Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    6 June 2019
    Published by

    In Focus: Mozambique – New restructuring terms; reiterate Hold 

    The Ministry of Economy and Finance announced agreement in principle on revised restructuring terms for the MOZAM 23s on 31 May (statement here). The new agreement replaces in full the previous agreement in principle that had been reached in November (see our research here). 

    There are some changes from the previously announced terms, crucially gas warrants (value recovery instruments – VRIs – with payments linked to gas revenues) have been removed. Financial terms for the new bond have, however, been improved to compensate, with a step up to a higher coupon and faster amortisation payments, and a small cash payment. Essentially, the deal drops VRI payments and puts them into the bond. 

    We estimate the value of the new offer (bonds and cash) is 102.9pts, in terms of the value of the offer today per unit of existing principal (ie on a comparable basis to secondary market prices for the MOZAM bond) at a 10% exit yield, falling to 90pts at a 12% exit yield. The MOZAM bonds closed 31 May at 94.5 (mid), based on indicative Tellimer prices; however pricing is uncertain due to the absence of trading after the revised restructuring terms were announced. Tellimer believes the market context is mid to high 90s. 

    We maintain our Hold recommendation on MOZAM 23 (which dates from 6 November after we upgraded to Hold from Sell following the previous agreement in principle). Prices in the mid-90s reflect some deal risk, relative to our estimated value of the offer of c103 (at a 10% exit yield), which seems appropriate, although lower prices could be justified on the basis of a more cautious exit yield assumption, especially given external market conditions. 

    Revised terms

    • Coupon. Now a step up. Slightly lower in the first few years than in the previous agreement, at 5% until 2023 (and no capitalised portion), but stepping up to a high 9% thereafter. 
    • Maturity. Maturing on 15 September 2031 (ie a 12-year bond, assuming issuance on 1 September 2019). This is two years shorter than in the previous agreement
    • Amortisation. Slightly quicker, with more payments. Eight equal semi-annual payments commencing 2028. The average life of the new bond is 10.5 years. 
    • Small cash payment on closing. This amounts to US$40mn, comprising a US$8mn consent fee (on the basis of US$11 per US$1,000 of bonds voted), and an exchange payment of US$32mn (before the deduction of the yet-to-be-determined committee fees). 
    • Interest paid on 15 March and 15 September, commencing 15 March 2020. The accrual date is 15 July 2019, which means a long first coupon.

    Read the full report here

    Recap of the week’s key credit developments 

    Ukraine (UKRAIN): The central bank left its policy rate unchanged today (Thursday) as expected, following the scheduled meeting of the monetary policy committee. Our view: We expected the National Bank of Ukraine (NBU) Board to leave rates unchanged. The key policy rate was cut by 50bps to 17.5% at its last meeting on 25 April. However, since the April decision, inflation picked up 20% to 8.8% in the same month while the currency weakened through May. Moreover, the delay to the pending IMF review caused by the parliamentary election timetable (with early elections called for 21 July) may also unsettle expectations and compel the NBU to take a cautious stance.

    Kazakhstan rates and election (KAZAKS): On Monday, the National Bank of Kazakhstan (NBK) decided to hold its key interest rate at 9%, in line with a Bloomberg survey. The next monetary policy decision is scheduled for 15 July. Meanwhile, early presidential elections will be held on 9 June (Sunday), in the first change of power since independence from the Soviet Union, after President Nursultan Nazarbayev unexpectedly announced his resignation on 19 March. Current acting-President Kassym-Jomart Tokayev, of Nazarbayev’s Nur Otan party, is expected to win. There will be little change in economic policy and Nazarbayev is expected to retain an important role behind the scenes.

    Indonesia (INDON): On 31 May, S&P upgraded Indonesia’s LT FC rating to BBB from BBB-, bringing it in line with Moody’s (Baa2 since April 2018) and Fitch (BBB since December 2017). All three agencies have a stable outlook. The rupiah had appreciated by c1% against the US$ on Monday. S&P cited strong growth prospects and favourable fiscal policy, and a further positive rating action could follow if external or fiscal settings continue to improve. Meanwhile, Indonesia has 56 international bonds outstanding, totalling US$42.85bn, JPY709.5bn and EUR7.25bn. Four will mature during the remainder of 2019 (one did in March), and four will mature in 2020.  

    South Africa (SOAF): GDP data released on Tuesday showed a much deeper than expected contraction in Q1, with real GDP of -3.2% qoq annualised (sa), while a 1.7% contraction had been predicted by economists in a Reuters poll. On an annual basis, real GDP growth was flat yoy, while a 0.7% expansion had been expected. Bloomberg data show that the decline was the largest quarterly fall since 2009 during the global financial crisis, and the rand depreciated sharply on the release. A key contributor was the power sector, as problems at state-owned Eskom caused the worst power outages in over a decade in Q1, negatively impacting productivity. The firm struggled to recover from last year’s recession, and was given a ZAR69bn (US$4.9bn) bailout in February’s budget. Despite retaining an investment grade Baa3 sovereign rating from Moody’s (only), the latest figures have led to speculation of a Moody’s downgrade, a near-term interest rate cut and large capital outflows, according to media reports. 

    GeoProMining, a small diversified metals and mining company based out of Armenia (B1/B+) and Russia (Baa3/BBB-), is looking to issue US$300mn 5-year bonds. The company has relatively rich gold reserves with estimated life of 16-21 years across three assets, and benefits from adequately high profitability and moderate leverage by industry standards. The transaction aims to refinance the outstanding senior secured debt and push all maturities to 2024, significantly improving liquidity. In the absence of obvious peers among the gold and non-ferrous metal producers in the region, the price discovery could yield an attractive credit premium. The fair value could be in the range of 8.5%-10.5%. 

    Turkish banks – Vakifbank (VAKBN) and Halkbank (HALKBK): Vakifbank announced that six deputy general managers would leave, and four new people would be appointed. Halkbank also announced organisational changes – five deputy general managers left that bank, and three new people were appointed. These changes may well be driven by the State, in our view, given ownership of the banks. The key short-term issue for all Turkish banks remains the potential delivery of military equipment from Russia. More detail on this is expected later this month, when President Erdogan is scheduled to meet with President Trump at the G20 Summit.

    Nigerian banks: Nigeria’s National Bureau of Statistic (NBS) has produced a report on the banking sector, based on Central Bank of Nigeria (CBN) data for Q1 19. Here are our highlights from the report: (a) There was a lot of focus on payment channels in the NBS report. (b) Almost 72% of customers pay over 20% on loans. (c) The top-5 obligors account for c13% of loans. The top-20 customers account for close to a quarter of total loans. (d) Total banking sector credit fell by 2.5% between Q1 18 and Q1 19. (e) Banking sector credit increased slightly qoq in Q1 19 (up 0.52%). (f) The two largest sector exposures remain oil and gas (30.4% of total credit) and manufacturing (14.5%). (g) Demand deposits declined marginally (-0.8%) yoy in Q1 19. However, time and savings deposits increased by c20% yoy, driven by growth in FC-denominated accounts.  

    Credit Bank of Moscow (CRBKMO): On 3 June, Fitch upgraded Credit Bank of Moscow to BB from BB-. The upgrade reflects a “significant reduction” in what the rating agency considers to be high-risk assets. According to Fitch, the residual volume of such assets is now manageable, and can be “adequately covered by sound pre-impairment profit.” Credit Bank of Moscow is now rated Ba3, BB- and BB by Moody’s, S&P and Fitch, respectively. All three ratings carry stable outlooks

    Privatbank (PRBANK): Ukraine President Volodymyr Zelensky is reported to have said that he will not be supporting the former shareholders of Privatbank. He was speaking in Brussels, where he was meeting with NATO and EU officials. The comments come after the nationalisation of Privatbank was ruled unlawful by a Ukraine court; a decision that has since been appealed by the National Bank of Ukraine (NBU). Given reports of close links between President Zelensky and Igor Kolomoisky, these comments may be seen as another attempt by Ukraine’s President to distance himself from Kolomoisky. In our view, if Privatbank’s former shareholders are eventually awarded compensation for the nationalisation of the bank, it may just strengthen a view previously expressed by senior members of Zelensky’s team, that judicial reform is needed. 

    Russian Standard Limited (RUSB): Vedomosti reports that holders of 25% of the 2022 security have hired A1, which is part of the Alfa Group, to negotiate with the issuer. This is not the first time that reports of Alfa Group’s involvement have been published. According to the article, this bondholder group has also sent a letter to the Central Bank of Russia, and sees enforcing security as a last resort (as a reminder, the bond is secured by a 49% stake in Russian Standard Bank). This news is to be welcomed, in our view, if it means progress will be made on resolving the long-running dispute between RUSB bondholders and the owner of Russian Standard Bank. There has been little progress since the issuer published an offer to bondholders in early-2018.  

    TCS Group/Tinkoff Bank (AKBHC): The founder and main shareholder of TCS Group, Oleg Tinkov, has stated that he will participate in the Group’s capital raising exercise. According to Vedomosti, Tinkov stated this at the St Petersburg International Economic Forum. These comments address uncertainty regarding continued support from the Group’s main shareholder. As noted in a recent report, if the capital increase is successful, TCS Group is unlikely to issue a new bond.