Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    26 September 2019
    Published by

    In Focus: Ukraine – What to expect from the IMF visit

    While the world’s eyes are on the nature of the Trump-Zelensky phone call on the Bidens (‘Ukrainegate’ – covered in detail by our research providers Macro-Advisory here), investors’ focus is on the relationship between the IMF and the Ukraine government. The IMF Article IV mission in Ukraine is due to wrap up this week and markets will be focusing on whether it concludes with a formal request for an IMF programme, or even a staff-level agreement on a new programme that could go to the board in the coming weeks. That is, assuming Kiev still wants a programme, given that it is able to borrow in the market in US$ at 7% or less (also given where its eurobond yields are). We think it does, with Prime Minister Oleksiy Honcharuk stating that programme talks would commence soon.  

    We think, while financial constraints may have eased and there is no pressing balance of payments (BOP) need, investors would welcome another IMF programme in Ukraine as a demonstration of the new President and government’s reform commitment. That being said, while the President and government may be politically inexperienced, the economic team isn’t and offers strong policy continuity. And the time it has taken to get here shouldn’t be a concern either. We think one reason why we haven’t seen programme negotiations or a formal request sooner is because the new government has only just been formed, and the IMF needed time to visit and discuss the new government’s policy intentions, which it has only been able to do now. The Letter of Intent (LOI) between the IMF and the authorities has to be signed by the President, Prime Minister, Minister of Finance and the NBU governor, and so until the Prime Minister was chosen, there was no negotiating authority. Besides, bonds have rallied even without a programme (following President Volodymyr Zelensky’s parliamentary success), although maybe that’s because of the expectation that the authorities will quickly work towards securing one. 

    However, there are no details yet on the nature of the programme being sought. We think the focus will be on the structural reform agenda. This will focus on continuing the reforms seen so far (anti-corruption, gas tariffs) and tackling those that have so far proved more elusive (land reform, privatisation). We think a small-ish three/four-year EFF would be appropriate, picking up where the 2015-2018 EFF programme left off (the small, US$4bn SBA approved at the end of last year was only meant to be a bridge during an election year). The new government has already taken measures, which we think could form the basis of prior actions for a programme (or lay the ground for future structural benchmarks). First, the minister of finance presented the draft 2020 budget to parliament on 20 September (unusually early in the year). It targets a 2.1% of GDP budget deficit. That would seem to us IMF-compliant, but we await the Fund’s views on this. Second, the Prime Minister presented the government’s strategy for farm land sales (aka land reform) on 19 September, with the Ministry of Economic Development, Trade and Agriculture publishing the text of the draft law on 20 September. The land reform is due to come into force on 1 October 2020. We think land reform will be a crucial condition in any new IMF programme. Hence, this announcement is positive. 

    Read the full report here

    Recap of the week’s key credit developments 

    Mozambique (MOZAM): On Friday, Moody’s upgraded its long-term foreign currency rating on Mozambique to Caa2 from Caa3. Moody’s maintains its stable outlook. The agency has also assigned a Caa2 rating to the new bond that will be issued at the end of the month in exchange for the existing 2023 bond. Although the bond exchange was agreed earlier this month (see our WCRM on 12 September here), the new rating still indicates a high risk of default as government debt remains very high (100% of GDP in 2018).  

    This week has been a monster week for EM bond issuance, as countries take advantage of lower global borrowing costs, following new monetary easing from the US and the ECB, and a rebound after the summer lull. It might also mark an attempt by issuers to get ahead of the competition, amid reports of other countries seeking to come to the market before the end of the year. We calculate some US$21bn has been issued (or priced) across eight issuers. Key highlights include:  

    • South Africa (SOAF): The government raised US$5bn in a eurobond offering on Monday, its largest offshore sale, split into a US$2bn ten-year tranche yielding 4.85% and a US$3bn thirty-year tranche yielding 5.75%. This month, average yields on South Africa’s US$ bonds have risen amid concerns over its heavily indebted SOEs, such as Eskom. 
    • Abu Dhabi (ADGB): The emirate sold US$10bn in its first international debt offering since October 2017. It comprised a three-tranche deal: US$3bn of five-year notes priced at 2.23%, US$3bn of ten-year notes priced at 2.56% and US$4bn of thirty-year notes priced at 3.25%.  
    • Bahrain (BHRAIN): Bahrain sold a total of US$2bn in bonds, US$1bn in an eight-year Sukuk, priced to yield 4.5% and US$1bn in a twelve-year conventional bond, priced to yield 5.625%. It is the first debt sale since neighbouring countries provided US$10bn in aid in October 2018, and a debt offering was delayed earlier this year. 
    • Kazakhstan (KAZAKS): Kazakhstan priced EUR1.15bn in new benchmark seven- and fifteen-year EUR-denominated bonds. EUR500mn was issued in the 2026s, priced to yield 0.6%, and EUR650mn in the 2034s, priced to yield 1.5%. Both bonds were issued at par. Total orderbooks exceeded EUR2.8bn. 
    • Armenia (ARMEN): On 19 September, Armenia priced a US$500mn ten-year bond at 97.976, to yield 4.2%. The coupon was 3.95%. The sovereign is rated Ba3 (stable outlook) by Moody’s and B+ (positive outlook) by Fitch. This was its first issue in four years. It also undertook a tender offer to repurchase a large amount of its outstanding US$700mn 2020 bond.  
    • Montenegro (MONTEN): A roadshow was held over 23-25 September for new ten-year bonds from Montenegro. The former Yugoslav republic intends to issue EUR500mn at the end of September, according to the Ministry of Finance. IPT was in the 3.125-3.25% area with final guidance reported at 2.85%. The country currently has three international bonds outstanding, all EUR-denominated, for a total of about EUR1bn, maturing in 2020, 2021 and 2025. EUR500mn of seven-year bonds were the last bonds issued, in April 2018, at a yield of 3.625%. 
    • Serbia (SERBIA): Although it did not issue this week, the Serbian government plans to raise another EUR700mn later this year, based on its draft 2019 budget. Serbia issued EUR1bn ten-year notes in June, with a coupon of 1.5%, to refinance dollar-denominated debt. The budget is being revised to allow higher public sector wages. 
    • Ecuador (ECUA): Ecuador returned to the market with a US$2bn dual-tranche offering, with interest accruing from 27 September. This consisted of a US$600mn 2025 bond at 7.875%, and a US$1.4bn 2030 bond at 9.5%. Both bonds were issued at par. Ecuador already had a heavy redemption profile over the 2020s, and the 2025 filled one of the few gaps, between the 24s and 26s, while the 2030 extended its curve (excluding the old defaulted 2030 global bond). The offering followed the US$2.125bn 10.75% 2029 bond issued in January. The deal came a day after the IMF announced a staff-level agreement on the second review of the EFF, a US$4.2bn programme which was approved in March 2019. Finance Minister Richard Martinez said that bond sale will allow the government to meet its programmed financing for this year. 

    Naftogaz (NAFTO): The company reported US$4.9bn (-1% yoy) in revenues, US$1.9bn (+17% yoy) in EBITDA and an EBITDA margin of 38% (+6pts yoy). We estimate that after the company issued US$335mn 7.375% notes due 2022 and EUR600mn 7.125% notes due 2024 in July 2019, its pro-forma leverage could have increased to 0.8x from c0.5x depending on the proportion of the bond proceeds used to refinance short-term debt. 

    Nord Gold: The gold producer is looking to issue US$-denominated 5-year notes. In 12 months ended H1 19, Nordgold produced 930 Koz of gold, earning US$1,169mn in revenues and US$484mn in EBITDA corresponding to an EBITDA margin of 41%. Nordgold’s net leverage came to 1.9x. With the bullion above US$1,500/oz, Nordgold is well positioned on the cost curve with all-in-sustaining costs of US$1,071/oz.  

    LIQTEL is to raise up to US$375mn loan structured a pre-IPO facility. Deutsche Bank will provide funding and PIC, which manages the pension funds of South African government workers, guarantee the loan.  

    Credit Bank of Moscow (CRBKMO): The Board of Credit Bank of Moscow has approved the sale of 2.75bn new shares. According to Bloomberg, CRBKMO is seeking to raise cRUB15bn, primarily from anchor investors.  

    Sovcombank (SOVCOM): After announcing a roadshow for a 10NC5.5 Tier 2 security, Sovcombank has been upgraded by both S&P and Fitch. S&P upgraded the lender to BB from BB-. The S&P upgrade reflects the view that the increase in Sovcombank’s market share raises the likelihood of extraordinary support. At Fitch, Sovcombank was upgraded to BB+ from BB, reflecting a number of factors including ‘exceptional performance’ and ‘robust asset quality’. Fitch also notes that capital and liquidity buffers are solid, and the operating environment in Russia has improved. 

    Ukrainian banks: Following the sovereign rating upgrade, Fitch upgraded its ratings on seven Ukrainian banks including Privatbank, Ukreximbank and Oschadbank. The lenders were upgraded to B from B-. In addition, the Viability Ratings of these banks were placed on rating watch positive, reflecting ‘improving macroeconomic stability’, and the rating agency’s view that further stabilisation of the sovereign’s credit profile should be positive for Ukraine’s banks. Fitch also notes that performance in the banking sector is recovering, solvency has improved and refinancing risks are lower than before. Our Hold recommendations on Oschadbank and Ukreximbank eurobonds remain unchanged.

    Georgia Capital (GEOCAP): On 25 September, Georgia Capital launched a consent solicitation related to its US$300mn 2024 bond. The issuer is seeking to modify certain terms of the bond and requires approval from bondholders of to waive ‘certain events of default or potential events of default’ resulting from inconsistent application of IFRS. Note, we do not assign recommendations to GEOCAP, but we do have a Buy recommendation on the Bank of Georgia (GEBGG) 2023 senior bond, and a Hold recommendation on the GEBGG AT1. GEOCAP has widened versus GEBGG. Recall that GEOCAP owns almost 20% of GEBGG, but GEBGG is a regulated entity, with a longer bond market track record. We acknowledge that this history is intertwined with that of GEOCAP, as both entities were part of the same group.