Weekly Credit Risk Monitor /
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Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    15 August 2019
    Published by

    In Focus: Argentina: Downgrading select corporates with peso poised for strong pullback 

    Given the primary election (PASO) results, we are downgrading to Hold (from Buy) Argentina’s four main Independent Power Producers (IPPs): Stoneway (STNEWY), Albanesi (ALBAAR), Genneia (GNNEIA), and MSU Energy (MSUNRG). We are also downgrading Argentina’s largest energy company, YPF (YPFDAR) to Hold. The results, with President Mauricio Macri suffering a heavy defeat, immediately brought about a strong pullback on the Argentine peso (ARS), and will likely also affect corporate bond prices negatively as the fear of a Fernandez-Fernandez victory transfers into the markets. 

    Undoubtedly, the spectre of a new wave of populist/socialist policies have been raised, bringing memories of the Kirchner administration (that of Nestor, followed by that of his wife Cristina) when utilities companies’ contracts that were originally denominated or linked to the US dollar were “peso-fied” and also saw their tariffs frozen for years. 

    This fear, in our opinion, is likely to affect the four main IPPs, which have thrived on the back of their dollar-linked contract and on the clean-up of the country’s government-owned energy and power wholesale and dispatch company CAMMESA. 

    For YPF, there’s the dread of another spectre: the nationalisation of YPF’s Spanish-owned part of the company (Repsol) by Cristina Kirchner, and the messy and lengthy indemnisation process that followed. 

    We believe that banks could also be hit hard by the PASO results, as the central bank has limited measures to stop a run in the peso that we are already witnessing. This might prompt the central bank to raise the already-high rates, making loans even more prohibitive and investment that much more expensive, negatively affecting economic growth. 

    In our view, what is clear is that there will be strong selling even in the stronger names, because previous Kirchner experiences are enough to spook even the most optimistic investor.

    Read the full report here.

    Recap of the week’s key credit developments 

    Argentina (ARGENT): Argentina’s financial markets went into free fall after incumbent President Mauricio Macri suffered a huge loss in Sunday’s primary elections (PASO). We downgraded our recommendation on Argentina’s US$ bond to Sell from Hold before the market opened on Monday, on concern over what a Fernandez-Fernandez administration would look like. Longer US$ bonds have since fallen to the c50 level, down some 40% from last week, while the peso (ARS) has fallen 25% against the US$ to 60 (from 45), amid seemingly modest central bank intervention. However, the authorities have limited ammunition to defend the currency (see here). The challenge for Macri will be to navigate through the next two months and try to force a second round vote, while the challenge for Fernandez will be to convince markets (and the IMF) that if he wins, he will maintain sound policies.

    Turkey (TURKEY): On Thursday, Turkey made significant changes to its central bank’s senior management team, as at least nine officials were moved from their positions to other roles. The officials include chief economist Hakan Kara and sources also listed the head of research, the banking department chief, the risk management chief and the institutional transformation manager. The move comes shortly after President Erdogan replaced the central bank governor Murat Cetinkaya with former deputy Murat Uysal, for ‘not conforming to instructions given on monetary policy’. Some of those recently dismissed are reported to have been externally hired by Cetinkaya. 

    DTEK (DTEKUA): The 2024 bonds sold off on the worrying headlines regarding an investigation into the Rotterdam+ formula, which refers to a pricing mechanism to set electricity tariffs for thermal power plants. The prosecutors suspect four officials of the electricity market regulator and two employees of DTEK to have caused a loss of US$750mn to electricity consumers in 2016-2017, of which cUS$570mn benefited DTEK. The downside risk to DTEKUA 24s stems from investigation-related news affecting investor sentiment and the actual outcome of the investigation, which could entail a financial consequence for the company. DTEK has limited resources to spare, therefore we expect its bonds to underperform while the investigation risk persists. 

    Gol Linhas Aereas (GOLLBZ): Gol Linhas Aéreas Inteligentes, reported strong Q2 19 results despite part of its Boeing Max fleet being grounded. Still, in what is cyclically the weakest quarter for aviation companies in Brazil, GOL reached net revenues of US$800.9mn and EBITDA of US$226.3mn in Q2 19, compared to US$652.2mn and US$57.6mn, respectively a year ago. We reiterate our Buy recommendation on GOLLBZ on what we believe are attractive yields and a positive business outlook.

    Azul S.A. (AZULBZ) reported strong yoy results in Q2 19 as well as in the last twelve months. We reiterate our Buy recommendation on Azul’s bonds and expect an even stronger H2 19. 

    Ecopetrol S.A. (ECOPET): The company had a soft second quarter on lower Brent prices and scheduled maintenance. We downgraded Ecopetrol S.A.’s (ECOPET) family of bonds in May following weak Q1 19 results and on tight yields. In Q2 19, not much has changed with results remaining soft. We emphasise that the main reason for our Hold recommendation is the low yields at which ECOPET bonds are trading, putting them at the lower-end of regional peers.

    African Bank (AFRIBK): In the issuer’s latest Pillar III disclosures, African Bank Ltd stated that the CET1 and total capital ratios were 32% and 38.7% at the end of June. AFRIBK also disclosed a liquidity coverage ratio of 437%. This ratio was much lower than in September 2018, reflecting repayments made since that time. We still have Buy recommendations on the US$-denominated AFRIBK 2020 bonds.

    Nigerian banks: As expected, Ecobank Nigeria (ECOTRA) redeemed a US$250mn subordinated bond on 14 August. The bond was called in July. This was the last subordinated Nigerian bank bond outstanding. There are now just four Nigerian bank bonds outstanding – the Access Bank 2021, Zenith Bank 2022, UBA 2022 and Fidelity Bank 2022 bond. The Ecobank Transnational 2024 bond also remains outstanding.