FW: RHB FIC Credit Markets Update - 25/1/18

 

 

25 January 2018

Credit Markets Update

           

Markets Look To BNM and ECB; Wharf (Holdings) Downgraded to BBB.

MYR Credit Market:

¨      Trading volume moderated as investors stayed on the sideline with focus on BNM MPC. The MGS curve saw yields remain largely unchanged as the belly of the saw an unwinding of the selloff seen a day prior. Weak liquidity could be partly blamed on these recent shifts. The 3y MGS remained at 3.37% while the 10y MGS rallied to 3.93% (+0.6bps). The 5y and 7y MGS rose -13.1bps and -7.7bps to 3.54% and 3.90% respectively. As the USD continued to be pressured downwards, fuelled by speeches by the US Treasury Secretary and Commerce Secretary at the World Economic Forum and on rising concerns of trade tensions of US and China, the MYR continued to rally along with the currencies across EM Asia. The MYR closed at 3.9130/USD (+0.35%). 15y MGS 04/33 with planned auction size is MYR2.5bn with an additional MYR1.0bn to be privately placed will be closely watched by market players.

¨      Govvies trading activity picked up slightly to see just above MYR1.9bn recorded. A large portion of govvie trades were focused on the short end of the curve which accounted for MYR1.1bn (55%) of total govvie trades. Continued interest occurred especially in the 5y benchmark GII 04/22, which rallied -0.7bps to 3.89% on MYR356m trades despite the weakening of the benchmark MGS. Secondary flows in the corporate bond/sukuk space picked up to a healthy MYR416m. Notable trades include those of issuer MEX II Sdn Berhad  which saw MEX II 29s and MEX II 32s record trades of MYR15m respectively at 5.14% (-5.2bps) and 5.41% (-4.4bps). YTL POWER 27s recorded MYR40m trades at 4.91% (+16.2bps) while shorter dated UMWH 22s and GAMUDA 22s and  saw trades of MYR20m and MYR30m each traded at and 4.61% (-0.6bps) and 4.70% (-0.3bps). Among financial names, PUBLIC 10/23 subnotes callable 10/18 were traded at 4.33% (+4.1bps) and DANAJAMIN 10/27 sub sukuks callable 10/22 closed at 4.72% (-1.2bps). Both saw trades of MYR20m and MYR30m respectively.

¨      Over in economic news, Malaysia's headline CPI rate of Malaysia pushed higher to 3.5% YoY Dec 17 (3.4% Nov 17). The rise in inflation was driven by increases in F&B and transportation. The full year 2017 saw headline inflation rise to 3.7% (2.1% 2016) broadly in line with RHB Economics estimates of 3.8%. As for 2018, RHB Research is raising headline CPI forecast to 3%, on expectations of elevated crude oil prices and resilient domestic demand. 

¨      Over in ratings, RAM Rating reaffirmed the AA3/Sta rating of Perbadanan Kemajuan Negeri Selangor (PKNS). The reaffirmation reflects its view that PKNS will enjoy extraordinary support from the Selangor State Government while it maintain its sturdy balance sheet and will gradually restore its debt coverage on the back of its improving property sales. Despite a heavier debt load of MYR1.48bn Jun 17 (MYR1.07bn Dec 16), gearing and net gearing were 0.25x (0.18x Dec 16) and 0.16x (0.09x Dec 16). The rating agency expects gearing to remain below 0.4x with additional financial flexibility from its 9,440-acre land bank. FFODC fell to 0.02x Dec 16 (0.05x Dec 15) due to lacklustre property sales, while visibility of PKNS business direction and earning prospects have been hampered by insufficient information. PKNS has committed to delivering 13,000 units of affordable homes under the Rumah Selangorku programme by 2020, which the Agency is likely to substantially subsidise. This will, crimp its profit margins. To compensate for its lower-margin offerings, PKNS has lined up several large-scale high-end projects. While their slow rollout alleviates concerns over hefty funding needs in the near term, these projects are viewed as carrying high execution and demand risks, Meanwhile, although frequent changes in the PKNS's top leadership in the past three (3) years may affect the momentum of execution of its strategies, PKNS is supported by a governing committee that oversees its business plans.

APAC USD Credit Market:

¨      US Treasuries yields reversed following Mnuchin's remarks on the USD. Comments from US Treasury Secretary Mnuchin during a press conference at the World Economic Forum in Davos surprised market participants after he showed support for weaker USD, citing US global trade would benefit from lower USD. Heightening trade tensions was seen between the US and China along with the move by Trump administration the day before to impose tariffs on imported residential washing machines and solar panels. The USTs weakened and saw yields rise across the curve. Despite the 5y bond auction recorded earlier in the trading session, the 2y, 5y and 10y USTs were seen paring gains after yields rose to 2.08% (3.6bps), 2.43% (+2.2bps) and 2.65% (+3.34bps) respectively. The longer tenure 30y note also weakened as yields surged past the 2.90% level, closing the day at 2.93% (+3.4bps). Over in economic data, existing home sales Dec 17 declined to 5.57m (consensus: 5.7m) from revised print of 5.78m on annualised basis. FFHA House Price Index Nov 17 was 0.4% MoM, from a revised 0.6% Oct 17. Markit US Manufacturing PMI improved to 55.5. Investors will now concentrate on the minutes of the ECB's first policy meeting in 2018 later today though muted action is widely expected.

¨      Asia ex Japan CDS unmoved. The iTraxx AxJ IG credit spreads unchanged at 63bps. Leading the tightening in the CDS space was Singapore Telecommunications Ltd. as levels plunged approximately -3.4bps. This was followed by ICICI Bank Ltd. with spreads reduction of about -1.3bps. Seeing a similar decline rate include Swire Pacific Ltd., Bank of India and State Bank of India/London of around -1.1bps. Over in sovereign space, CDS levels for Indonesia fell further as it rallied close to -1.5bps, followed by Malaysia shedding spreads of another -0.6bps in estimation. Leading the widening, on the other hand, was Hutchison Whampoa Ltd. as CDS levels increased approximately +1.1bps. This was followed by Export-Import Bank of China which saw levels reversing close to +0.7bps.

¨      Moody's has upgraded Emeco Holdings Ltd. rating from Caa1/Pos to B3/Sta. The upgrade reflects Emeco's improving credit profile from increased earnings and margins in the last three (3) quarters along with the completed acquisition of Force Equipment, which was funded by equity raising that would further support its credit profile. As 2Q FY18, Emeco recorded improved operating EBITDA of AUD35.8m (AUD31.2m 1Q FY18) while operating EBITDA margin rose from to 43% (35% 1Q FY18). Moody's believes that the acquired business would ensure Emeco maintains its current rating comfortably as adjusted debt/EBITDA expected to sustain between 3-3.5x in FY 18.

¨      Moody's downgraded Wharf (Holdings) Limited to BBB/Sta from A- with a Ratings Watch Negative. The negative rating watch was placed on Wharf following the announced spinoff of the majority of its HK investment properties into a separately listed company. Wharf still has a property development business in China and HK (contracted sales CNY31bn 2016) and logistics business (EBITDA HKD1bn 2016) but main assets are in the investment properties (IP) segment valued at HKD79bn and generating rental income of HKD2.4bn 2016. The latter segment is materially reliant on rental income from the single asset Chengdu IFS whereas its other large projects will be fully operational in 2018, with earnings material from 2020, as operations mature. Fitch believes wharf has a healthy financial profile, given its operational flexibility to mitigate the high risk profile of its development properties in China, but also notes that Wharf's IP business in China is weaker than HK operations because of asset concentration, business cyclicality and competition. Wharf returned to a net cash position after the demerger and Fitch expects it to remain in net cash position in 2018 assuming no new acquisitions. Recurring EBITDA/interest expense to fall to around 3x 2017 (7.5x 2016) due to the loss of rental income from the spin off HK properties. Recurring EBITDA interest coverage is expected to be low due to its higher cost from its development property loans, though this is expected to strengthen over the next two (2) years as the new Chongqing and Changsha IFS malls mature operationally and as land acquisition expenditure has continued to decline in its property development business. Fitch expects Wharf's leverage to remain minimal with net debt-to-adjusted assets remaining in the low single digits as it completes its capex for the IPs under development.

¨      Fitch has published a B/Sta rating on Gangtai Group Co. Ltd. The rating on the China-based company reflects its diversified jewelry brand portfolio, expansion into other business segments and improving credit profile though is capped by limited access to cash from its 39.2%-owned operating entity Gangtai Holdings. This along with short history of operating in the industry, as well as high leverage. Fitch opines that the moderate to weak linkage between the two entities would only allow Gangtai Group's access through its associate's dividends. Fitch estimates Gangtai Group to earn dividends of CNY10-15m per annum and EBITDA of CNY0.5-1bn a year between 2017 and 2020. Fitch forecasts the jewelry retailer to generate 51% of group revenue and 57% of gross profit in 2017 (79% of revenue and 57% of gross profit in 2016). Fitch expects that diversification benefit would support its credit profile where the property business seen likely to contribute the most to Gangtai Group's revenue and EBITDA from 2018. Fitch also considers Gangtai Group's credit metrics to be weak. FFO fixed-charge coverage is low of about 0.6x, EBITDA gross interest coverage is 0.8x 2017 while leverage is expected to remain high. FFO net leverage is expected at 17.5x and net debt/EBITDA of 13.3x. Fitch forecasted Gangtai Group to generate negative FCF of CNY400-700m a year between 2017 and 2018 due to capex on residential and commercial property development and may only turn positive from 2019. Fitch also believes FFO net leverage to fall to about 5-8x and FFO fixed-charge coverage to rise between 1.2-2.3x in 2018-2020 period following the completion of residential property development projects and the injection of acquired Buccellati.

 

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