Debt market dampener

PETALING JAYA: Bond issuers in the non-financial space could come under further pressure this year due to weaker economic prospects and external headwinds.

These issuers could face the possibility of their debt ratings being lowered by rating agencies, hence placing them on negative outlook in the agencies’ portfolios.

A positive rating outlook means that a rating may be raised while a negative outlook reflects the possibility of the rating lowered. A stable outlook denotes situations where the rating is expected to remain unchanged over the intermediate term.

A rating outlook generally covers a six to 24-month time horizon.

RAM Ratings head of data analytics Julie Ng told StarBiz the rating agency has placed a negative outlook for the automotive, media, oil and gas support services, commercial property and construction sectors.

“These sectors are facing the mounting pressures stemming from a slower economy, declining prices and poor industry prospects,” she added.

PHOON: We expect broad credit conditions to remain supported on the back of still stable macro settings.

As at end-2018, there were 14 issuers with a negative outlook in RAM’s portfolio, of which many of them were from the above sectors.

While the majority of the issuers on negative outlook had already transitioned to lower ratings in the preceding quarters, she said their outlook remained negative as industry challenges had not sufficiently abated to warrant a revision ie back to stable outlook.

Ng, however, said she does not expect rating downgrades to further rise this year, adding that a change in rating outlook typically, although not always, precedes a change in rating in the subsequent 12-18 months.

In 2018, there were more downgrades than upgrades due to the more challenging economic conditions.

The downgrade to upgrade ratio was 2.25 in 2018 (2017: 2.00).

Issuers with a positive outlook could eventually see a rating upgrade in upcoming reviews, she noted.

These positive outlook involved companies in the plantation and power sectors, which exhibited sturdier credit metrics as a result of improved sales and cost savings, Ng said.

A rating downgrade is when a rating agency lowers a bond’s rating as opposed to an upgrade when a rating is raised.

Meanwhile, Maybank Kim Eng head of fixed income research Winson Phoon noted that within the rated universe, there has been negative-biased credit trends in the past few years, with “ratings downgrades and negative outlook ratings “ outnumbering “ratings upgrades and positive outlook ratings”, partly due to sector-specific weaknesses such as the media and toll-road sectors.

He thinks this trend would continue in 2019.

Phoon said he does not expect broad-based bond issuer downgrades this year as there was no sign of stress in domestic bond markets as credit spreads have tightened in the past few months because of positive supply-demand profile (ie demand exceeds supply). “We expect broad credit conditions to remain supported, on the back of still stable macro settings,” he said.

Malaysian Rating Corp Bhd (MARC) in its latest 2018 Annual Corporate Default and Rating Transitions Study noted that the overall weaker performances of Malaysian corporates would likely exert pressure on the rating trajectories of MARC-rated non-financial corporates.

In particular, the rating agency expects corporates in the property, construction and palm oil sectors to be more vulnerable to headwinds.

On balance, it however noted, there is generally enough headroom within the rating bands to allow performance stress to be absorbed without necessitating severe rating changes. It foresees more challenges for Malaysian non-financial corporates in 2019 due to weaker economic prospects on both the domestic and external fronts.

As for yield projection for this year amid a Dovish stance by the US Federal Reserve (Fed), Phoon said he forecasts the 10y MGS yield to reach 3.90% by end-June and 4.00% by end-December 2019.

As to whether the dovish stance by the Fed would impact government and corporate bonds?

He noted: “The Fed’s dovish pivot is causing the US Treasuries (UST) curve to gravitate lower.

“This has encouraged yield-seeking flows to other regional bond markets and indirectly benefited local bonds.”

On the impact of the current inverted US treasury yield curve on the Malaysian Government securities (MGS) and overall bond market, Phoon said it depends on the time horizon.

In the near term, he said the focus would be more on lower yields in the developed markets and the anchoring effect on other regions. But if one were to take a medium to longer term view, he said the fact that the UST yield curve inversion signals a recession risk in the US, then it should not be under-estimated. Ng views the inverted US treasury curve as a dampener to foreign investor demand for domestic bonds even as the Fed and other major central banks pull back on liquidity tightening efforts.

Source : TheStar