In Focus: Argentina's debt reprofiling: High implementation risks
Following three weeks of intense market pressure, Argentina announced its intention to extend the maturities of certain of its government debt (ie, maintain existing interest payments, no haircut to repayment of principal) – US$7bn of short-term debt, US$50bn long-term debt and US$44bn IMF debt. The surprising aspect of this announcement is the inclusion of the foreign debt, given the relatively low level of maturing foreign debt in the next 12 months.
From a low base of expectations (since the 11 August primary election, the debt market has moved to price in default, currency is down c25%, FX reserves down c15%, merely 10% of the most recently maturing short-term debt was rolled over, and equities are now valued at half their five-year median PB valuation), we see it as positive that this is being done sooner rather than later, with some coordination between the government and opposition. However, there is likely to be high execution risk associated with such an operation, and it does not necessarily alleviate policy uncertainty around what a future government could do.
Given the focus of the reprofiling operation, it should be easier to restructure the short-term (domestic) debt and the IMF debt. However, restructuring the long-term (foreign bonded) debt could be harder, given the existence of collective action clauses (CACs), creditor-coordination issues and the possible need to maintain PV neutrality.
To the extent it matters, the IMF response, following a scheduled trip to meet finance minister Hernán Lacunza, central bank head Guido Sandleris and opposition presidential candidate Alberto Fernandez, was supportive. The IMF “understands that the authorities have taken these important steps to address liquidity needs and safeguard reserves… will continue to stand with Argentina during these challenging times”.
It remains to be seen how much damage has been done to the IMF’s credibility in other markets (not to mention that of former head, Christine Lagarde) given the unprecedented speed, size and heavy front-loading of the package initially approved for Argentina in 2018 and the recent positive progress report on July 2019.
We reiterate our Sell recommendation on Argentina's sovereign bonds (we downgraded from Hold here). We also reiterate our view published in the August equity monthly that, among the three big underperforming, very cheap markets in our universe, we prefer Pakistan (structural change afoot), then Argentina (a mess but also the lowest hurdle to attract back capital) and lastly Nigeria (low growth with no policy or structural change to address this).
Read the report here.
Recap of the week’s key credit developments
Sri Lanka (SRILAN): The Central Bank of Sri Lanka lowered its key interest rate on 23 August. The benchmark standing lending facility rate was cut by 50bps to 8% and the standing deposit facility rate was cut by 50bps to 7%. The latest cut was intended to increase economic activity, even as consumer price inflation of 3.3% in July is below the 4%-6% target and the central bank’s 2019 GDP growth forecast was lowered to 3% in July.
Zambia (ZAMBIN): S&P became the latest credit rating agency to downgrade Zambia’s long-term foreign currency rating, lowering it to CCC+ from B- in its third consecutive downgrade of the country. According to reports, rising external debt, large infrastructure spending, large domestic arrears and falling reserves were the key reasons for the S&P’s downgrade, all while progress towards an IMF programme is slow. Zambia’s fiscal deficit is also a negative factor, forecast by the IMF to be 5% of GDP this year.
Lebanon (LEBAN): Fitch downgraded Lebanon to CCC from B- (negative outlook), similar to Moody’s Caa1 rating and below S&P’s B-. The agency cited pressure on the country’s financing model leading to risks to the public debt servicing capacity, falling banking sector deposits, falling central bank reserves and a reliance on unorthodox measures taken by the central bank to attract inflows.
Ardshinbank (ARBANK): Moody’s has upgraded Armenia to Ba3 from B1. The outlook on the new, higher rating is stable. This action may have implications for Ardshinbank. This lender is currently rated B1, with a positive outlook at Moody’s. ARBANK has one USD-denominated bond outstanding, which is a sinker. We note that the final payment is due in January 2020. It is possible that Ardshinbank may look to replace this bond.
Burgan Bank (BGBKKK): Following the tender offer earlier in the year and the placement of a new US$500mn perpetual security, Burgan Bank (BGBKKK) has called what is left of the BGBKKK 7.25% Perp. This action means that since Banco Santander’s decision to skip the first call on a EUR-denominated instrument, Dubai Islamic Bank, Emirates NBD and Al Hilal Bank and Burgan Bank have all called perpetual securities at the first call dates. This implies a 100% record of calling perps (at the first call date) in CEEMEA this year. For more on this, see CEEMEA Perps: Call me maybe.
Ecobank Transnational (ETINL): The IFC has concluded the sale of its 14.1% stake in ETINL to Arise B.V. The buyer is a Dutch investment firm owned by FMO, Norfund and Rabobank. FMO is a triple-A rated Dutch development bank and is actively involved in providing financing across Africa. Norfund is the Norwegian Investment Fund for Developing Countries and is owned by the Norwegian Government. Rabobank is the leading cooperative lender in the Netherlands, and is rated Aa3 at Moody’s, A+ at S&P and AA- at Fitch. Rabobank’s international business focuses on food and agricultural sectors. Our Buy recommendation on the ETINL 2024 bond is unchanged. The sale by IFC was disclosed previously, and we do not expect this to lead to a significant change in strategy at ETINL.
Kazakhstan banks: Moody’s revised the outlook on the sovereign’s Baa3 rating to positive from stable. Following this, the outlook on Development Bank of Kazakhstan has also been revised to positive. The rating agency has also revised the outlook on Halyk’s deposit ratings to positive. The outlook on Halyk’s Ba3 senior unsecured bond rating remains stable. We recently commented on Halyk’s strong Q2 results. The news, while positive, is unlikely to have a material impact on HSBKKZ bonds, in our view.
Orient Express Bank (VOSEXP): Orient Express Bank has disclosed that it has ‘no plans’ to write off subordinated debt. The lender has a US$125mn perpetual security outstanding. Previous comments from the Central Bank of Russia regarding a breach of capital ratio requirements had led to concerns about this bond. However, VOSEXP disclosed that Finvision, a shareholder in the bank, has offered to buy RUB2.2bn, easing pressure on the bank’s capital. Given what occurred at other banks dealing with capital challenges, this news is likely to be seen as positive for VOSEXP in particular, and Russian bank subordinated debt in general. Having said that, VOSEXP is yet to resolve other challenges, including some uncertainty about owners and the longer-term outlook for performance.
Yapi Kredi (YKBNK): Bloomberg reports that UniCredit (UCGIM) is considering options for its interest in Yapi Kredi and may take direct control of the stake in the Turkish bank currently held via a joint venture with Koç Holding. UniCredit’s aim is to free up capital, according to the report. Koç Holding has responded to this report, saying that ownership can be evaluated at any time, but there are ‘no developments that would require disclosure to the public’. The reports about a potential sale of UniCredit’s stake in Yapi Kredi are not entirely surprising given that (a) the value of the stake in Yapi Kredi was written down in Q3 18, and (b) UniCredit sold its US$200mn holding of YKBNK perps. UCGIM remains exposed to Yapi Kredi via subordinated loans. However, UCGIM has a stated intention of reducing its exposure to Turkey/Yapi Kredi, as discussed in the note here.