Maybank IB Research. Fixed Income. 4Q12 MYR Fixed Income Outlook. Market Focus 1 October Malaysian rates market

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1 Maybank IB Research PP16832/01/2013 (031128) Market Focus 1 October 2012 Fixed Income 4Q12 MYR Fixed Income Outlook Malaysian rates market Tan Chee Wee tan.cwee@maybank-ib.com (603) MGS curve bull flattened in the first month of 3Q12 but has since bear steepened, as sentiments moved from risk-off to risk-on over the time period. MGS: Yield Curve Movements Chia Suil Fun suilfun.c@maybank-ib.com (603) Source: BNM Indicative Yields The MYR IRS curve experienced the same movements as MGS in 3Q12. IRS: Yield Curve Movements Source: Bloomberg

2 Sovereign bond supply Larger govvies issuance in The recent Budget 2013 and Economic Report indicated that total gross MGS and GII issuances this year will be MYR96.2b, out of which MYR2.2b is from a switch auction of an existing MGS. This means the remaining MYR94b will come from the auctions listed in the auction calendar. Further details were given in the Economic Report by MOF, which stated that of the MYR96.2b, MYR54.2b will be in the form of MGS and MYR42b in GII issuances. Of the MYR54.2b MGS issuances, MYR21b are through new issuances, MYR31b through re-openings and MYR2.2b through a switch auction of an existing MGS. Meanwhile, the MYR42b GII issuances comprise of MYR26.5b new issuances and MYR15.5b re-openings. Based on the data above, we estimated the expected issuance sizes for the remaining auctions as shown in the table below. Date Size (RM'm) Average Yield Sources: BNM, Maybank-IB estimates in yellow Bid-tocover ratio High Low 7-year Re-opening of MGS 09/ % 12-Jan-12 3, % % 3.400% 3.5-year New Issue of GII (Mat on 07/15) 02-Feb-12 4, % % 3.170% 10.5-year New Issue of MGS (Mat on 08/22) 14-Feb-12 4, % % 3.403% 5.5-year New Issue of GII (Mat on 08/17) 29-Feb-12 3, % % 3.295% 15-year New Issue of MGS (Mat on 03/27) 14-Mar-12 3, % % 3.873% 7.5-year New Issue of GII (Mat on 09/19) 30-Mar-12 4, % % 3.690% 3.5-year New Issue of MGS (Mat on 10/15) 06-Apr-12 3, % % 3.188% 20-year New Issue of MGS (Mat on 04/32) 15-Apr-12 3, % % 4.110% 5.5-year New Issue of MGS (Mat on 10/17) 30-Apr-12 4, % % 3.309% 10.5-year New Issue of GII (Mat on 11/22) 15-May-12 4, % % 3.695% 7-year Re-opening of MGS 09/ % 31-May-12 3, % % 3.400% 15-year New Issue of GII (Mat on 06/27) 08-Jun-12 3, % % 3.887% 3-year Re-opening of MGS (Mat on 10/15) 15-Jun-12 3, % % 3.085% 7-year Re-opening of GII (Mat on 09/19) 28-Jun-12 3, % % 3.485% 10-year Re-opening of MGS (Mat on 08/22) 12-Jul-12 3, % % 3.410% 5-year Re-opening of GII (Mat on 08/17) 20-Jul-12 3, % % 3.238% 15-year Re-opening of MGS (Mat on 03/27) 30-Jul-12 2, % % 3.583% 3.5-year New Issue of GII (Mat on 02/16) 08-Aug-12 3, % % 3.225% 5-year Re-opening of MGS (Mat on 10/17) 15-Aug-12 4, % % 3.257% 10-year Re-opening of GII (Mat 11/22) 13-Sep-12 4, % % 3.671% 7.5-year New Issue of MGS (Mat 03/20) 27-Sep-12 4, % % 3.481% 20-year Re-opening of MGS (Mat on 04/32) Oct 2,500 5-year Re-opening of GII (Mat on 08/17) Oct 2, year Re-opening of MGS (Mat on 08/22) Oct 3, year New Issuance of GII (Mat on 05/20) Nov 3,500 5-year Re-opening of MGS (Mat on 10/17) Nov 3, year Re-opening of GII (Mat on 06/27) Dec 2,000 7-year Re-opening of MGS (Mat on 03/20) Dec 3,000 Total 94,000 1 October 2012 Page 2 of 16

3 2013 gross MGS and GII issuances to decline to MYR90.6b. Government expects 2013 budget deficit at around MYR40b or 4% of GDP. Given that govvies maturity in 2013 is RM50.6b, the total gross funding required by the government next year is about RM90.6b, while net issuances will be RM40b. This is also based on the assumption that the government will not be issuing any foreign or retail bonds. Malaysia: Government Bonds Maturing in 2013 Month Stock MYR 'b February MN2/ March GH3/ GI3/ May MJ5/ MH5/ July GH7/ MJ7/ September GG9/ October MS10/ Total Source: Bloomberg Malaysia: Budget Deficit and Funding Strategy 2013 MYR'b Budget 4% of GDP 40.0 MYR bonds maturities 50.6 Total Funding Requirement 90.6 MGS and GII issuances 90.6 Total Issuances 90.6 Sources: Budget 2013, Bloomberg, Maybank-IB's estimates An analysis of the 2012 expected govvies issuances profile reveals that the government had once again limited the issuance sizes of the 15- and 20-year benchmarks, we believe in an attempt to continue to keep the yield curve flat. 36.2% of issuances were in the 3-5 year bracket while only 17% were in the year range. Malaysia: Forecast of MGS & GII Issuances in 2012 Benchmarks Maturity Amount (RM 'b) % 3-year % 3-year % 5-year % 7-year % 7-year % 7-year % 10-year % 15-year % 20-year % Total % Source: Maybank-IB's estimates 1 October 2012 Page 3 of 16

4 The expected government bonds maturity profile on 1 Jan 2013 looks as follows: Malaysian Government Bonds: Expected Maturity Profile on 1 Jan ,000 60,000 50,000 50,000 40,000 40,000 MYR 'm RM 'mil 30,000 30,000 20,000 20,000 10,000 10, Source: Bondstream * Including maturities: US$1.25b in 2015, US$1.2b in 2016, and US$800m in 2021 * Including maturities from expected govvies issuances in 4Q12 based on the calendar on page 2 The graph above shows that the government can still afford to issue more on the short-end of the term structure next year, especially in the following maturity buckets: 2016 (3yr), (5yr), 2020 (7yr) and 2023 (10yr). 1 October 2012 Page 4 of 16

5 Foreign holdings of MYR bonds Huge foreign inflows into the MGS market in July but August saw some outflows. BNM data revealed that there was a net inflow of MYR9.2b into the MGS and GII market in July followed by a net outflow of MYR4.6b in August. As of end-august, they hold MYR118.0b worth of these securities or 28.4% of the total outstanding. Looking at just the MGS market, foreigners hold a whopping 41.5% of the total outstanding or MYR116.4b. We believe the reduction in offshore holdings in August is due to the maturity of MH8/12 which had an outstanding amount of MYR14b. We expect continued increase in foreign holdings in MGS as we head towards the end of 2012, premised upon the small MGS maturities in 4Q12 and the recent introduction of QE3. However, the pace of the increase could be slower due to our expectations of a steeper MGS curve and a weaker MYR by year-end. Our FX Research in Singapore forecasts that USDMYR will settle at 3.09 by end 4Q12. Malaysia: Monthly Foreign Inflow/Outflow into MGS & GII Source: BNM Malaysia: Foreign Holdings of MGS & GII Source: BNM 1 October 2012 Page 5 of 16

6 Malaysia: Foreign Holdings of MGS Source: BNM Meanwhile, foreigners increased their holdings of MTB/BNMNs in July and August by some MYR1.4b and MYR5.9b respectively. Offshore holdings of these discount instruments were at MYR68.7b or 45.9% of total outstanding as at end-august. Similar to the MGS market, we continue to expect more foreign inflows into the MTB/BNMN markets as well, premised on the same reasons as stated in the previous page. Malaysia: Monthly Foreign Inflow/Outflow into Discount Instruments Source: BNM 1 October 2012 Page 6 of 16

7 Malaysia: Foreign Holdings of Discount Instruments Source: BNM Who are these foreign investors? Over the past 2 years, we noticed an increase in interests in our government bond market from Asian sovereign wealth funds, especially those in the ASEAN and Asia Pacific regions. We estimate that currently about half of the foreign investors in the MYR govvies market are real money investors such as asset management companies and sovereign wealth funds, while the other half are fast money investors such as hedge funds. Compare that to the composition a few years back where most of the foreign investors were fast money, the general psyche of these investors would have changed somewhat as real money investors are more inclined to hold their purchases for a longer term compared to fast money. 1 October 2012 Page 7 of 16

8 Foreign holdings of Private Debt Securities (PDS) declined in July but increased in August to settle at MYR13.2b (representing 3.53% of total outstanding) as at end-august. We expect offshore holdings of PDS to remain relatively steady between 3-4% in 4Q12. Malaysia: Monthly Foreign Inflow/Outflow into PDS Source: BNM Malaysia: Foreign Holdings of PDS Source: BNM 1 October 2012 Page 8 of 16

9 Yield curve going forward Yield curve is very flat The MGS curve has flattened significantly since May 2011, during which the OPR has remained unchanged at 3.0%, CPI data fallen from 3.3% to 1.4% YoY, and foreign investors increased their MGS holdings by 32%. MGS: Flat Yield Curve Source: Bank Negara Malaysia, Maybank-IB s forecast but yields are rising. However, since early August 2012, the MGS curve have steepened, firstly in response to Fitch s warning that Malaysia faces rising negative fiscal pressures, and then followed by S&P s assertion that Malaysia s credit rating could be downgraded if the government does not deliver promised reforms to cut spending to reduce the fiscal deficits. Large long tenor MGS supply in 4Q12. We also note that 5 of the 7 auctions scheduled in 4Q12 are long tenor issuances; i.e. 7-year and above. The expected issuance sizes of these 5 auctions which is around MYR14b, will likely add to the upward pressure on yields over in the long-end of the term structure. We expect the MGS curve to bear steepen over the next 6-9 months, with a target term structure as follows: 3yr: 3.20%, 5yr: 3.40%, 7yr: 3.55%, 10yr: 3.75%, 15yr: 3.93% and 20yr: 4.10%. Other assumptions incorporated into the above forecast includes (1) unchanging OPR at 3.0%, (2) higher CPI in 2013 (average 2013 CPI at 2.7% compare to 1.7% in 2012) as the government resumes the Subsidy Rationalisation Programme after the general election. The 2013 auction calendar which will be released in December will likely have an impact on the yield curve, and we will reevaluate our forecast then. 1 October 2012 Page 9 of 16

10 MGS: Yield Curve Forecast Source: Bank Negara Malaysia, Maybank-IB s forecast IRS curve has steepened, then flattened and now steepened again since Jan 2012, mirroring the UST movements in response to changing risk sentiments globally. IRS: Yield Curve Movement Source: Bloomberg Bear steepening of the IRS curve expected in the next 6 months, with a target as follows: 1yr: 3.16%, 3yr: 3.30%, 5yr: 3.45%, 7yr: 3.65% and 10yr: 3.90%. This is premise on our base case scenario where (1) there will be more risk-on moments versus risk-off, (2) unchanging OPR and (3) higher inflation. 1 October 2012 Page 10 of 16

11 IRS: Yield Curve Forecast Source: Bloomberg, Maybank-IB s forecast 1 October 2012 Page 11 of 16

12 Private debt securities Primary market Record primary issuances YTD. Total PDS issuances as at 25-Sep stood at MYR96.2b, a 94.3% jump from the same period last year. A large part of the issuances was due to PLUS which issued a total of MYR30.6b bonds of which MYR13.8b were through private placements. The second largest sector was the power sector which contributed around 14.4% of total issuances, while the financial services sector came in third at 11.5%. The total above excludes MYR750m Edaran SWM Sdn Bhd, which book has closed but not issued at the time of writing. Given the strong primary issuances in 9M12, we have increased our forecast of the total PDS issuances for the year to between MYR b. Malaysian PDS: Total Issuances Source: BNM & Bloomberg PDS: Issuances by Ratings and Sectors Source: Bloomberg, MARC, RAM, Maybank-IB s analysis 1 October 2012 Page 12 of 16

13 Malaysia: Current Known PDS Pipeline A list of potential PDS issuances is as follows: Issuer Currency Size (billion) Rating PLUS MYR 3.75# GG/AAA Dana Infra Nasional Bhd (MRT) MYR 1.5 GG Pengurusan Air SPV Bhd (PASB) MYR 20** GG SME Bank MYR 3** GG Putrajaya MYR 3** AAA Westport MYR 0.5 AA+ Khazanah MYR 2** AAA Malaysia Airlines MYR 9.0*** GG/XX AMMB Holdings Bhd MYR 0.3 A1/A2 Maybank USD 5** EXIM Bank USD 1.0# SapuraKencana Petroleum Bhd MYR 0.3 AA3 CIMB Islamic Bank Bhd MYR 0.3 AA+ CIMB Bank Bhd (Subordinated Debt) MYR 0.5 AA+ Sarawak Energy Berhad MYR 15** AA1 Tanjung Bin Power MYR 0.305# AA2 Sabah Development Bank MYR 0.5# AA1 Kimanis Power Plant MYR 0.3# N/A First Resources Limited MYR 1.4# AA2 WCT Bhd MYR 0.7# AA- Telekom Malaysia MYR 2.0** AAA Star Publication MYR 0.55# AA1 Riverson Corporation MYR 0.15# AAA(fg) 1MDB MYR 3* GG/AAA Perbadanan Kemajuan Negeri Selangor MYR 0.7 AA3 KPJ Healthcare MYR 0.5 N/A Emery Oleochemicals Group MYR Up to 0.48 N/A Academic Medical Centre Sdn Bhd (over 3 years) MYR 1.5 N/A Quill Capital Trust MYR 0.27 N/A Gulf Sukuk I Company BSC MYR 3.5*** AA1 ABHC Sukuk Bhd MYR 1** AA3 Source: Various newspapers, online news articles, market talk * Maybank-IB s estimates ** Facility size *** RM2.5b in perpetual bonds (of which RM1.5b issued). Remaining consists of RM5.3b in gov't SPV and RM1.2b for capex from loan facility # Remaining unissued 1 October 2012 Page 13 of 16

14 Credit conditions Continued downward pressure on the credit front. 3Q12 saw 4 downgrades versus 3 upgrades. The new downgrades were Formis Resources Bhd, Scomi Group Bhd and two tranches of MRCB Souther Link Bhd. Meanwhile, the new upgrades were Class B tranche of RH Capital Bhd, DFZ Capital Bhd and UOB (M) Bhd. Malaysia PDS: Upgrades vs. Downgrades N.B.: For years , defaults were classified as downgrades. Source: RAM, MARC, Maybank-IB s Analysis 2012 YTD Rating Activities: Upgrades Downgrades Defaults Number of issues (including ABS) Total issue size (RM mil) Average issue size (RM mil) Number of asset-backed securities (ABS) ABS issue size (RM mil) Average issue size (excl. ABS) (RM mil) * Different issuances by Ample Zone, Prima Uno, Premium Commerce and Golden Crop were treated separately to reflect differences in ratings. * Scomi Group Bhd, Maxtral Industry and MRCB Southern Link Senior & Junior Sukuk, which were downgraded more than once, were counted as one downgrade. 1 October 2012 Page 14 of 16

15 In terms of outlook revisions, 3Q12 witnessed 3 reductions in outlook and only 1 upward revision. Malaysia PDS: Outlook Revisions Source: RAM, MARC, Maybank-IB s Analysis 2012 YTD Rating Activities: Outlook Revisions for Corporate Bonds (Including ABS) Outlook Increased Outlook Reduced Outlook Developing Number of issues (including ABS) Total issue size (RM mil) Average issue size (RM mil) Number of asset-backed securities (ABS) ABS issue size (RM mil) Average issue size (excl. ABS) (RM mil) * Different issuances by RCE Advance, ABS Logistics, Senai-Desaru and Menara ABS were treated separately to reflect differences in ratings. 1 October 2012 Page 15 of 16

16 Disclaimer This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each security s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad and consequently no representation is made as to the accuracy or completeness of this report by Maybank Investment Bank Berhad and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank Investment Bank Berhad, its affiliates and related companies and their officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking, advisory and other services for or relating to those companies. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and project and statements that an event or result may, will, can, should, could or might occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward looking statements. Maybank Investment Bank Berhad expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. This report is prepared for the use of Maybank Investment Bank Berhad's clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of Maybank Investment Bank Berhad and Maybank Investment Bank Berhad accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Published / Printed by Maybank Investment Bank Berhad (15938-H) (A Participating Organisation of Bursa Malaysia Securities Berhad) 3rd Floor, Menara Maybank, 100 Jalan Tun Perak, Kuala Lumpur Tel: (603) ; Fax: (603) Fixed Income Business: Level 3, Menara Maybank, 100 Jalan Tun Perak, Kuala Lumpur Tel: (603) ; Fax: (603) Tan Chee Wee tan.cwee@maybank-ib.com (603) Chia Suil Fun suilfun.c@maybank-ib.com (603) October 2012 Page 16 of 16