FW: RHB FIC Credit Markets Update - 26/1/18

 

 

 

26 January 2018

Credit Markets Update

           

BNM Hikes OPR 25bps to 3.25%; ECB Left Rates Unchanged.

MYR Credit Market:

¨      BNM hikes OPR 25bps. Following a more hawkish statement made in its Nov meeting, the BNM MPC raised its policy rates a further 25 bps to 3.25%. The reason cited for this increase was a pre-emptive move to prevent the build-up of risks that could arise from low interest rates for a prolonged period of time while also expressing expectations of a steady growth path for the economy. We opine the interest rate adjustment made to OPR is more of a normalisation. Looking ahead, we expect OPR to potentially enter into a rate pause mode after the recent hike. We are maintaining our OPR forecast at 3.25% for 2018.

¨      The MYR pushed below 3.9000/USD. In the wake of the rate hike, the MYR continued to rally as it ended the day at 3.8855/USD (+0.71%). The MGS saw a rally in the 3y and 10y MGS, ending at 3.35% (-1.7bps) and 3.92% (-0.6bps). The 5y MGS weakened to 3.62% (+7.8bps). Focus of the market should now rest on the MYR2.5bn reopening of the 15y MGS 04/33.

¨      On the back of BNM MPC's decision, trading saw a pick up. Govvies trading activity rose to record just under MYR2.7bn trades. Notable trades were again seen in the 5y space as the benchmark GII 04/22 saw MYR526m change hands closing at 3.88% (-0.8bps) while the benchmark MGS 3/22 recorded MYR100m trades at 3.62% (+7.8bps). As expected, the benchmark 7y, 10y, 15y and 20y also saw increased activities as the MGS 09/24, MGS 11/27, MGS 04/33 and MGS 04/37 saw trades of MYR135m, MYR124m, MYR180m and MYR162m. Off-benchmarks MGS 07/21 and MGS 06/28 also saw trades of MYR133m and MYR220m, at 3.47% (-10.7bps) and 4.07% (-3bps).

¨      Secondary flows in the corporate bond/sukuk space saw trades weaken as only MYR280m changed hands. A large portion of it, MYR170m occurred surrounding the newly printed SAJ Capital Sdn Bhd sukuks particularly the SAJC 01/29 and SAJC 01/30. Southern Power Generation Sdn Bhd bonds saw increased activity as SPG 04/31, SPG 10/31 and SPG 10/33 were traded at 5.16% (-1.8bps), 5.20% (-6.6bps), and 5.35% (+0.1bps) on trades totalling MYR21m. MYR20m of PKNS 05/20 were traded +1bps weaker at 4.71%.

¨      Over in the primary space, Danga Capital Berhad issued MYR1.5bn 15y sukuks from its AAA rated MYR10bn programme. The sukuks were issued at profit rates of 4.94%, 50bps over the last traded 15y MGS. Liziz Standaco Sdn Berhad tapped the market for MYR130m 5y bonds from its MYR2bn programme. The unrated bonds were issued at coupon of 10.70%, 708bps over the corresponding benchmark MGS. SAJ Capital Sdn Berhad came to market with a total issuance of MYR650m from its AA3 sukuk murabahah programme. The sukuks were issued in eleven (11) tranches with maturities ranging from 2-12 yrs and profit rates between 5.07% and 5.67%.

¨      Over in ratings, MARC has affirmed its AA-_IS/Sta rating on MMC Corporation Berhad (MMC). The rating affirmation reflects MMC's strong competitive position in port operations, engineering and construction, as well as power generation supported by long term concessions for ports and power operations, sizable government-related infrastructure contracts. For 9M17, MMC's consolidated revenue increased 5.4%YoY to MYR2.9bn, driven by the work progress on the Klang Valley Mass Rapit Transit Sungai Buloh Serdang Putrajaya Line (KVMRT-SSP Line) and Langat Sewerage Treatment Project as well as from the increase in volume handled by PTP and Johor Port. The pre-tax profit was lower at MYR267m (9M16: MYR368m), due to a one-off SMART tunnel impairment charge of MYR98m. The engineering and construction division continues to benefit from the ongoing large domestic infrastructure projects with order books of MYR17.6bn Sep 17 which provides earning visibility through 2022. Its port operations business has ensured MMC is the largest domestic port operator in terms of container handling, and the group has continued to invest in its ports to increase handling capacity and improve operating efficiencies. With revenue from dividend income and construction revenue, MMC generates CFO of MYR353m which translates to CFO interest cover of 2.02x 2016 (1.94x: 2015). Consolidated borrowings stood at MYR9bn 9M17. While MMC has fully issued the RM1.5 billion sukuk under its rated programme, it has strong financial flexibility in the form of ownership of approximately 5,000 acres of land, and unencumbered cash balance of about MYR706m 9M17, in addition to approximately MYR2.5bn in unutilised credit lines.

¨      MARC also affirmed its AAA-_IS/Sta rating on PETRONAS Dagangan Berhad (PDB). DB's ratings are equalised to the ratings of its parent, Petroliam Nasional Berhad based on assumption of strong parent-subsidiary relationship between entities. During 9M17, PDB's retail sales volume declined 5.0%YoY partly due to temporary station closures for renovation and upgrading activities. Commercial sales volume increased 1.0%YoY 9M17 on the back of higher growth in the diesel and aviation fuel segments. Revenue rose 26.6%YoY to MYR19.7bn owing to higher average selling prices of its products. Net profit rose 84.4%YoY to MYR1.3bn, boosted by a disposal of its overseas subsidiaries. CFO declined to MYR1.1bn 9M17 (9M16: MYR1.3bn) due to higher settlement of payables. The lower CFO, coupled with higher dividend payment resulted in a decline in FCF to MYR485.3m (9M2016: MYR81.2 m). The company's liquidity position remained strong with cash balances increasing to MYR3.5bn Sep 17.

APAC USD Credit Market:

¨      US Treasuries rallied; ECB maintained monetary policy unchanged. As expected, ECB left benchmark interest rates unchanged. The moderately dovish toned Draghi had once again reiterated the need to remain accommodative, citing the current policy is expected to continue supporting growth in the Eurozone as well as gradual pickup in inflation level in the medium term. Draghi insisted that rates would continue to stay low beyond Sep 18 after the QE program ends. Meanwhile, President Trump assured WEF participants a stronger greenback will remain a priority. Following this, buttressed by decent 7y note auction, USTs ended the day on a higher note which was mostly led by longer end of the curve. The 10y and 30y USTs rallied to 2.62% (-3bps) and 2.88% (-4.7bps) respectively. The 2y UST, however, paused at 2.08%. USD regained momentum as DXY saw a slight uptick to close the day at 89.4 (+0.21%). Over in economic data front, initial jobless claims for the period of 20^th Jan rose from a revised figure of 216k to 233k though it was below projected level of 235k. New home sales for Dec 17 on annualised basis dropped to 625k (consensus: 675k) from updated figure of 689k. While focus of the market continued to be on Fed FOMC meeting next week, investors will now concentrate on the release of US GDP data for 4Q17 later today where growth is forecasted to slow to 3% from 3.2% recorded previously.

¨      Asia ex Japan CDS inched higher. The iTraxx AxJ IG credit spreads rose slightly to 63.8bps (+0.8bps). Leading the rally in the CDS space was Bank of India as levels edged lower approximately -0.9bps. Leading the widening, on the other hand, was Singapore Telecommunications Ltd. as CDS spreads gained approximately +1.7bps. This was followed by Fis China Development Bank, Korea Development Bank, Export Import Bank of Korea and Export Import Bank of China, recording similar rate increase of about +1.3bps. Over in sovereign space, CDS levels South Korea rose close to +1.6bps, followed by China edging higher of around +1.4bps. Malaysia and Philippines were seen paring gains from the previous day as both levels elevated at the same rate of about +1.3bps.

¨      S&P has assigned UTAC Holdings Ltd. with a B/Sta rating. This follows restructuring and reduced debt obligations, lifting it from bankruptcy. The rating is supported by UTAC's position as a midsize outsourced assembly and test (OSAT) business in a volatile industry with limited FOCF due to high capex requirements. S&P, however, believes its sound cost position and profit margins should ease these limitations. S&P expects the restructured balance sheet allows UTAC to implement its growth plans in the next couple of years despite limited near-term liquidity constraints while at the same time firmed its position in the industry with a 3.5% market share. Fitch also estimates UTAC to maintain steady profitability with EBITDA margins of 22%-25% as it has shown the ability to retain its customers from the restructuring and is expected to increase volumes with renewed expenditure on production capacity. Restructuring should allow debt/EBITDA remain below 4x and EBITDA interest coverage of above 3.5x. UTAC managed to reduce its debt obligations to USD665m with 8.5% coupon from approximately USD1.1bn with a 10% interest rate. Fitch sees its cash balances of USD180m recorded in end 2017 would also support near-term flexibility.

¨      Fitch has published ratings on Taizhou Huaxin Pharmaceutical Investment Co. Ltd. (THPI) with a BB+/Sta. THPI's ratings are credit linked, but not equalised, with those of Taizhou municipality in eastern China, reflecting ownership by Taizhou government and its strong level of control and oversight, as well as the strategic importance of THPI to the municipality and the development zone in which THPI operates. THPI's liabilities are not automatically absorbed by the government since THPI is registered as a state-owned limited liability company and is 71.1% owned and directly supervised by Taizhou State-owned Assets Supervision and Administration Commission (SASAC). Taizhou SASAC plans to repurchase the remaining stake by 2019 though the government currently has no intention to dilute its shareholding in THPI. The municipal government and the Taizhou Medical High-tech Industry Development Zone's (Taizhou HTDZ) management committee appoint THPI's board members. THPI is Taizhou's largest government-related entity (GRE) by total assets the Taizhou HTDZ's contribution to the city's GRP is limited to about 5%. THPI has established close financial ties with the Taizhou municipality, which provides a combination of recurring injections and subsidies. The government injected CNY3.4bn in capital between 2015 and 2016, while subsidies averaged 26% and 139% of the company's revenue and total profit, respectively.

 

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