Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    20 June 2019
    Published by

    In Focus: DTEK – Strong financials vs. regulatory concerns

    We upgrade the DTEKUA 24s to Hold on valuation. DTEKUA has underperformed the Ukraine corporate space through most of 2019. The tenor-adjusted DTEKUA-METINV spread has widened above 300bps, while the DTEK 24s Bloomberg mid-yield to maturity is at 10.72%. 

    Given the company’s strong credit fundamentals, we think the bond prices incorporate generous premia for regulatory and FX risks. Once regulatory concerns are dealt with, we see the DTEKUA-METINV spread tightening.

    Read the full report here.

    Recap of the week’s key credit developments

    Mozambique (MOZAM): Anadarko Petroleum Corporation and its co-venturers announced Final Investment Decision (FID) on its US$25bn offshore Area 1 LNG project in Mozambique on 18 June. This important milestone means that the construction phase can now begin. Anadarko has a 26.5% working interest in Area 1. Its co-venturers include ENH (15%), Mitsui E&P (20%), ONGC Videsh (10%), and PTTEP (8.5%). First gas is expected around 2024. The project is to be financed by US$11bn in equity and US$14bn in debt. According to the company, it is the biggest foreign investment in Africa ever. 

    Our view: This is more good news for Mozambique, on the heels of the bondholder agreement in May, which was preceded by a very challenging period. Mozambique’s LNG potential is transformative, as we have noted before, although in the immediate future, the country has to deal with the impact from Cyclones Idai and Kenneth that devastated the country in March and April, restore its image after the economic and reputational damage caused by the hidden debt saga (including resolving the default situation on its MOZAM 2023 bond and associated commercial loans), and face a presidential election this October. 

    Macedonia (MACEDO): On Friday, Fitch upgraded (North) Macedonia’s long-term foreign currency rating to BB+ from BB, while S&P’s rating remains at BB- since May 2013. The outlook is stable. The move follows improving governance, reform implementation and political stability. The agency forecasts 3.4% GDP growth in 2019 and 3.6% next year, following the uptrend over recent years. Unemployment has fallen, Fitch cites World Bank measures of the business climate as being better than BB peers, and EU accession negotiations could be on the horizon, which could lead to further reforms. Fitch also notes consideration of eurobond maturities: bullet maturities of EUR270mn and EUR500mn are due in December 2020 and July 2021 respectively.

    Benin (BENIN): On Wednesday, Moody’s became the latest ratings agency to assign a long-term foreign currency rating to Benin. The West African nation received B2 from Moody’s, in line with the B from Fitch, while S&P has rated Benin B+ since July 2018. The outlook from both Moody’s and Fitch is positive. Benin has a dependence on agriculture and exports to Nigeria. Moody’s notes that it has low institutional and fiscal strength, but that fiscal consolidation is expected to lower the high government debt burden. 

    Turkey (TURKEY): Also on Friday, Moody’s downgraded Turkey’s long-term foreign currency rating to B1 from Ba3, in line with S&P’s B+, while Fitch remains at BB. The ratings agency cited an increasing risk of a balance of payments crisis and a government default. 

    Odebrecht (ODBR): The Brazilian bankruptcy court in Sao Paulo accepted Odebrecht's bankruptcy protection filing on Tuesday. According to reports, the filing did not include its subsidiaries Braskem SA, Odebrecht Engenharia e Construcao, Ocyan SA, Odebrecht Transport SA and Enseada Industria Naval SA. The company is seeking to restructure cUS$13bn in debt. In addition to this, the holding has inter-company loans and other debt totalling cUS$25bn, making it Latin America’s largest corporate bankruptcy filing in history. The filing was prompted by the bankruptcy of the holding’s ethanol subsidiary Atvos SA, which guarantees cBRL11bn in bank loans, and the subsequent action by local bank Caixa Economica Federal with which the holding has an estimated BRL6bn in debt. 

    Our view: We still have a Sell on the ODBR bonds (cUS$3bn). As we have stated in our research reports, we do not discount the possibility that recovery for ODBR bond holders could very well be zero as the construction company continues to struggle to add new projects to its backlog, continues to burn cash at an estimated rate of cUS$200mn per quarter, and faces fines related to the Car Wash (Lava Jato) corruption scandal. In addition, in the absence of assets owned by the construction company, we would not be surprised if there is, in fact, no recovery, as has been the case with other construction companies with no major assets to liquidate or monetise. 

    Silknet (SILNET): The company reported Q1 19 financial results and pro-forma debt after using the proceeds from US$200mn of bonds for refinancing. Revenue decreased 12% to US$34mn due to reduction of termination rates and GEL depreciation, but EBITDA benefited from partially realised acquisition synergies and application of IFRS 16 coming it at US$15mn and a margin of 50%. Silknet is a leading telco in Georgia, with somewhat elevated leverage (2.5x) on the back of its recent acquisition of Geocell. The company has strong liquidity with no debt repayments until 2024, amplified by US$36mn of unutilised cash on the balance sheet and access to funding from local banks to the tune of US$50mn. FX risk, albeit partially hedged, remains our main credit concern in the absence of high organic growth rates to offset the depreciation of GEL. We believe the bonds’ credit premium addresses the inherent risks and reiterate our Hold recommendation. 

    Petropavlovsk (POGLN): The company has issued US$125mn 8.25% convertible bonds due 2024 to refinance the outstanding US$100mn convertible bonds due March 2020, with the net proceeds to be spent on capex. This is a positive development for the company. Petropavlovsk has dealt with the most pressing liquidity issues (IRC loan and convertible bond refinancing), the POX facility is up and running, the lion’s share of capex is out of the way and gold prices are moving above US$1,300/oz. On top of that, holders of US$500mn bonds due 2022 will become structurally senior to convertible bonds after refinancing. POGLN 22s could have a potential for further tightening if the bonds are increasingly perceived as part of the mainstream Russian corporate bond universe – a constellation of bonds trading at low-to-mid-single-digit yields. We maintain our Hold recommendation. 

    Black Sea Trade & Development Bank (BSTDBK): The issuer placed a US$400mn 5-year bond, at MS+175bp this week. The total order book was cUS$1.7bn. The IPT was 5Y MS + ‘low 200s’. BSTDBK opted for a 5-year bond after previous headlines suggested a 3-year security could be placed instead. Mid-single-A securities in the Bloomberg Global Aggregate index yield 2.13% on average (duration: 6.73). The average OAS is 89bp. As is usually the case, this EM issuer appears to have placed its new bond much wider than similarly-rated non-EM issuers trade.  

    Isbank (ISCTR): Isbank has placed TRY800mn in Tier 2 securities in the domestic market, paying an annual interest rate of almost 27.7%. This should be seen in the context of Turkey's current main benchmark rate, which is 24%. Our very quick estimate suggests that based on end March 2019 disclosures, this may add about 18bp to Isbank's total capital ratio (consolidated), which was 14.9% when the bank last reported. 

    Bank of Cyprus (BOCYCY): Moody’s downgraded the bank’s senior unsecured MTN program to Caa2 from Caa1, reflecting a change in the legal framework which 'establishes full depositor preference over senior unsecured debt instruments in the event of a bank resolution.' As Moody's notes, Cyprus has transposed an EU law into its local law. There are no senior bonds outstanding, so the downgrade doesn't affect any securities. Further, Moody's has not changed the Caa2 rating assigned to the Bank of Cyprus (BOCYCY) 9.25% 2027 subordinated bond or the positive outlook assigned to the issuer. Source: Moody’s, Bloomberg, Tellimer Research

    Piraeus Bank (TPEIR): Piraeus Bank has placed a EUR400mn 10NC5 Tier 2 security at par, with a 9.75% coupon. The IPT was 10.25% area and the total book size was cEUR850mn. The bank disclosed that the new issue will add about 90bp to its total capital ratio, which was 13.7% at the end of March. This is the first unsecured bond to be issued by a Greek bank in some time. As S&P notes, the new issue is part of the banks’ plans to strengthen its capital position and comes after Piraeus Bank disclosed that it will enter into a partnership with a Swedish debt collector, to manage EUR27bn in problem exposures. The rating agency believes this arrangement may ‘contribute a further 55-60bp of additional capital by 2021’. 

    Al Hilal Bank (ALHILA): Al Hilal Bank has published a notice exercising the call option on its US$500mn 5.5% perpetual security. The first call date is 30 June 2019. Emirates NBD and Dubai Islamic Bank called similar securities earlier this year. This action means all Middle East banks have redeemed their perpetual securities at the first call date. The Burgan Bank call comes up next – the BGBKKK Perp is callable on 30 September, and the minimum notice period is 30 days. We note that Burgan Bank recently announced plans to issue a US$500mn Tier 1 security, which could replace the callable bond. Source: Company statements, Bloomberg, Tellimer Research

    Ecobank Transnational (ETINL): Ecobank Transnational disclosed that the International Finance Corporation (IFC) has entered into an agreement to sell its 14.1% stake in ETINL to Arise BV. Arise BV is a Dutch investment firm, which is owned by FMO, Norfund and Rabobank. FMO is a triple-A rated Dutch development bank and is actively involved in providing financing across Africa. We note that the sale is subject to regulatory approval. We still have a Buy recommendation on the ETINL 9.5% 2024 bond. For more on the Group's latest performance see our note published in May.