Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    17 October 2019
    Published by

    In Focus: Turkey – US sanctions and the impact on banks

    No more Buys: US charges on Halkbank raise the prospect of a sustained period of negative headlines impacting one of Turkey’s largest lenders. There is a risk that this may continue long after Turkey’s current operation in northern Syria – Operation Peace Spring – comes to an end. We acknowledge that there have been concerns about potential charges on Halkbank for some time – we have discussed this ourselves in previous reports. However, the bank’s former deputy general manager was released from prison early and there were reports of several high-ranking government officials and other individuals on both sides, including Turkey’s President, seeking to avoid such charges. The charges mean that, at least for now, our hitherto constructive stance on Turkish bank bonds is much harder to justify. As a result, we have downgraded all Buys to Holds. 

    What bonds hold up best? Before the US charges were announced, indicative mid prices on about 95% of the Turkish bank bonds we track were already down versus the levels recorded just before Operation Peace Spring began. Based on percentage changes in mid prices, Akbank and Garanti subordinated bonds had declined the most. In a previous report, we discussed performance of Turkish bank bonds in 2018, highlighting that in relative terms, securities including the Vakifbank EUR-denominated covered bond and Kuveyt Turk (KFINKK) bonds were more resilient. Having said this, we stress that past performance is not always indicative of future results – this time may be different. 

    More on the indictment: The indictment contains six charges – conspiracy to defraud the US, conspiracy to violate Iran-related sanctions, bank fraud, conspiracy to commit bank fraud, money laundering and conspiracy to commit money laundering. Further, US authorities state that in mid-2014, ‘the then-Prime Minister of Turkey and his associates […] instructed Halkbank to resume the [sanctions-evasion] scheme, and Halkbank agreed.’ The US also state that the scheme ‘would artificially inflate Turkey’s export statistics, making its economy appear stronger than it in fact was.’ The US authorities stress that these are ‘only allegations.’ However, it is hard to understate the seriousness of the charges in the indictment, given the potential implications on Halkbank. The bank has issued a statement saying the indictment ‘appears largely to repeat allegations used during the Atilla trial.’ Hakan Atilla is the former deputy general manager of the bank who was released earlier this year and who has launched an appeal against his conviction. Halkbank sees the decision to indict as ‘unprecedented legal overreach’ as the bank does not have branches or employees in the US, and therefore falls outside the US Department of Justice (US DoJ) jurisdiction. In addition, Halkbank highlights extensive investigations it has had carried out and says that the US authorities have received finds from these independent investigations showing the bank’s innocence. Halkbank also states that discussions with the US DoJ are ‘ongoing’. Importantly, the bank has formally linked the charges to sanctions imposed on Turkey as a result of Operation Peace Spring. 

    HALKBK eurobonds in focus: We note that Halkbank has been absent from the eurobond primary market for some time. Based on Bloomberg data, the bank now has just three USD-denominated bonds totalling US$1.75bn and maturing in 2020 and 2021. Management previously stated that the bank has enough liquidity to repay upcoming maturities, and in today’s statement, Halkbank says it is ‘determined to fulfil all financial liabilities.’ We are not changing our Hold recommendation on the Halkbank bonds in this report, though we acknowledge that these charges may undo much of the progress achieved by the bank in the second quarter.

    Read the full report here.

    Recap of the week’s key credit developments 

    Georgia (GEORG): On Friday, S&P upgraded Georgia’s long-term foreign currency rating to BB from BB-. The outlook is now stable. S&P said that growth rates have been high and that the economy was supported by foreign funds inflows. The National Bank of Georgia has also been accumulating reserves, which should help to mitigate balance of payments risks. Despite lower tourism revenues in H1 19, which impacted growth, S&P revised its GDP growth forecast up to 4.5% for this year (from 4% previously) and expects annual growth of at least 4% to 2022. The agency also noted domestic political volatility, which it expects to continue until legislative elections in October 2020. 

    Sri Lanka (SRILAN): The Monetary Policy Committee of the Central Bank of Sri Lanka (CBSL) decided to maintain interest rates at current levels on Friday. The Standing Deposit Facility Rate remains at 7% and the Standing Lending Facility Rate remains at 8%. The decision is consistent with the objective of keeping inflation in the target 4-6% range while supporting economic growth, according to the CBSL statement. The economy expanded by 1.6% in Q2 19 (3.7% in Q1 19) on provisional CBSL figures. 

    Global Ports (GLYHO): The cruise and commercial port operator was downgraded one notch to B+ and placed on negative watch by Fitch. The rating agency highlighted higher-than-expected leverage, increasing capex, upcoming bullet maturity and M&A appetite as rational for its decision. We have a Sell recommendation on GLYHO 21s. The company’s M&A appetite, weak operating results and outlook for commercial port Akdeniz – the key guarantor of the bonds – and the need to address refinancing of the bond outweigh high profitability and low exposure to TRY FX risk. GLYHO 21s yielding 9.32% based on Bloomberg indicated mid-prices, showed little reaction to the downgrade. 

    Pearl Petroleum: The company holding 100% working interest in Khor Mor, a giant gas and condensate producing field (2P reserves; 1.6billion boe) in the Kurdistan region of Iraq (KRI), is looking to issue a debut US$-denominated bond to finance capex. Pearl is rated B- by both S&P and Fitch. We expect the new issue to be benchmarked to the outstanding bonds of E&P companies operating in the KRI. The lowest yielding is DNO (DNONO 24s indicated at 8.71% YTM) set at the lower bound and HKN Energy (HKNENG 24s indicated at 10.35% YTM) set at the upper bound. We expect Pearl’s debut issue to be priced somewhere in between 9-10%. 

    Seplat (SEPLLN): The oil and gas exploration and development company based out of Nigeria will spend GBP382mn to acquire Eland, an oil company with net production of c10,000boepd in H1 19. The acquisition will be financed by a mix of cash and debt. Our back-of-the-envelope estimates suggest that a combined entity could have cUS$1bn in annual revenues, US$0.5bn in EBITDA and net leverage of less than 1x. Seplat had US$433mn of cash on the balance sheet at the end of H1 19, and will have to raise debt to finance the acquisition. While bridge-funding from banks is most likely ready to be deployed, we would not be surprised to see the company returning to the bond market with a new bond to refinance the acquisition’s financial arrangements. SEPLLN 23s are indicated at 6.65%. 

    Ukrainian Railway (RAILUA): The 100% state-owned railway monopoly, will start preparing an IPO, according to CEO Yevhen Kravtsov, who also said that it could take 1-3 years before the transaction. A potential IPO, if it happens sooner rather than later, could cause RAILUA 24s falling out of EMBI once its 100% state ownership is diluted, potentially causing some credit investors to sell the bonds. On the bright side, improved transparency and disclosure often associated with listed companies could benefit international bondholders. The news has no immediate implications. We have a Hold recommendation on RAILUA 24s, which is indicated at YTM 6.17%. 

    Tinkoff Bank/TCS Group (AKBHC): Fitch has upgraded Tinkoff Bank to BB from BB-. The outlook on the new rating is stable. The upgrade reflects the ‘extended record of exceptionally strong performance’. It also reflects the positive impact of the recent equity raising exercise on capital. Tinkoff Bank is also rated Ba3 at Moody’s. That rating was upgraded in February this year. This year’s rating upgrades are not completely surprising, given the impressive performance of the bank. Given valuations relative to other Russian banks, we have a Hold recommendation on the AKBHC Perp. 

    Halyk Bank (HSBKKZ): According to the bank’s CEO, the bank may seek a waiver from bondholders, which would permit Halyk to pay out more than half of net profit to shareholders as dividends. Halyk Bank is also considering buying back more of its 2022 bond next year. These comments from the CEO are in line with previous statements from the bank. We have Hold recommendations on the HSBKKZ bonds.