CIMB Investment says O&G, property and automotive facing more challenges
PETALING JAYA: Strong signs are emerging for further rating downgrades in the oil and gas (O&G), property and automotive sectors as the economy further moderates amid external headwinds.
To downgrade a company or bond means to assign it a lower rating that denotes the higher risk of not being able to fully-meet its debt obligations on time.
Investors would face a higher risk or probability of not being able to receive the full principal and interests on their investments.
CIMB Investment Bank Bhd senior managing director and global head of capital markets Nor Masliza Sulaiman told StarBiz that rating downgrades may be elevated due to the increasingly challenging Malaysian and global economic conditions.
Based on data compiled from RAM Rating Services Bhd and Malaysian Rating Corp Bhd (MARC), she said that the first half of this year saw a higher number of rating downgrades at four compared with three in the previous corresponding period.
Over the last 2½ months from end-June 2016, five more rating downgrades had been noted, she said, adding despite the rating downgrades, most ratings are still well above investment grade indicating low probability of default.
“Sectors experiencing a more challenging operating environment are the O&G, property, automotive as well as commodity-based sectors due to volatile commodity prices and lacklustre demand given moderating growth on both local and global fronts. The challenges include the low or subdued and volatile commodity prices, concerns over China’s recovery, the Federal Reserves monetary policy stance/direction and geopolitical risk from the US presidential elections. Investors should be selective as there are credible and resilient credits within that space.
“Whilst there may be potential downside risk persisting through the year as a result of ongoing economic headwinds and as the Malaysian economy continues to moderate further, we note that based on statistics compiled by Bloomberg as of August, 95.2% (or RM342bil) of the total outstanding rated ringgit issuances carries a rating of at least AA-/AA3, which reflect issuers of high credit quality and low default risk,” Masliza noted.
RAM Ratings head, data and analytics Julie Ng said the rating agency had a negative rating outlook on three sectors, namely O&G, property and automotive due to operating challenges and high leverage.
“We also expect forward rating actions to lean more negative-biased, in the absence of strong domestic growth and prevailing uncertainties in the external environment.
“Despite the significant headwinds and challenges in the last couple years, we do not expect defaults, if any, to be significant in 2016,” she noted.
RAM head of consumer and industrial ratings Kevin Lim said the prolonged slump in crude oil prices has reduced O&G activities, particularly for the upstream segment, which could in some instances lead to a liquidity crunch for some of the players in this sector.
“We expect these industry challenges to persist at least up to the second half of next year.
Of the two entities with exposure to the O&G sector and whose debts are rated by RAM, UMW HOLDINGS BHD’s long-term rating had been downgraded to AA2/stable from AAA/negative. The downgrade is premised on its weakened operating performance and financial profile as a result of continued challenging operating conditions in the automotive and O&G segments together with expected higher debt requirements. In the case of Perdana Petroleum Bhd, its debt issue carries the AAA(fg)/stable rating on account of its guarantee from Danajamin,” Lim said.
Meanwhile, MARC chief economist Nor Zahidi Alias said there was no bond default recorded in MARC Universe last year and also year-to-date. He said that there was scant evidence to suggest rising default risk among local corporates given that very few issuers were rated in the lower rating spectrum despite increasing risks of more downgrades.
On the direction bond yields in anticipation of Fed rate hikes this year, he said: “As expectations of a Fed fund rate hike draws closer, we foresee that bond yields will bottom out and in fact will rise slightly as ringgit is not expected to rebound significantly due to firmer US dollar.
“However, we also do not anticipate any significant increase in yields for ringgit bonds this year because of the gradual increase in interest rate by the Fed, as well as the accommodative stances adopted by other major central banks,” Zahidi said.
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