FW: RHB FIC Credit Markets Update - 16/5/18

 

 

Credit Markets Update

           

Risk assets declined as 10y UST yields edged higher to reach 3.07%.

MYR Credit Market:

¨      Rising UST yields takes its toll on EM Asia currencies and bonds. As global yields continue to push upwards, led by UST yields, risk assets including EM Asia assets saw declines. The MGS yield curve saw the 3y MGS yields rise +1.5bps to end the day at 3.71% while the 10y MGS saw yields unchanged at 4.16%.  While EM Asian currencies all fell against the USD, the MYR closed the day performing the best among them as it consolidated another -0.14% to close at 3.9562/USD. As global yields continue to show volatility, we expect investors to remain on the side lines especially with the upcoming results of the Malaysian GDP and balance of payments for 1Q 18 tomorrow.

¨      Trading in govvies remained at MYR4.9bn. Trades in the benchmark GIIs were mainly focused on the 3y GII 04/20 and newly issued 7y GII 04/20 where the securities recorded trades worth MYR120m and MYR350m respectively, to close mixed at 3.71% (-17.5bps) and 4.18% (+2.8bps). Among MGS benchmarks, the 7y MGS 03/25, 10y 11/27, 15y 11/33 and 20y 04/37, closed at 3.97% (+2.6bps), 4.16% (unchanged), 4.62% (+4.5bps) and 4.80% (unchanged) on trades worth MYR182m, MYR176m, MYR298m and MYR202m respectively. Other notable trades include off benchmarks MGS 11/26 which rallied -0.7bps to 4.24% on MYR139m trades while previous benchmarks MGS 02/21 and MGS 09/24, saw trades worth MYR461m and MYR249m, to close at 3.81% (-3.8bps) and 4.14% (+9bps).

¨      Corporate trades remained weak with only MY157m recorded. Issuances of power producers Southern Power Generation Sdn Berhad, SPG 10/23 and SPG 10/25, saw trades worth MYR30m and MYR20m to trade weaker at 4.63% (+10.8bps) and 4.85% (+8.7bps) while SEB 22s crossed the day at 4.62% (+17.7bps) on MYR10m trades recorded. Other infrastructure names, NGISB 23s and DANAINFRA 07/24 both saw trades of MYR10m and MYR15m to trade at 4.70% and 4.52% (+18bps).

APAC USD Credit Market:

¨      Risk assets declined as 10y UST yields edged higher to reach 3.07%. The UST yields continued their upward hike as the 2y UST and 10y UST both weakened to 2.58% (+2.7bps) and 3.07% (+7.0bps). The 30y UST yields pushed up +6.6bps to 3.20%. Investor took stock as the 10y USTs which breached the 3.0% psychological level leading to a decline in risk assets. Fed President Williams expressed his support of the Fed’s target of three (3) to four (4) interest rates this year, while Fed President Kaplan expressed little concern with the rise in UST yields. The USD as seen by the DXY Index rose 0.68% to close at 93.22. Middles Eastern geopolitics continues to concern markets, as Europe and Iran continue to discuss ways to maintain the P5+1 Joint Comprehensive Plan of Action. This occurs while a resolution to the recent cross missile attacks between Iran and Israel continue to be watched for and conflict between Israel and Palestine continue to boil over. OPEC, on the other hand, in its monthly report, said crude oil production rose 12k barrels a day to 31.9m barrels a day while petroleum stockpiles in the developed world fell to 9m barrels above the 5 yr average. Oil prices as seen by Brent crude oil prices continue to increase to 78.43/bbl (3 yr high). In economic news, the US retail sales for Apr rose 0.3% MoM (0.8% Mar) while the Empire State manufacturing index rose in May.

¨      The iTraxx AxJ credit spread increased +1.08bps to 75.19bps. Indian financial institutions Bank of India, ICICI Bank Ltd, and State Bank of India saw CDS spreads increase between +5.4bps and +9.0bps while Reliance Industries Ltd saw CDS edge up around +6.4bps. The sovereign of Indonesia, South Korea and the Philippines on the other hand saw CDS spreads spike up close to +3.8bps, +2.0bps and +0.9bps respectively. Korean issuers KEB Hana Bank, Korea Electric Power Corp, Kookmin Bank, SK Telecom Co Ltd, KT Corp, GS Caltex Corp and Industrial Bank of Korea saw CDS levels widen between +0.6bps and +2.6bps. Malaysia’s CDS on the other hand tightened about -1.2bps while Oversea-Chinese Banking Corp Ltd and DBS Bank Ltd saw CDS levels edge down approximately -1.9bps and -1.4bps respectively.

¨      Over in ratings, Moody’s moves down its outlook on Dr Peng Telecom & Media Group Co., Ltd. to Ba2/Neg from Ba2/Sta. The same occurred for its subsidiary, where Moody’s changed its outlook on Dr Peng Telecom & Media Group Co., Ltd. to Ba2/Neg from Ba2/Sta the outlook on Dr Peng Holding HongKong Ltd. The outlook change reflects Moody’s concern over the weakened operating performance of the group’s core broadband business amid intense competition and ongoing need to invest in network upgrades and acquisitions, which in turn it expects to effect cash flow generation. Intensifying price cuts by major telco operators has resulted in broadband revenue falling -8.1% 2017 (+11.9% 2016). Consequently Moody’s now expect revenue to decline by single digit percentages over 2018-19. Moody’s also expects capex to remain elevated at about RMB3bn pa over the next 2-3 yr. Coupled with weakened operating cash flow, Moody’s projects FCF to turn negative over 12-18mths. Debt leverage increased to 1.8x 2017 (1.1x 2016) and Moody’s expects it to deteriorate to 2.0-2.5x over the next 12 mths. Moody’s however also notes that the company’s adjusted EBITDA margin is expected to remain at 40-45% with cost-saving initiatives while its liquidity position is expected to remain strong with cash of RMB 3.1bn Mar 2018 and expected operating cash flow RMB2.5-3.0bn, sufficient to cover short term debt, dividend payment and capex of RMB3.4bn over 12 mths.