Weekly Credit Risk Monitor /
Global

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    9 May 2019
    Published by

    In Focus: Ecopetrol – Weak Q1 results on lower Brent prices and COP depreciation; downgrade to Hold 

    Ecopetrol’s Q1 19 results were mixed – there were improvements in COP terms, but a deterioration in US$ terms. This, despite higher sales volume, strict cost controls and our slightly positive outlook on the company and the industry. We believe that ECOPET bonds will trade laterally on these financial and operational results, and since the Ecopetrol curve is already trading at fair prices, we downgrade our previous Buys to Holds and now have the full universe of ECOPET curve rated as Hold. 

    Ecopetrol reported total sales of US$5.09bn in Q1 19, from US$5.12bn in Q1 18. The decline was mainly due to: 1) lower Brent prices, which averaged US$63.8/bbl in Q1 19 compared with US$67.2/bbl in Q1 18 (US$56.2/bbl for ECOPET’s crude oil basket in Q1 19, compared with US$59.9/bbl in Q1 18); 2) COP depreciation to 3,144.79/US$ in Q1 19 (average) compared with COP 2,855.62/US$ a year ago.  

    Higher volumes in both local sales (390.8 thousand barrels of oil equivalent per day – mboed – in Q1 19, compared with 386mboed in Q1 18) and export sales (518.1mboed in Q1 19, compared with 465.6mboed in Q1 18) were not enough to compensate the negative effects of the drop in Brent prices and currency depreciation. Further, these higher volumes resulted in higher variable costs (US$1.951bn in Q1, compared with US$1.820bn a year ago), which explains the drop in EBITDA to US$2.3bn in Q1 from US$2.5bn a year ago. 

    Still, the company saw a slight improvement in credit metrics with cash of US$2.805bn in Q1 19 from US$1.942bn at end-2018, but lower than US$2.814bn a year ago. There was also a slight sequential qoq increase in total debt at US$11.841bn in Q1 19 from US$11.712bn in Q4 18, but showed a substantial drop yoy from the US$14.654bn reported in Q1 18. As a result, debt/EBITDA in Q1 19 was 1.15x, almost the same as the 1.12x in 2018 and better than the 1.40x in Q1 18. The company’s short-term debt of US$1.268bn was more than covered by cash-on-hand at end-Q1 19. 

    In sum, Ecopetrol’s Q1 19 results were mixed. There were improvements in COP terms, but a deterioration in US$ terms. This, despite higher sales volume, strict cost controls and our slightly positive outlook on the company and the industry.  We believe that ECOPET bonds will trade laterally on these financial and operational results, and since the Ecopetrol curve is already trading at fair prices, we downgrade our previous Buys to Holds and now have the full universe of ECOPET curve rated as Hold. (See our earlier review here, where we had a mix of Buys and Holds on Ecopetrol’s family of bonds mainly due to our preference for short duration bonds and levels that – at the time – we believed were fair for some securities and attractive for others).  

    Read the full report here.

    Recap of the week’s key credit developments 

    Turkey (TURKEY): On May 6, the Turkish election board nullified the result of the Istanbul mayoral election, which had been won by opposition candidate Ekrem Imamoglu, raising concerns about democracy in Turkey under President Erdogan. The vote will be re-held on 23 June. We don’t think that the decision to re-hold the election will surprise many: Istanbul accounts for more than 30% of Turkey’s GDP on some estimates and President Erdogan was once Mayor of the city. The AKP had also publicly called for a re-run.

    South Africa (SOAF): Elections were held in South Africa on 8 May and the incumbent ANC is widely expected to win, with just over 50% of the vote (albeit lower than the 62% result in 2014), followed by opposition DA with 20%, according to opinion polls. Full results are expected on Friday, although official announcements may not come until later. We have Buy recommendations on the African Bank 6% 2020 and 8.125% 2020 senior bonds. On the larger banks, the spread difference between the US$-subordinated bonds of Absa and FirstRand has narrowed to c55bps, which looks close to fair. The Investec Plc and Investec Bank Plc GBP bonds have largely ignored election-related jitters and are much tighter than in January, possibly reflecting the currency, issuer domicile and the diverse nature of the Investec Group. 

    Rwanda (RWANDA): On May 6, the National Bank of Rwanda (BNR) lowered its benchmark interest rate by 50bps to 5%. Inflation, which is projected at 3% in 2019, is within its target band of 5% (+/-3%), despite the rise in CPI from an average of 1.4% last year. The Monetary Policy Committee assessed that domestic demand continued to improve in Q1 19, partly due to increasing credit to the private sector. 

    Pakistan (PKSTAN): On 4 May, Reza Baqir was appointed Governor of the State Bank of Pakistan (SBP) for three years by the President, at the behest of Prime Minister Imran Khan. Baqir has 18 years of experience with the IMF, where he most recently served as the Resident Representative in Cairo, and two years working with the World Bank. Baqir’s appointment should be seen as a strong positive as it signals the commitment of Pakistani authorities to orthodox policy reforms. Furthermore, the appointment of a former IMF economist will increase the likelihood of a Staff Level Agreement in coming days. 

    Kenya (KENINT): After issuing its debut eurobond in 2014, with 5- and 10-year tranches, Kenya has announced plans to refinance the now maturing 2019s. On May 8, it was announced that JP Morgan and Standard Chartered Bank had been mandated to organise investor meetings in London and the US, beginning on May 9. The news of Kenya’s latest eurobond offerings should come as no surprise as many have been expecting this for quite some time. We expect initial pricing targets of c7 5/8ths and 8 5/8ths for the 12- and 31-year tranches, respectively. 

    Ukrainian banks (EXIMUK, OSCHAD): Both Ukreximbank and Oschadbank recently reported Q1 results. At Oschadbank, net income of UAH70mn was up from UAH42mn a year ago, reflecting slightly stronger net income, a rise in net commission income and reversal of a loss on financial instruments. At Ukreximbank, Q1 net income of UAH395mn was up from UAH259mn a year ago. Net interest income declined, but Ukreximbank reported a small net gain on some investment securities, We have Hold recommendations on the Ukreximbank and Oschadbank US$-denominated bonds.

    Alternatifbank (ALNTF): Alternatifbank reported net income of TRY52mn for Q1, up from TRY39mn a year ago and just TRY2.5mn in Q4 18. The annualised ROE was 11.2%. Good revenue generation and lower provisions contributed to improved performance. Net interest income recovered qoq, and net fee and commission income was very strong, a trend we have seen at other Turkish banks