Weekly Credit Risk Monitor /
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Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    18 July 2019
    Published by

    In Focus: Fixed Income – Top 5 picks and H2 outlook 

    Greek bonds trading through US Treasuries, Italy’s order book for a 50-year bond 5.5 times oversubscribed and US$13tn in negative yielding bonds – the search for yield is back with a vengeance. Buoyed by expectations of global monetary easing, in the US and in Europe, and a more dovish ECB with the impending arrival of the IMF’s Lagarde, as well as the US-China trade truce agreed at the G20 (even if the trade war hasn’t gone away), markets have been able to dismiss the risk of slowing global growth, and other geopolitical or idiosyncratic stress points.  

    The credit boom may not end well, but that might not be for some time yet, assuming the global economy can finally escape from the liquidity trap it finds itself in. In the meantime, investors can just buy anything that moves. We prefer to be more discerning.  

    The compression in yields, amid surging capital flows to EM, make finding value harder and harder, without going down the credit curve, extending duration or accepting lower liquidity. But even some idiosyncratic risks (distressed sovereigns and special situations) need to be treated with care at this stage.  

    We make four changes to our Top 5 picks. We add Buys on Ghana, Petropavlovsk and DTEK. We keep our Buy on CSN. We add a Sell on Kaltex. Our picks reflect the compression of EM sovereign yields, with just one sovereign Buy, as we see more value in corporates/special sits.  

    We also identify nine other trades to watch for H2 and identify four global themes that we think will shape the outlook for H2: 

    1. Global monetary easing, with the Fed expected to cut rates this month. In our Special Feature on page 25, we look at EM bond performance during previous periods of US Fed easing and conclude (tentatively), that EM bonds generally perform well if the easing is associated with a slowdown rather than a recession.
    2. Slower global growth. Policy accommodation could mitigate the impact, but slower growth can bring vulnerabilities to EM/frontiers. 
    3. And related, another flaring up of the US-China trade war.
    4. Oil prices. Will softer demand outweigh supply factors, notwithstanding US-Iranian tensions? 

    Read the full report here

    Recap of the week’s key credit developments

    Turkey (TURKEY): Last Friday, Fitch became the latest rating agency to downgrade Turkey’s long-term foreign currency rating. Its third consecutive downgrade takes the rating to BB- from BB, with Negative outlook, and comes one year after the agency’s last downgrade. It still remains one notch above S&P’s B+ (Stable) and Moody’s B1 (Negative). 

    Argentina (ARGENT): On Friday, Moody’s downgraded the outlook on Argentina’s B2 long-term foreign currency rating to negative from stable. S&P and Fitch both have an equivalent B rating (Fitch with a negative outlook since November 2018). The agency cited heightened uncertainty over policy implementation and the change in sentiment that this may bring. Our view: Largely a non-event for markets, which have pretty much anticipated these negative ratings factors. In fact, some might question the timing, pointing to some positive economic indicators released recently. Of more importance to markets at this stage, the IMF Board approved the fourth review of the SBA the same day.

    Pakistan (PKSTAN): On Tuesday, the State Bank of Pakistan (SBP) increased its target rate for the eighth consecutive time, by 100bps to 13.25. The MPC cited temporary effects of recent events that cause the inflation expectation for FY 20 to be raised. 

    Citgo (CITHOL): The company announced on Tuesday its intention to refinance its existing senior secured note, the US$1.87bn 10.75% 2020 due in February, through (i) the issuance of a new senior secured note due 2024, amounting to US$1.37bn (principal), and (ii) a new US$500mn senior secured term loan facility due in 2023. 

    Pemex (PEMEX): Company CEO Octavio Oropeza presented a summary of the company’s business plan on Tuesday, during Mexico President Andres Manuel Lopez Obrador’s (AMLO) daily press conference. We find nothing new in the plan and remain sceptical about the reversal of Pemex’s fundamental problems and continue to believe that some of the objectives of the ‘new’ plan are not right. Investors would be better-served by taking a ‘show, don’t tell’ stance on Pemex. 

    Fortebank (ALLIBK): Moody’s has upgraded ForteBank’s long-term deposit ratings to B1 from B3. The rating agency has also upgraded the bank’s senior unsecured debt to B3 from Caa1. The baseline credit assessment rating (BCA, a standalone rating) was upgraded reflecting the decline in the ratio of problem loans to tangible common equity to 72% at end-2018 from 100% in 2016, and improved profitability (return on total assets increased to 1.9% in 2018 from 1% in 2016). The Moody’s upgrade is the second positive rating action at ALLIBK in just over a month. 

    Belarusian banks: In its latest update on the sector, Fitch Ratings states that asset quality is ‘still weak’ and sees reserve coverage as ‘modest’. The rating agency is also concerned about the proportion of foreign currency loans, which was 48% at the end-Q1. Fitch notes that exposure to ‘highly leveraged public sector enterprises’ has impacted asset quality and doesn’t expect this to improve in the near term. 

    Privatbank (PRBANK): Privatbank generated a net profit of UAH18.3bn in H1 19, 2.6x higher than in H1 18. In a brief press release, management highlighted that loans to SMEs and to individuals increased, and so did customer deposits. Our view: Bondholders may argue that this performance strengthens the case for compensation. However, it is likely the bank will continue to state that performance only improved because the state intervened.

    Turkish banks: As discussed above, Fitch has downgraded the Republic of Turkey to BB- from BB. The outlook on the new rating is negative. Following this, Fitch has downgraded a number of Turkish corporates. No bank ratings had been adjusted at the time of writing, but Fitch has commented on liquidity in Turkey’s banking system. Fitch notes that the volume of external debt has decreased, and foreign currency liquid assets far exceed debt repayments due over the next 12 months. Separately, according to a Reuters report, efforts to restructure problem loans at Turkish banks have stalled as some banks and borrowers are waiting for further guidance from the authorities while others believe conditions (and therefore restructuring terms) may improve 

    Kuveyt Turk (KFINKK): Kuveyt Turk recently priced a US$200mn perpetual security. The bank previously said it planned to issue a perp, so this isn’t a surprise. Like Albaraka Turk (ALBRK), this lender appears to have opted for a private placement of some sort. Nonetheless, the new deal does mean we now have three USD-denominated perpetual securities outstanding in Turkey. Our view: We estimate that this bond could add c230bps to KFINKK’s total capital ratio, which was 16.4% at end-March. As discussed in a previous report, performance at KFINKK has generally been solid. This, and strong parental support, has probably contributed to the resilience of KFINKK bonds. The KFINKK 2026 subordinated bond ‘only’ fell to the high 80s in August/September 2018, and is now quoted around par. 

    Alternatifbank (ALNTF): Commercial Bank (COMQAT) reported results for H1/Q2 earlier this week. Our view: Performance at ALNTF in H1 was decent overall. ALNTF has two USD-denominated bonds outstanding, one of which matures on July 22 (and is guaranteed by COMQAT). We had hoped that the bond would be replaced, but haven’t heard anything about a new issue (yet?). If it isn't replaced, ALNTF will only have the 2026 subordinated bond outstanding. 

    Ecobank Nigeria (ECOTRA): Ecobank Nigeria has issued the notice required to call its US$250mn subordinated bond on 14 August. This comes after Access Bank and First Bank of Nigeria called similar securities earlier this year. Our view: Once the ECOTRA subordinated bond is redeemed, there will be no other Nigerian bank subordinated bonds outstanding in USD. 

    Petropavlovsk (POGLN): Petropavlovsk has been successfully rebuilding its operating and financial credibility over the past year. The company (i) finished, tested and launched the state-of-the-art pressure oxidation facility (POX), (ii) refinanced its debt and, (iii) has recently benefitted from rallying gold prices. Our view: We upgrade POGLN 22s to Buy. Positive developments in the company’s credit profile changed sentiment around the POGLN 22s, causing the bonds to rally since the beginning of the year. 

    DTEK (DTEKUA): The company has started to catch up with the rest of the corporate space in Ukraine, but the DTEKUA spread to the bonds of its sister-company Metinvest is still barely off its 12-month highs. We upgrade the DTEKUA 24s to Buy. We expect DTEKUA to outperform the Ukrainian corporate space and the spread to METINV to tighten to 200-250bps from c300bps.