Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    2 May 2019
    Published by

    In Focus: CSN – Result of cash tender offers for 2019 and 2020 notes; reiterate Buy

    Companhía Siderúrgica Nacional (CSN, CSNABZ) continues to successfully strengthen its balance sheet, announcing on 26 April the results of the cash tender offers for CSN Resources S.A.’s 2019 and 2020 bonds. 

    The tender offers further lift to a debt burden that, just over a year ago, seemed unsurmountable. The company, through aggressive balance sheet management policy, extensions of key maturities of loans with Caixa Económica Federal and Banco do Brasil, the issuance of longer-term bonds and some asset sales, has radically improved its debt profile, liquidity and ability to take advantage of the positive business environment in Brazil and abroad. 

    CSNABZ remains the top pick in our LatAm coverage universe. We continue to see value on the company’s bonds curve as we believe it will continue to improve its operations, reduce its leverage and see its spreads converge to the levels of some of its closest peers, such as Gerdau (GGBRBZ). 

    CSNABZ’s most liquid bonds – its US$600mn, 7.625% senior unsecured bonds due 2026 issued by CSN Resources S.A., rated B3/NR/B- – trade at cUS$99.839 (TRACE) to yield c7.65% (g-spread 527bps, z-spread 528bps. For comparison, Gerdau’s GGBRBZ US$650mn 4.875% senior unsecured bonds due 2027 (BBB-/BBB-) trade at cUS$102.332 (TRACE) to yield c4.54% (g-spread 210bps; z-spread 211bps). 

    Similarly, CSN Resources S.A.’s US$350mn, 7.625% senior unsecured bonds due 2023 (B3/NR/B-) are trading at cUS$102.109 (TRACE) to yield c6.99% (g-spread 473bps; z-spread 468bps). The Gerdau comparable, the GGBRBZ’s US$517.9mn (from an original issued US$750mn) Ba1/BBB-/BBB-, 4.75% senior unsecured bonds, trade at cUS$103.376 (TRACE) to yield c3.82% (g-spread 156bps; z-spread 151bps). 

    Also, CSN Resources S.A.’s US$1.052bn (from an original issue of US$1.2bn) 6.50% bonds due 2020 (B3/B-/B-) are trading at cUS$102.206 (TRACE) to yield c4.61% (g-spread 224bps; z-spread 213bps). Gerdau’s GGBRBZ US$504.5mn (from an original issue of US$1.25bn) 5.75% senior unsecured bonds (BBB-/BBB-) trade at cUS$104.437 (TRACE) to yield c3.12% (g-spread 81bps; z-spread 70bps). 

    Acknowledging the ratings difference and the operational and financial strengths that Gerdau enjoys over CSN, we still believe that the spread differential makes CSNABZ a much more attractive investment proposition; one that is repeated throughout the bond curves of both companies. 

    We base this opinion on our belief that CSN’s business will continue to improve, its financial metrics will continue to strengthen and that this credit has more upside potential than that of its peers.

    Read the full report here.  

    Recap of the week’s key credit developments 

    Argentina (ARGENT): The central bank announced further changes to its FX regime on Monday, the third set of changes to the currency regime since February on our count (and excluding other policy changes to the monetary base target and interest rates). In short, the central bank has effectively abandoned its non-intervention zone (NIZ), the corner piece of its FX policy since October, and is pretty free to intervene as it likes to stabilise the peso (within reason), replacing what it had set out as a carefully constructed rules-based FX intervention policy with a largely discretionary one.  

    Turkey (TURKEY): In Tuesday’s inflation report, Turkey’s central bank (CBRT) attempted to ease investor concerns over future monetary policy, by saying that all tools to control inflation, including further interest hikes, remained on the table. The CBRT said that monetary policy would remain tight ‘until there is a significant improvement in the outlook for inflation.’ Tuesday’s comments had only a minor effect on the lira’s exchange rate with the US$. 

    Azerbaijan (AZERBJ): The Chairman of the Central Bank of Azerbaijan (CBA), Elman Rustamov, said last week that it had cut its refinancing rate to 8.75% from 9%, and also lowered its rate corridor by 25bps, to 6.75-10.75%. Additionally, the CBA said that its 2019 inflation forecast would remain at 2-6%. The decision, the third rate cut this year, had been made given the macroeconomic processes taking place in the economy.  

    Ukrainian Railways’ (RAILUA) CCC+ rating was put on negative watch by S&P. According to the rating agency, the downgrade will follow if the company fails to refinance its short-term debt in the next 90 days. The company’s debt falling due in the next 12 months is estimated at US$527mn by S&P, an amount the company may not be able to repay from its operating cash flows.  

    Nostrum Oil (NOGLN) reported Q1 daily production at 32,646boe, 9% above FY 19 guidance and slightly below Q1 18 numbers, making it the third consecutive quarter of stable-to-slightly positive output dynamics. The company had to draw on its cash reserves as Q1 had a lot of outflows, including coupon payments on both bonds.  

    Genels (GENLLN) Bina Bawi licence in Kurdistan lapsed as the company is renegotiating the terms of the gas lifting agreement (GLA) with the Kurdistan Regional Government (KRG). The current Bina Bawi PSC allows the company 12 months to agree a new GLA. The KRG retains the right to terminate the PSC if no agreement is reached.  

    Kuwait Energy (KUWAIE) reported FY 18 financial results posting US$205mn (+1% yoy) in revenues and US$102mn (-27% yoy) in EBITDA adjusted for impairment and write-offs. US$250mn notes mature in August, but the company has yet to come up with a refinancing solution.