FW: RHB FIC Credit Markets Update - 12/4/18

 

 

12 April 2018

Credit Markets Update

           

FOMC Minutes Suggest Hawkishness; 20y GII Reopening Later Today.

MYR Credit Market:

¨      The MGS yield curve remained muted with the exception for 15y and 20y MGS which saw yields picking up by +1.4bps and +4.5bps to close at 4.43% and 4.57% respectively. The 3y and 10y MGS both remained flat to close firmly at 3.47% (+0.5bps) and 3.97% (+0.4bps) respectively. Meanwhile, the auction for benchmark 20y GII 08/37 reopening will close later today. The MYR closed lower against the USD yesterday at 3.8745USD (-0.14%) after IPI data showing slower growth, despite Brent crude oil prices continued to improve, ending at USD72.06/bbl (+1.4%) on the back of Saudi’s recent announcement and the US President Trump weighing options for military strike against Syria and later on oil prices slightly picked up even further after the news about Saudi interception of Yemen’s rebel missiles released.

¨      Govvies trading volume halved to MYR1.3bn after recording significant jump the day before (MYR2.6bn last trading session). Off-benchmark MGS 07/24 was the most traded after MYR252m changed hands to close at 3.87% (+0.4bps) while GII 09/30 saw yield picking up +4.5bps to close at 4.59% after recording MYR150 trades. Other notable trades include benchmarks 5y GII 04/22 and 15y GII 06/33 which saw trading volumes of MYR150m and MYR100m to end the day at 3.83% (+0.3bps) and 4.56% (+1.6bps) respectively.

¨      Trading of secondary corporate bonds/sukuks rose to MYR1.1bn. Last trading session saw most securities in the secondary corporate space rallied, led by GOVCO 06/23 which saw yield declined -5.2bps to close at 4.16% after MYR200m changed hands. Government-guaranteed PTPTN 03/24 and AAA rated KHAZANAH 03/24 both recorded MYR90m and MYR60m trades also rallied by -3.0bps and -3.7bps to end the trading session at 4.31% and 4.27% respectively. Meanwhile, GOVCO 02/24 saw MYR50m transacted closed at 4.22% (-5.0bps).

¨      On the economic front, Malaysia Industrial Production (IP) index eased to 3.0% YoY in Feb 18 due in part to shorter working days and slower manufacturing and electricity outputs, lower than revised IP Index for Jan 18 of +5.4% YoY. Manufacturing sales performance also slowed down in Feb, growing by 4.9% YoY, lower than 10.8% in Jan.

¨      Over in ratings, RAM Ratings reaffirmed Sasaran Etika Sdn Bhd (SESB) at AA1/Sta reflecting the company’s robust cash flow-generating aptitude and sustained debt-servicing ability supported by a steady inflow of Availability Charges. SESB has been receiving a predictable stream of monthly Availability Charges under its concession agreement with the Malaysia government and International Islamic University Malaysia (IIUM) following the successful delivery of IIUM residential colleges in Oct 14. RAM added that as of Dec 17, the receipt of Availability Charges from IIUM remained timely. Based on RAM’s sensitivity analysis, SESB should be able to maintain a DSCR of at least 1.50x throughout the remaining tenure of the bonds which is commensurate to its current rating band. In terms of collection risk, it is deemed minimal since the Malaysia government through Ministry of Higher Education is the ultimate obligor of the concession payments to SESB. The concession awarded to SESB is for 22.5y for design, construction, completion and maintenance of residential colleges of IIUM in Pahang.

 

 

APAC USD Credit Market:

¨      FOMC, inflation and Syria reignite investors’ concerns. The minutes to the March FOMC showed members of the FOMC wary of above average growth and strengthening in the labour market believing in inflationary rise over the coming months. More importantly, members of the FOMC contemplate the revision of the statement language from accommodative stance to being neutral or restraining in relation to economic activity. This as the YoY CPI came in stronger than expected at 2.4% YoY Mar (2.2% Feb). Despite this the USD as seen by the DXY continued to remain largely unchanged at 89.54 (-0.04%). In the geopolitical front, following the failure to reach a compromise between Russia and other members of the UN Security Council on a response to the use of chemical weapons in Syria, the US President purportedly threatened unilateral missile strikes on Syria. This has raised geopolitical tensions, as Russia has threatened to retaliate to defend its ally, Syria. The short end of the USTs remained largely unchanged as the 2y UST remained unchanged at 2.31% while the long end of the curve were supported as the 10y UST rallied to 2.78% (-2.0bps) and the 30y UST saw yields fall to -2.6bps dropping just below 3.00%. Over in economic news, the CPI for Mar were within expectations at 2.4% YoY (+2.2% Feb) though it disappointed expectation on a MoM basis at -0.1% (+0.2% Feb).

¨      The iTraxx AxJ IG credit widened to close at 76.76bps (+0.28bps). Leading the widening of CDS were the sovereigns of Indonesia, Malaysia and the Philippines, all of which saw CDS levels increase between +1.2bps and +2.7bps. Hongkong Land Co Ltd saw CDS spreads pick up close to +1.8bps whereas Export-Import Bank of China and PCCW-HKT Telephone Ltd saw spreads edge up around +1.0bp. Korean corporates Samsung Electronics Co Ltd, Hyundai Motor Co, SK Telecom Co Ltd and KT Corp all saw spreads widen between +0.5bps and +0.7bps. Leading the tightening in CDS spreads, on the other hand, were Woori Bank and Singapore Telecommunications Ltd, both which saw CDS spreads edge down about -1.4bps. Indian financial names Bank of India and State Bank of India saw CDS spreads compress roughly -0.9bps and -0.8bps respectively while Hutchison Whampoa Ltd, Petroliam Nasional Bhd, and POSCO saw CDS levels edge down between -0.6bps and -0.8bps.

¨      Moody’s upgraded Future Land Development Holdings Limited to Ba2/Sta from Ba3/Pos. The rating upgrade reflects Moody’s expectation that Future Land’s operating scale will grow and subsequently improving its credit profile over the next 12-18 mnths. The rating agency expects Future Land’s sales to grow by about 40% YoY to CNY170-180bn this year supported by its competitive position on the back of China’s residential development market consolidation. Moody’s expects revenue to grow 55-60% YoY to RMB60-65bn in 2018 while projecting gross margins at 32-34% and land acquisition spending not to exceed 50% annual contracted sales. Consequently, Moody’s expects adjusted revenue/debt and adjusted EBIT/interest coverage at 95-100% and 4.0-4.5x over the next 12-18mths. The stable outlook reflects expectation that the company will maintain disciplined approach to land acquisition, stable financial metrics and sound liquidity level over the next 12-18 mnths.

¨      Moody’s placed Lippo Karawachi Tbk PT on review for downgrade from B1/Sta. The same occurred for Theta Capital Pte Ltd, a wholly owned subsidiary of Lippo Karawachi, which also guarantees its bonds. This follows the delay in financial reporting and failure to fulfill reporting obligations under the indenture of its USD notes, leading to concerns on corporate governance. This is the third time financial reporting has been delayed over the last year. Moody’s also expects weaker liquidity of the holding company over the next 12 mths, owing to short-term debt of IDR1,336bn, though a portion of it is extendable syndicated loans, and Lippo Karawachi still has undrawn credit facilities.

¨      Moody’s assigns B1/Sta to China Hongqiao Group Limited. The rating reflects Hongqiao’s long operating history and leadership position in aluminium production in China. In addition, Hongiqao’s vertically intergrated business model has resulted in strong profitability and high business growth. Consequently, the company enjoys stronger profitability compared to peers and is expected to maintain its cost advantage with EBITDA margins of 21% 2018-19 forecasted by Moody’s despite the cyclicality of aluminium and raw material prices. Moody’s expects debt/EBITDA to rise to 4.1x 2018-19 (2017: 3.5x), with assumed average aluminium price of RMB11,695 per tonne. The rating is constrained by the cyclicality in the aluminium industry, frequent changes in Hongqiao’s auditors and late publication of its 2016 financial statements.