Weekly Credit Risk Monitor /
Global

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    5 September 2019
    Published by

    In Focus: Argentina – YPF's Swiss franc bond to be fully paid on time 

    YPF S.A. has a CHF300mn 3.75% senior unsecured bond due on 30 September. The bond is now rated B2/NR/CCC after the recent sovereign downgrades and trades at cCHF97.734.  

    Due to the high volatility in the Argentinian market and the currency controls imposed by the government, questions have been raised on whether the bond will be paid on time and in full. Only a month before the bond is to come due, YPF’s bonds tumbled to cCHF0.96 from almost par, after Argentina’s government sought to delay sovereign payments. Price slides right before maturity are rare unless there is a risk of default (eg a Greek government “samurai” yen-dominated bond due July 2015 slumped after the country’s referendum on austerity earlier that month, although the government eventually repaid the bond on time). 

    This sparked speculation that YPF’s repayment is no longer a given on account of the company’s close links to the government. Meanwhile, S&P and Fitch Ratings both downgraded YPF in August. Fitch cited the close linkage with the sovereign, which “can sometimes govern the company’s strategy and business decisions.” 

    We spoke to YPF management and the company assured us that it will be making the payment “in time and in full”, as it has enough funds to do so. This is consistent with the Q2 19 cash on balance sheet reported by the company of cUS$1.3bn, and with the fact that YPF is one of a very small group of Argentina corporates that has never defaulted. 

    In our view, the worst-case scenario would be that YPF makes use of a grace period that would delay maturity until after the October elections, but, even then, the payment would still be made as there are protections for bondholders through a cross-default clause. We assign a very low probability to this scenario in any case. 

    In sum, we are confident that the company will pay on time and in full, but we also want to make sure that investors are aware of the risks given the number and speed of policy changes that are happening in Argentina.

    Read the full report here

    Recap of the week’s key credit developments

    Argentina (ARGENT): On Sunday, the Argentinian government announced a limited range of restrictions on currency purchases on firms and individuals until the end of the year. The move follows the government’s announcement last week of its intention to extend the maturity on some US$100bn of debt (see our research here). FX controls might buy the authorities some time during the election period and they avoid burning FX reserves in a futile defence of the FX rate, but they are straightforwardly negative for international investors. Recent precedents for currency controls include Egypt and Nigeria. We have a Sell recommendation on Argentina’s sovereign bonds. See our report here

    Dominican Republic (DOMREP): On Friday, the Central Bank of the Dominican Republic (BCRD) announced that it will lower its monetary policy rate by 25bps to 4.5%. It is the third consecutive month of rate cuts, after a 50bps and 25bps cut in June and July, respectively. Inflation in July was 1.4% yoy, compared with the target of +4%/- 1% annually. The decision also reflects external factors, including trade disputes and an expectation of lower rates in the US. LatAm growth expectations are also down, now 0.6% for 2019. The BCRD cited data indicating domestic growth of 4.7% over January-July, and monetary easing has begun to increase private credit. 

    Georgia (GEORG): On Wednesday, the National Bank of Georgia (NBG) increased the policy interest rate by 50bps to 7%. Annual inflation was 4.9% in August, above the NBG target of 3% per year (over 2018-21). The MPC statement cited one-off factors such as higher excise tax on cigarettes and pass through effects of the exchange rate depreciation for the inflation rate. The lari is down 10.4% versus the US dollar so far this year, and the MPC is prepared to increase rates further if the exchange rate effects continue. The next MPC meeting is scheduled for 23 October. 

    Zenith Bank (ZENITH): On 4 September, Zenith Bank announced plans to buy back its US$500mn 2022 bond. This is the only US$-denominated bond which Zenith Bank has outstanding. The purchase price for the ZENITH 7.375% 2022 bond has been set at 108.50. The offer expires at 5pm London time on 11 SeptemberA number of factors may have contributed to Zenith Bank’s decision to buy back its only eurobond three years early including (1) its long US$ position, (2) overpayments on US$-denominated loans by borrowers operating in the upstream oil sector, (3) limited opportunities to lend in foreign currencies, (4) availability of cheaper funding from development financial institutions and (5) speculation regarding the calculation of the minimum loans/deposit ratio, with some suggesting the regulator may include term financing in the denominator of the ratio. The purchase price represented a premium of almost 3ppts to the pre-announcement level, and is clearly positive for bondholders. We recently downgraded our recommendation on the ZENITH 2022 bond to Hold following strong performance. 

    Bank of Sharjah (BOSUH): The lender has announced plans to repurchase the US$500mn BOSUH 3.374% 2020 bond, at 101. BOSUH has also announced plans to issue a new 5-year benchmark bond, and there is a new issue condition attached to the buyback of the 2020 notes. The buyback offer expires at 4pm London time on 9 September. 

    Privatbank (PRBANK): Earlier in the week, there were reports of an indicative bid for Privatbank subordinated bonds of around 25. The move up may reflect the following: (1) Delayed reaction to the London Court of International Arbitration (LCIA) ruling on senior bonds. There is more detail on this in a report published in July. Bondholders had until August 13 to provide the required information to the Trustee, which would then be handed over to PRBANK's legal team. We have not heard much about this case in recent days. (2) Inclusion of at least two known allies of Igor Kolomoisky in Ukraine’s new Cabinet, suggesting his influence remains quite strong. One of them is Dmytro Dubilet, the son of a former CEO of PRBANK, who held that position for some time. He also served on the Board of PRBANK himself, prior to the nationalisation of the bank in 2016. The second person is Arsen Avakov, who has been in politics for many years. Koloimsky is reported to have called Avakov a friend.