Weekly Credit Risk Monitor /
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Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    27 June 2019
    Published by

    In Focus: G20 preview – Trade war and EM impact 

    All eyes will be on US-China trade negotiations this weekend, with Presidents Trump and Xi Jinping set to meet during the G20 summit in Osaka, Japan. In our report, part one of two, we explore some of the channels that trade wars in general – and the US-China trade war in particular – could have on emerging and frontier markets. Part two will identify the potential winners and losers if the tensions continue. 

    The escalation of the US-China trade war has been one of the defining themes of the global economy over the past year, and is perhaps the most important since the eurozone debt crisis of 2010. Since its start in April 2018 (albeit with beginnings further back), the tit-for-tat between the two countries reached a peak in May 2019, and has threatened to derail global GDP growth, even risking a global recession.

     There might be reasons for optimism over a trade deal in Osaka: 

    1. It was confirmed last week, after some uncertainty, that Trump will meet Xi, which should be a good sign; 
    2. Trump has walked away once; perhaps he will not walk away again; and 
    3. Optimists may point to the recent agreement between Mexico and the US, after similarly high tensions, suggesting the same could happen with US-China. 

    However, just because a meeting is planned, it doesn’t mean it will produce a favourable outcome – and US officials have played down expectations. Moreover, Mexico is much smaller, and less geopolitically significant, than China. Mexico’s GDP is just 6% of US GDP; China’s is around two-thirds (at current exchange rates). It may have been obvious that Mexico would have to cave in to its neighbour. It is not so obvious that China will cave into the US, which it might increasingly see as an equal, and with the economic and political ammunition to withstand the adverse supply shock stemming from higher tariffs on its exports to the US. Indeed, it is China’s structural challenge to US hegemony that is more of an issue than the US$600bn of bilateral trade (which is only 3% of US GDP). 

    But trade decisions cannot easily be disentangled from the approaching US presidential election in 2020, with Trump having announced his intention to stand again last week. Playing tough against China may win him support in some states and sectors, but the fear of no deal in Osaka and his re-election next year could cause growing worry that the trade war will continue for years. And the economic cost to the US of the (self-inflicted) conflict could also undermine Trump’s re-election bid. Even looser monetary policy from the US Fed, as signalled last week, may not be enough to save the economy in time. So, could Trump just try to get a deal, sell it domestically as a success and run a campaign on fighting China, getting something in return, lower interest rates and a growth pick-up by next year? 

    What next? Trump is threatening additional tariffs on the remaining US$300bn of Chinese imports if he cannot get a deal, pending his meeting with Xi, but it is hoped some form of understanding on bilateral trade can be reached in Osaka. The US objectives seem to include reducing its bilateral deficit with China and securing agreement on technology and IP. We think specific deals seem unlikely, but an agreement to continue talks without escalation would be a positive outcome.

    Read the full report here

    Recap of the week’s key credit developments

    Zimbabwe: President Emmerson Mnangagwa said last week that Zimbabwe will aim to bring back its own currency by end-2019 or Q1 20 at the latest. Mnangagwa pointed to Finance Minister Mthuli Ncube’s success with the government’s first budget surplus as a preparatory step towards the return of a new currency. In March 2018, Deputy Finance Minister Terence Mukupe had said that a new currency could be introduced once six months’ import cover of international reserves have been accumulated, which should take 2-3 years. However, the latest IMF report forecasts import cover of just 0.2 months’ cover in 2019 and 0.6 in 2020 (gross reserves import cover of goods and services).  

    Seychelles (SEYCHE): Fitch upgraded Seychelles’ only long-term foreign currency rating last Friday, to BB from BB-, the fourth consecutive upgrade since the initial rating of B- in February 2010. The outlook is stable. Fitch cited the latest review mission (18 March) of the PCI programme with the IMF.  

    Pakistan (PKSTAN): On Monday, Qatar became the latest country to pledge support for Pakistan (B3/B-/B-). Between deposits and direct investment, Qatar will provide a total of US$3bn, bringing the total economic partnership between the two countries to US$9bn. The Qatari Foreign Minister made the announcement following the Emir of Qatar’s recent visit to Pakistan.  

    YPF (YPFDAR): The Argentinian energy firm issued a US$500mn 10-year bond with a coupon of 8.5% on Thursday, priced to yield 8.75%, after initially being marketed to yield over 9%. The issue marked the first corporate bond out of Argentina in more than a year. We believe the yield is attractive and expect the new issue to perform well.  

    Metinvest (METINV): The company released an unaudited monthly report disclosing headline financials. In 4M 19, revenues came to US$3.8bn (-7% yoy), EBITDA (ex. JVs) was US$538mn (-30% yoy), and EBITDA (ex. JVs) margin decreased to 14% (-5ppts yoy). Debt was roughly unchanged ytd, but net leverage increased slightly to 1.2x on weaker EBITDA.   

    Nostrum Oil (NOGLN): Nostrum said it will consider bids from third parties who want to acquire the company, and is also open to other options including farm-outs of stakes in some assets. A potential transaction involving divestiture of Nostrum’s assets in some form could trigger a change of control put on the US$725mn notes due 2022 and US$400mn notes due 2025, if any party gains control of more than 50% of the company or acquires all – or substantially all – of its property and assets. We think that a partnership or partial farm-out is more likely than sale of the business as a whole. 

    Kazakhstan banks: Kazakhstan’s new President Kassym-Jomart Tokayev has signed a decree cancelling fines and penalties imposed on some individual creditors by banks. For some debtors, reports suggest that loans will be written off completely. This measure will impact c500,000 Kazakhstanis, according to Tokayev, and is expected to cost the government cUS$1bn. Separately, Tokayev has stated that he does not support bank bailouts. These comments are important because: (a) Kazakhstan appears to be changing the recently-adopted stance on support. In the last 2-3 years, authorities have provided support to former KKB (which made acquisition by Halyk possible) and extended subordinated loans to a number of lenders, including ForteBank and ATF Bank. Prior to these packages, there had been a number of rounds of restructuring at Kazakhstan banks, in which foreign bondholders participated in losses. (b) The regulator is still expected to carry out an asset quality review, which could lead to some banks requiring additional help. In the absence of extraordinary government help, there may be concerns about the implications of this asset quality review for some bondholders. 

    Halyk Bank (HSBKKZ): On June 24, Halyk Bank published a revised dividend policy. The bank will now look to pay out ‘at least 50% and up to 100%’ of the group’s consolidated income. This should have been expected, following Halyk’s Capital Markets Day. It is in line with what we discussed in a recent note – there are more opportunities for equity investors than for credit investors at Halyk bank. 
     

    TBC Bank (TBCBGE): TBC Bank has returned to the eurobond market with a US$125mn PerpNC5.25 security, in Reg S/144A format. This comes after Bank of Georgia (GEBGG) placed a US$100mn Reg S only Perp at par, with a 11.125% coupon (IPT was low/mid 11%). Looking at indicative mid z-spreads, the GEBGG Perp is quoted around 2x wider than the GEBGG 6% 2023 bond (not adjusting for the difference between the maturity of the senior bond and the first call date on the perp). The GEBGG Perp yields c10.15% to the 2024 call (mid, z+842bp). TBC Bank disclosed IPT of ‘high 10%’ for its debut US$-denominated perp issue.  

    Halkbank (HALKBK): On 26 June, Bloomberg reported that Hakan Atilla, former Deputy General Manager of Halkbank, will be released on 19 July. The reports about Atilla’s potential release come just before the much-anticipated meeting between President Trump and President Erdogan, at the G20 Summit this weekend. Turkey’s plan to take delivery of military equipment from Russia will be the likely focus of discussions. However, this latest news suggests Turkey’s relationship with Iran could also come up. 

    First Bank of Nigeria (FBNNL): FBN announced its intention to call the US$450mn subordinated bond on 23 July, which is the first call date. FBN also called a US$300mn subordinated bond last year and redeemed its debut US$175mn subordinated bond at the first call date in 2012.  

    Access Bank (ACCESS): S&P has affirmed the ‘B’ rating assigned to Access Bank. The outlook is stable. The rating agency believes that acquisition of Diamond Bank ‘will cement Access as the leading franchise in the competitive Nigerian banking sector’ and notes that the new bank will have a market share of banking sector total assets of nearly 25%. We still have a Buy recommendation on the US$300mn ACCESS 10.5% Oct 2021 bond, which is now the only bond the group has outstanding.  

    Bayport Management Ltd (BAYPRT): Bayport has disclosed that it is considering strategic options, including an IPO. This is probably the next logical step in the development of this issuer. Having said that, questions will likely be raised about the commitment of the founder shareholders to the bank following any IPO.

    Sharjah Islamic Bank (SIB): Sharjah Islamic Bank has placed a US$500mn PerpNC6 security at par, with a 5.00% coupon. The IPT was ‘mid-to-high 5%’. The new bond was more than 10x oversubscribed, and is the latest in a stream of new issues of perpetual securities from banks in the Middle East.  

    Burgan Bank (BGBKKK): Burgan Bank has invited holders of its US$500mn perpetual security, which is callable at par (plus accrued) on 30 September 2019, to tender their bonds. The purchase price is 100.85% of par. Burgan Bank will also pay accrued interest on amounts purchased, on the settlement date (expected to be 9 July 2019). The tender offer expires at 4pm London time on 1 July 2019. Avid followers of Burgan Bank will recall the infamous reg par call incident, involving a US$400mn security. Assuming the tender offer is successful, all Middle East banks’ perpetual securities with 2019 call dates will have been redeemed this year. Dubai Islamic Bank, Emirates NBD and Al Hilal Bank have all called perpetual securities.