Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    24 October 2019
    Published by

    In Focus: Argentina – End of the road for Macri; straight over, fork or U-turn for Fernandez 

    Argentina goes to the polls this Sunday (27 October) for presidential and legislative elections. The main opposition candidate Alberto Fernandez, and his vice-president Cristina Fernandez de Kirchner (CFK) look set to win, following their resounding victory in the primaries (PASO) on 11 August. 

    We think the best that incumbent President Mauricio Macri can hope for is to force a second round in November, and if so, he might stand a chance by collecting losing votes (and the market response might then be very different). But it still looks pretty unlikely given the size of the deficit he has to overcome, against a worsening domestic economic situation. 

    We don’t expect a big (negative) market reaction, similar to the PASO result, following a Fernandez victory. This is now almost fully discounted, although we could see some mild weakness to the extent that there was any residual hope left for Macri and reflecting the cold hard reality of the shift in power. What will matter more for investors after the election will be what Fernandez says and does, and who he appoints to his cabinet; the sooner he puts forward a serious and credible economic programme, the better. The market will look for reassuring signals immediately, but with the inauguration not until 10 December, there could be a period of time before there is greater visibility on this. A smooth and cooperative transition will therefore be welcome. 

    What has always been clear, however, is that the winner will inherit an economic crisis, and crucial for investors will be the nature of engagement with the IMF and what to do with the debt. 

    Read the full report here

    Recap of the week’s key credit developments 

    Brazil (BRAZIL): The Brazilian Senate passed the pension reform bill on 23 October, in a boost for President Jair Bolsonaro. The reform is one of various fiscal reforms planned by the government, including tax reforms to improve the ease of doing business, and the bill can reportedly save the government cBRL800bn over 10 years. For more on the bill, see our recent report here

    Chile (CHILE): A seemingly unremarkable four-cent hike to the Santiago subway fare has sparked chaos in Chile, with additional proposals to raise other public transport fares as well as energy prices exacerbating the situation. President Sebastian Piñera’s response was initially tough, on Monday though, after five days of riots, the president was much more conciliatory (after first reversing the fare hike). Our view: Piñera’s main challenges are, first, to prevent a further escalation, and, second, to find a way to address the discontent, taking care of an economy that has weakened slightly as a result of the relatively low copper prices. See our full report here

    Indonesia (INDON): On Thursday, Bank Indonesia cut its main interest rate for the fourth consecutive month, to 5% from 5.25%. The policy rate started the year at 6%, following five hikes in 2018. The latest cut comes amid controlled inflation and concerns over the global growth outlook. The decision is a pre-emptive step to support domestic growth and further decisions will depend on data from one month to the next, said Governor Perry Warjiyo. 

    LatAm new issues: As the Q3 reporting period starts, we see three new issues coming to the credit markets in Latin America. 1) In Brazil, Prumo Participacoes e Investimentos, or PrumoPar (PRMLBZ) is planning a US$350mn senior secured 12.2 years (due in December 2037) bond, expected to be rated Ba2/NR/BB. 2) Also in Brazil, Braskem (BRASKM) is expected to come to the market with a “benchmark-sized”, “intermediate or long” maturity, senior unsecured bond. 3) In Chile, Celulosa Arauco y Constitucion, S.A. (CELARA), is expected to issue “sustainability bonds” with intermediate and/or long tenor. See our full report here

    Nostrum Oil (NOGLN): There has been a two-fold increase in the Nostrum Oil equity price since 11 October, accompanied by uncharacteristically high trading volumes, according to Bloomberg. NOGLN 22s and 25s have also seen buying interest, with bond prices recovering from their all-time lows of 45-46 to the 49 area. There have been no developments in fundamentals that could have caused the shift in investor sentiment. However, given the ongoing strategic review that could change the shape of Nostrum’s business and, potentially, enable it to focus on production growth, we cannot ignore price moves of such scale. We therefore change our recommendation on the NOGLN 22s and 25s to Hold. See our full report here

    Privatbank (PRBANK): On 17 October, the Trustee sent an update to bondholders, after it received certain responses from Privatbank. The Trustee had previously asked for noteholder information and had passed this on to the bank’s lawyers. Privatbank responded to the information sent. Here are our three key takeaways: (A) Privatbank ‘does not dispute’ its liability to pay par plus accrued to some noteholders. This is likely to be seen as a step in the right direction. (B) Privatbank does dispute some claims and has asked for additional information. Where such information is ‘outside the scope of the specified evidence and information’, the Trustee has told PRBANK that it is not entitled to such information. This suggests that the Trustee has pushed back in some cases. (C) Patience is still required. Recall that the Trustee has filed a directions application in the English courts, which will allow some bondholders to be paid and not others. As highlighted in a previous note, that case isn’t due to be heard until late Feb 2020. Separately, on 23 October, Privatbank disclosed that as a result of the English Court of Appeal ruling on 15 October, Kolomoisky, Bogolyubov and others are required to ‘pay back the interim costs’, which PRBANK had previously made to these defendants. PRBANK is seeking to recover US$1.9bn (excluding interest) from these defendants. A date for the trial has not been set. Regarding the PRBANK bonds, our view remains that it’s best to focus on cases which are specific to these securities, as those cases have clearer implications for bondholders. 

    Halkbank (HALKBK): Moody’s has placed Halkbank’s ratings on review for downgrade. Moody’s is concerned that Halkbank may be required to pay a large fine by US authorities. Importantly, Moody’s only discusses the possibility of a large fine, suggesting that the rating agency doesn’t expect punitive sanctions to be imposed on Halkbank. This is important as bipartisan bills introduced by members of the US House of Representatives suggest sanctions on Halkbank as one possible action against Turkey. Fitch has also placed Halkbank’s ratings on negative watch after the US authorities charged the bank with various offences. Here are a few key takeaways: (A) Fitch describes Turkey’s foreign exchange reserves as ‘limited and volatile’ and sees potential escalation of geopolitical tensions between the US and Turkey as a risk. Most will probably agree with these statements, though the ‘volatile’ nature of these reserves has not prevented Turkey from providing support to Halkbank (and others) in the very recent past. (B) Fitch also believes that Halkbank’s non-state ownership ‘may complicate prompt provision of solvency support’. While this may apply to an equity injection (which would dilute non-state ownership), that statement does not appear to take other forms of capital support into consideration. We note, for example, that Halkbank has received boosts to Tier 2 and Additional Tier 1 capital in recent quarters. This is mentioned separately in the statement from Fitch. (C) On Halkbank’s standalone profile, Fitch notes a number of weaknesses including ‘modest capital buffers’ and ‘reduced access to external funding’. Fitch also believes asset quality risks are significant and sees profitability as weaker than at most large bank peers. All this is hardly surprising. What may come as a surprise is the rating agency’s reference to ‘weakness in governance and risk controls.’ Halkbank is unlikely to welcome such comments, given the US charges. (D) There is at least one positive in the Fitch statement. While the rating agency does see refinancing risks as ‘high’, Fitch also states that Halkbank ‘has sufficient FC liquidity to cover short-term maturing FC debt’. This is in line with statements from the bank’s management. Separately, the former deputy general manager of Halkbank, Hakan Atilla, has been appointed as the CEO of Borsa Istanbul. Recall that Atilla is appealing against his US conviction. He was released earlier than planned, in July. Further, the US Vice-President stated that Halkbank was not part of the ceasefire talks, and he had informed Turkish officials that the Halkbank case was being handled by the US Department of Justice. Our view: On the ratings, comments from Fitch seem much more negative than Moody’s. However, Fitch does rate Halkbank much higher (B+ versus B3 at Moody’s). Thus, Moody’s actions may be more closely watched. The appointment at Borsa Istanbul may have no direct implications for Halkbank, but we note that the EBRD – which owns a 10% stake in Borsa Istanbul – said it is opposed to the appointment and was not consulted on the decision. Comments from the US Vice-President regarding Halkbank are not surprising, we think. Our view remains that a fine – even if large – will be preferred over punitive sanctions.