FW: RHB FIC Credit Markets Update - 23/1/18

 

 

 

23 January 2018

Credit Markets Update

           

US Government Shutdown Resolved; BNM Reserves USD103bn.

MYR Credit Market:

¨      MGS consolidates across the curve. The MGS curve saw yields rise across the tenures on the back of the spike in global yields the day before. The 3y MGS fell to 3.36% (+1.2bps) and the 10y MGS weakened +1.3bps to 3.95%. The 20y and 30y MGS fell +1.0bps and +0.4bps to 4.64% and 4.86% respectively. Expect investors to remain on the side-lines as focus to shifts towards the upcoming BNM MPC meeting. The MYR continued to see a rise as the US government shut down weighted on the USD. The MYR closed at 3.9327/USD (0.11%).

¨      Govvies trading activity weakened as only MYR1.5bn was recorded. In a context of low trading in the govvies, a large amount of this trade was centred on the off the run MGS 06/31, which saw MYR501m traded at 4.44%, +4.5bps higher than its previous trade. The benchmark 5y GII 04/22 saw increased trading of MYR213.9m crossing the day at 3.89% (+0.5bps). Secondary flows in the corporate bond/sukuk space consolidated to MYR342m. Short dated Cagamas Berhad sukuks and bond CAGAMAS 10/18 and CAGAMS 11/18 saw a total of MYR100m change hands at 3.65% (+4.5bps) and 3.57% (+8.8bps). Short-dated DANAINFRA 10/20 saw MYR50m of trades at 3.93% (-1.4bps). Among financial names, ALIANCEB 10/25 subdebt callable 10/20 and the RHBBANK 03/39 Hybrid T-1 Callable 03/19 were traded at 4.86% (-1.7bps) and 4.62% (-8.2bps) on trades worth MYR20m each.

¨      Over in economic news, BNM announced its international reserves grew to USD103bn as at 15 Jan 18 (USD102.4bn as at 29 Dec 17), sufficient to finance 7.1 mths of retained imports and 1.1x the short term external debt.

¨      Over in ratings, MARC Ratings affirmed the AAA/Sta rating on both Berjaya Land Berhad's (BLand) programmes guaranteed by Danajamin Nasional Berhad and OCBC Bank (Malaysia) Berhad respectively. The affirmed ratings reflect the unconditional and irrevocable guarantees provided by Danajamin and OCBC Malaysia respectively. BLand continues to face challenges in its foreign property developments. From the suspended MYR1.0bn residential development joint venture in Jeju, South Korea, MYR374.5m has been recovered with the remainder to be recovered through court proceedings. MARC expects that with the recent change in BLand's key management team, the group is expected to refocus its property development activities. BLand's hotels and resorts operations have generally improved on the back of higher average room rates which have been a source of liquidity though BLand's consolidated financial profile remains dominated by its subsidiary Berjaya Toto Berhad, which accounted for about 84.5% of operating profit for the financial year ended Apr 2017 (FY17). BLand's revenue, largely comprising dividend income, declined to MYR70.4m FY17 (MYR140.8m FY16). This was due to lower dividend income from its property development, and hotels and resorts business. The pre-tax loss was -MYR46.4 FY17 (pre-tax profit MYR196.1m FY16). The sums of the rated MYR650m of programmes are fully drawn down, with the first repayment of MYR175m scheduled in Dec 2018, which could be rolled over.

¨      RAM Ratings assigned a final AA3/Sta rating to Medini Iskandar Malaysia Sdn Bhd's (MIMSB). MIMSB is the master developer of Medini Iskandar Malaysia, a 2,230-acre township set in the heart of Iskandar Puteri. About MYR1.4bn has been invested on developing infrastructure in Medini, which will be beneficial to future developments in the township. MIMSB was considered as a government-linked entity by the rating agency by virtue of the 52% effective stake in the Group held by Khazanah Nasional Berhad and strong relationship with Khazanah which resulted in a ratings uplift. The terms of the proposed sukuk programme requires MIMSB to pledge assets with a market value of at least 1.67x the sum of any outstanding sukuk throughout the tenure of the programme. The Group may discharge or substitute these assets on condition that the security coverage and rating are not affected. On a stand-alone basis, MIMSB's credit profile is supported by its unique position as the master developer of Medini, enjoys a host of fiscal and non-fiscal incentives unique to the region, with an approved gross floor area (GFA) of about 45m sq ft. MIMSB suffers from its short track record in property development, and is expected to increase gearing to fund its upcoming development plans. Over 2012-2026, MIMSB aims to raise MYR1.15bn to complete projects with a total GFA of 12m sq ft. Based on the planned drawdown and repayment schedule, MIMSB's borrowings are anticipated to peak at about MYR1.1bn. Annual funds from operations debt coverage is expected to average below 0.10x, and MIMSB will not generate any free operating cash flows until around 2020.

APAC USD Credit Market:

¨      US Treasuries took a breather after Senate moved to end 3-day shutdown. A continuing resolution bill to the US spending bill has been signed which will fund its operations through 8^th Feb lifting the government shutdown. The USTs were mostly unmoved as investors seen relatively unfazed by the on-going political development in the US while concentration remained on the release of US GDP for the period of 4Q17 at the end of the week. The 2y UST further weakened as yields lifted a tad higher to 2.07% (+0.44bps) while yields on the 10y UST retreated to 2.65% (-0.73bps). The DXY continued to decline as it closed -0.19% lower to 90.4. Elsewhere, IMF has raised U.S. economic growth outlook for 2017 to 2.3% from 1.9% and for 2018 to 2.7% from 2.1% citing the positive impact of the new tax bill which should spur growth in the short to medium term. The IMF predicted that the tax plan will ease growth after 2022, offsetting earlier gains, as some of the individual cuts expire while attempting to curb budget deficit. Global economic growth forecast has also been revised upwards for 2017 from 3.5% to 3.7% and from 3.7% to 3.9% in 2018. Meanwhile, BoJ policy meeting will be the highlight of investors later today as investors anticipate possible changes in policy stance.

¨      Asia ex Japan CDS largely unchanged. The iTraxx AxJ IG credit spreads unchanged at 63.2 (+0.3bps). Leading the tightening in the CDS space was GS Caltex Corp. where levels decreased close to -1.7bps, followed by Samsung Electronics Co. Ltd. and SK Telecom Co. Ltd. which saw CDS falling about -1bp -0.9bps respectively. South Korea Fi Woori Bank, however, saw a fall as CDS spreads deteriorated +3.2bps to lead the widening in the CDS space. This was trailed by Singapore Telecommunications Ltd. with levels edged up approximately +3.1bps.

¨      Fitch assigned BB-/Sta rating on Central China Real Estate Limited (CCRE). The rating reflects on its healthy financial profile as translated by its low leverage with net debt/adjusted inventory of 27% as at 2016. CCRE aggressive expansion strategy over the next two (2) yrs is expected to pressure its current rating with leverage to hover above the 30% level, currently with a 4-yr average of 20%. In 9M17, CCRE replenished a sizeable gross floor area of land bank of CNY9.4bn, or a land-acquisition-to-contracted sales value ratio of 0.6x, exceeding the 0.2x-0.3x in previous years. CCRE's leverage rose to 27% end-2016 from 17% end-2015. Fitch expects leverage to stay above 30% for the next three (3) yrs on accelerated land acquisitions. Contracted sales recorded rose 51% YoY 2017 to CNY30.4bn (CNY20bn 2016) driven by increased penetration and better sell-through rates in lower-tier cities in Henan. Fitch estimates EBITDA margin to be between 16-17% in 2017-2019. EBITDA margin fell from 25% in 2014 to 17% in 2016 due to accelerated inventory clearance 1H15 though Fitch believes EBITDA margin will be supported by higher contracted sales ASP in 2017 and would stabilise over time should the projects been recognised.

¨      Moody's assigned a B1/Sta rating to Golden Energy and Resources Ltd. (GEAR). Moody's opines that the rating is supported by 67% controlling interest in PT Golden Energy Mines Tbk (GEMS), GEM's long reserve life and low cost position, as well as strong liquidity profile of both GEAR and GEMS though capped by the execution risk associated with the capacity expansion at GEMS. Debt service at GEAR will be dependent on dividends from GEMS as GEAR is structurally subordinated to the creditors and cash flows at GEMS as GEAR only receives around 60% of dividends declared by GEMS. Following the proposed USD300m bond issuance, of which USD200m is to be utilised for potential acquisitions. Moody's projects GEAR's interest cover from the dividends received from GEMS will be in the range of 1.2–1.3x. Moody's also expects that adjusted debt/EBITDA will be in the range of 2.5x – 3x over the next 12-18 months.

 

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