Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    10 October 2019
    Published by

    Leading opposition candidate Alberto Fernandez has suggested he will pursue a Uruguay-style debt restructuring if elected. This saw a five-year maturity extension with unchanged coupons and principal, resulting in fairly modest PV losses to investors. The idea has appeal; for Argentina bondholders, it might even be the second-best outcome, given the starting point and alternatives. 

    We calculate similar treatment in Argentina could lead to recovery in PV terms of c60-70 (for a representative medium-term bond – 2028 maturity), depending on the assumed exit yield, compared with current prices in the low 40s (42 mid for the 5.875% 2028 US$ bond). Even adding a Ukraine-style 20% nominal reduction (with maturity extension and unchanged coupons), PV is still c48-57. 

    But a Uruguay-style solution may not be viable. First, factors that made Uruguay a success may not be present for Argentina; eg political commitment to a necessary stronger fiscal adjustment may be lacking. Uruguay had strong buy-in. Without strong policy commitment there is no guarantee that the fiscal space provided by maturity extension will improve debt service capacity, which would merely lead to the need for another restructuring at some later date (in fact, with a strong policy commitment, there might not be a need for any kind of restructuring at all). Second, the IMF may think differently and want to see more burden sharing. Ukraine, with a small (20%) nominal reduction, may be a model, although, as we show, that still offers upside from current prices. 

    That is not to say some form of reprofiling or restructuring is not feasible – and raising the Uruguay model has set out the stall to make a restructuring inevitable – but, if necessary, it should follow good-faith discussions with creditors and IIF/G20 best practice, the IMF should be involved and, given the domestic maturity profile, Argentina may need a domestic exchange too (Uruguay or Jamaica (2013) may also be a model). But, in the first instance, it will depend on the next president’s policy objectives, and the IMF’s assessment of debt sustainability and financing requirements. To that end, obtaining a new IMF programme (which implies a commitment to pursuing sound policies) will be an essential part of restoring investor confidence and setting the ground for creditor talks to begin. But this is where the intrinsic conflict between what Fernandez wants to do, and can do, given his own ideology and political constraints, and what the IMF needs/wants to do, will come into play. 

    It is not clear how long it will take either. We could be positively surprised, and Fernandez and his team have made encouraging steps (although other comments sound incoherent and inconsistent). They could be ready to move on day one. But, despite saying he wants a programme, it is not obvious he will agree to what the IMF will want to see (on private sector involvement – PSI – and policies), or be able to implement it, or how long it will take to reach an accord with the Fund. However, the cost of not doing so would be equally high. 

    We upgrade our recommendation on US$ bonds to Hold from Sell (although arguably lower cash price bonds are preferred). We see upside potential from current prices in “restructuring-light” scenarios, and more generally from an illiquidity versus insolvency diagnosis, but the outlook is uncertain. Further downside is possible if there are policy missteps or if Fernandez’s stance towards the IMF or creditors hardens, but downside may be limited at current prices (few performing sovereign bonds, let alone defaulted ones, have traded this low). However, upside – and its timing – is also uncertain, and inter alia, is dependent on Fernandez’s policy objectives, and the IMF. We think the IMF will seek more from PSI and that it could take longer to secure an IMF programme.

    Read the full report here

    Recap of the week’s key credit developments 

    Alfa Bank (ALFARU): Alfa Bank has placed a US$400mn 10.5NC5.5 Tier 2 security at 5.95%. The estimated book size was ‘above US$450mn’ and the initial guidance was ‘6% area’. This new issue came after Sovcombank, a much smaller lender, placed a US$300mn subordinated bond at 8%. Further, Alfa Bank redeemed a USD-denominated subordinated bond last month. Separately, Fitch changed the outlook on Alfa Bank’s BB+ rating to positive from stable. Our view: Although Alfa Bank is privately owned, its strong performance and leading profile mean it’s most often compared to Russia’s state-owned lenders. ALFARU is already rated in line with issuers such as Gazprombank at Moody’s and S&P. We note, however, that Sberbank is rated Baa3 at Moody’s and BBB at Fitch. Thus, Alfa Bank still has some way to go on its ratings, to catch up with Russia’s largest lender. Given the pricing achieved on the recent Tier 2 issue, some may argue that valuations already discount higher ratings. 

    Ardshinbank (ARBANK): Ardshinbank has launched a tender offer for its 2020 bond. US$100mn was issued, but only US$50mn remains following partial amortisation. The outstanding amount includes US$10.31mn ‘held by the borrower and its subsidiaries’. ARBANK is also seeking approval from bondholders for ‘mandatory early redemption’ of the notes. Notes held by the bank will not be considered for the upcoming bondholder meeting to vote on this. The early tender consideration equates to a cash price of 105. This includes an early tender premium of 1ppt, ie the ‘regular’ tender offer consideration equates to 104% of par. Given restrictions on incurring financial indebtedness, ARBANK will only consider issuing new bonds if mandatory early redemption of the existing notes is completed. These actions by the bank should be seen in the context of (a) the recent buyback and new issue by the Republic of Armenia, and (b) Moody’s upgrade of ARBANK’s rating to Ba3, which followed a sovereign rating upgrade. 

    Vietnam (VIETNM): On Wednesday, Moody’s placed Vietnam’s Ba3 long-term foreign currency rating under review for downgrade. The downgrade review is due to institutional deficiencies that have become visible, including delayed payments on a government obligation, and creditworthiness may no longer be consistent with a Ba3 rating. The delayed payments suggest inadequate coordination and complex processes in government that may hinder timely payments in the future. The review period (expected three months) will allow the agency to assess the degree of institutional weakness, although it is noted that high foreign reserves support debt service capacity, and strong growth continues to support the credit profile. Moody’s also noted that Vietnam is at risk of climate change due to the limited fiscal space to respond to adverse climate shocks, and the country’s specific risk to rising sea levels. Moody’s has also placed the ratings for 17 Vietnamese banks under review for downgrade. 

    Ecuador (ECUA): Anti-government protests gained steam, following unrest sparked by rising fuel prices last week as President Lenín Moreno sought to cut gas subsidies. Protests, which are becoming more violent, have spread from Quito to other cities. Moreno declared a state of emergency last Thursday and, on Tuesday, moved government operations from the capital Quito, to the largest city, Guayaquil, accusing his political opponent (read ex-President Correa) of attempting a coup. Our view: The public reaction to the fuel price increases could now put the government in a difficult position. Either Moreno stands firm, and remains IMF-compliant, but risk further protests. Or he reverses them, which risks making him look weak and could put the IMF programme at risk. The removal of fuel subsidies is one measure in the country’s US$4.2bn EFF programme with the IMF, agreed in March 2019, although the IMF referred to a “gradual” approach (and we wonder if Moreno went too far too quickly). The Fund reached a staff level agreement on the second review on 23 September and released a statement on 2 October, which supported Moreno’s latest reform measures (which we see as a prior action to approving the second review). Investors will hope reports of negotiations between the government and protestors can de-escalate tensions and reach a satisfactory outcome.