRCB Southern Link's cash balances stood at MYR17.45bn, insufficient to cover the principal and profit payment for its outstanding sukuks. Should negotiations on a final settlement be prolonged and without shareholder support or any other external liquidity support thereafter, the rating of the sukuk is expected to be downgraded in anticipation of a potential default by the end of this year. 

 

APAC USD Credit Market:

¨      The US spending bill remains unresolved. The USTs saw a bear steepening as yields picked up across the curve. The 2y UST yields continued to float upwards to 2.04% (+2.89bps) while the 10y USTs fell +5.33bps to 2.59%. The long end of the curve also weakened as the 30y UST fell +3.16bps to 2.86%. The US Fed's first Beige Book of 2018 reported the US economy and inflation expanded at a modest-to-moderate pace between Nov and Dec 17, while wages continued to push higher. On the economic front, IP rose 0.9% MoM Dec, ahead of expectations of 0.5%. Housing starts will now be the focus of the market as will the resolution of the US spending bill. With no visible progress towards the spending bill needed by Friday to avoid a government funding gap, the US Republican party looks to be pushing for a continuing resolution of the bill, delaying negotiations to 16th Feb. The USD continued to slip in the beginning hours of Asia before seeing a bounce upwards towards the end of US trading. The DXY ended the day stronger at 90.54 (+0.16%).

¨      Chinese issuers led the widening in AxJ IG CDS. The iTraxx AxJ IG credit spreads weakened slightly overnight at 60.70bps (+2.4bps). Leading the widening in the CDS space were Chinese issuers Industrial & Commercial Bank of China Ltd, Bank of China Ltd, Export-Import Bank of China, China Development Bank and CNOOC Ltd, where spreads widened between +0.81bps and +2.20bps. Korean names Korea Development Bank, Export-Import Bank of Korea, and Korea Electric Power Corp also saw CDS widen around +0.71 to +0.74bps.  

¨      Moody's upgraded Fosun International Ltd to Ba2/Sta from Ba3/Pos. This follows Moody's view that the company now providing better transparency over investment strategy while shifting focus to more stable and asset-light businesses, improving its capabilities to withstand cyclical risks and expectations the company will refinance its debt at the holding level. Moody's opines the company has established a track record of managing well its acquired businesses while demonstrating the ability to recycle its investments. This execution ability is important in containing the company's debt growth while pursuing business growth to improve its portfolio quality. Moody's estimates that Fosun held RMB16bn of cash and RMB45bn of marketable securities compared with short-term debt of RMB35bn at the holding company level at 2017. Moody's expects Fosun to continue to raise funding by recycling investments, increase dividend income from the investment portfolio, hold a fair amount of marketable securities, reduce its reliance on short term funding, and maintain debt leverage at the holding company at around 30%-35% over the next two (2) years.

¨      Fitch downgraded the outlook of Adani Transmission Limited (ATL) to BBB-/Neg from BBB-/Sta. This move follows ATL's planned acquisition of Reliance Infrastructure Limited's intergrated power generation, transmission, distribution and retail business in Mumbai. The financial profile of ATL is expected to deteriorate due to this move. ATL's adjusted net debt to EBITDAR is expected to rise to 4.2x FY19 ending Mar 19 (3.9x FY18) coming down to 3.4x in FY20. EBITDAR net-fixed charge cover and adjusted net-debt-to-fixed-assets ratio are expected to remain around 2.2x and 65% respectively, close to the negative rating triggers

¨      Moody's assigned Ba3/Sta to GCL New Energy Holdings Ltd. GCL is one of the largest solar farm operators in China, supported by a diversified asset portfolio with recurring cash flows, and currently enjoys favorable industry and policy environments. Its installed capacity reached 5.9GW, with grid-connected capacity of 5.4GW, in China at the end of 2017. GCL New Energy's short track record under its current scale and aggressive debt-funded expansion are key rating constraints. Starting with 616MW in 2014, expanding to 1.6GW in 2015, and further to 5.9GW in 2017. This aggressive and mainly debt-funded expansion results in a weak financial profile while dependence on short term funding has pressured liquidity. Moody's expects the company's leverage will remain high in the near term, given its target of adding 1GW annually on a net basis. Such an outcome would translate into annual capex of over RMB10bn 2017 and RMB7-9bn 2018-2019 under Moody's estimations. FFO/debt is estimated to reach 5.0%-7.5% and FFO/interest coverage 2.0x-3.0x in the next two (2) yrs. GCL New Energy is taking initiatives to reduce leverage and lengthen its debt maturity profile in addition to pursuing a new business strategy involving an asset-light model through the partial disposal of new capacity. Furthermore, parental support expected from GCL Poly, both operationally and financially boosts the ratings of the entity. GCL Poly is the world's largest solar photovoltaic manufacturing company with an established history. S&P has assigned BB-/Sta to GCL New Energy Holdings Ltd.

 

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