Weekly Credit Risk Monitor /
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Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Chief Economist & Head of Fixed Income Research

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    Tellimer Research
    23 January 2020
    Published byTellimer Research

    In Focus: Nigeria – Top pick and 2020 credit outlook

    In the sovereign space, we have one new view and one change of view. We assign a Buy to short tenor naira-denominated government (FGN) bonds, with 1-year yields of 8.5% and 3-year at 10.0%, and we downgrade our view on T-bills to Hold from Buy, given the compression in T-bill yields since October. We maintain Hold on Nigeria’s US$ bonds as “muddle through” becomes the new reality, with a yield on the 7.143% 2030 US$ bond of 6.5% (z-spread 470bps). Among financials, we now have four Hold recommendations. We downgrade the Access Bank 2021 bond to Hold. We reiterate our Hold on the Fidelity Bank, UBA and Zenith Bank 2022 securities. 2020 may be the year to maintain (rather than add to) existing holdings of Nigerian bank bonds, while looking to the primary market for potential new issues. Within non-financials, the two main corporate bond issuers in US$ of any note – Seplat and IHS – are unrated. 

    On the macro outlook, President Buhari’s re-election last year just about guarantees the status quo in his second (and likely, final) term. While this year (and next) presents an opportunity to advance more serious structural reform, especially as Buhari now has control of the legislature, before the election cycle begins ahead of the next presidential election in 2023, we doubt this opportunity will be grasped vigorously with both hands. But while the authorities could do more, they would also have to do a lot to mess it up. We expect moderate real GDP growth, around 2.0-2.5% pa, to continue over the medium term, well below regional peers and the government’s aspirations in its ERGP. We see real GDP growth of 2.5% in 2020. Inflation should remain in low double digits (c12-13% by year-end), as a passive central bank balances pressure to reduce rates to boost lacklustre growth with upside risks to inflation. We expect the CBN to remain on Hold this year (its policy rate is 13.5%). 

    We don’t foresee any changes to FX policy (unification of the FX rates) or the FX rate (devaluation), as political imperatives will outweigh pressures to adjust the currency coming from the deteriorating external balance and fall in reserves. However, we see downside risks to the naira in a devaluation scenario as less severe now than in 2015-2016. 

    Nor do we expect any major changes in fiscal policy. While the recent VAT increase is a welcome step towards tackling Nigeria’s chronically low revenue base, more needs to be done and its revenue yield is unclear. Such a seemingly benign outlook may be viewed positively by investors, helped by a low headline budget deficit (1.5% of GDP), stable FX, ample reserves’ coverage, low US$ bonds’ debt service and low but rising public debt burden (30% of GDP). 

    However, important vulnerabilities remain. The fiscal deficit at the wider general government level is much larger and more persistent (c4.7%), which contributes to large financing needs, while debt dynamics are poor. High debt interest and the low revenue base threaten fiscal sustainability (interest is 60% of Federal revenue). And Nigeria is increasingly reliant on non-resident portfolio inflows into the local market (leaving it vulnerable to changes in investor sentiment and sudden stops) and central bank financing (which threatens monetary policy effectiveness and could be inflationary). 

    Still, absent lower oil prices/production and/or a flaring up of the domestic or regional security situation, there isn’t anything obvious – this far away from the 2023 election – to upset the outlook, which may be some comfort to investors.

    Recap of the week’s key credit developments 

    Ukraine (UKRAIN): Ukraine (Caa1/B/B) returned to the market with a tight issue which initially looked pretty cheap, pricing a EUR1.25bn 10-year euro-denominated bond on Wednesday at 4.375% compared to initial guidance (IPT) of 5%. It was Ukraine’s first issuance in c18 months (when it issued a EUR1bn 7-year bond) and its second EUR-denominated bond. Separately, PM Honcharuk, speaking in Davos, suggested that the agreement with the IMF on a new US$5.5bn programme could be approved by April, once conditions are met, according to Bloomberg. 

    Province of Buenos Aires (BUENOS): The deadline for consent solicitation on the province’s 10.875% 26/01/2021 bond was extended to 31 January. The authorities are seeking support from holders to delay a US$250mn principal payment on the bond from 26 January to 1 May. The extension now takes the deadline into the 10-day grace period for principal, assuming the authorities do not make the scheduled principal payment on due date (26 Jan), and therefore allows a bit more time to reach an agreement. But it’s still tight. 

    Bolivia (BOLIVI): On Tuesday, the Bolivian Congress formally accepted the resignation of the leftist Evo Morales, who stepped down in November. New elections have been confirmed for 3 May, after the interim government of president Jeanine Anez passed legislation in November calling for them within 120 days. This week Morales, currently in exile in Argentina and alleging a right-wing coup, named his Movement to Socialism party’s candidate in the May presidential election as former economy minister Luis Arce Catacora. His running mate will be former foreign secretary David Choquehuanca. Meanwhile, the yield on the 4.5% 2028 bond has been relatively well contained since spiking out in October following the protests, and is now 4.8% (z-spread 323bps), having fallen to a low of 4.4% at the end of 2019 from its peak of 5.9%. We have a Hold on the bonds

    MHP (MHPSA): A bird flu case has been reported in the Vinnytsia region of Ukraine, the location of the largest of MHP’s three poultry facilities. The company has not been directly affected; moreover, MHP’s excellent track record in managing biosecurity risks and its adoption of EU regulations on compartmentation after the last outbreak (in 2017) suggest its facilities are adequately protected. However, we expect the outbreaks in Ukraine and several other countries in Eastern Europe to weaken investor sentiment. We downgrade the MHPSA 24s and 26s to Hold and reiterate our Hold on the MHPSA 29s. See our recent research here

    Genel (GENLLN): Genel’s FY 19 operating update confirms our view that it is able to deliver strong cash flow generation, maintain a solid balance sheet and fund expansionary capex at prevailing oil prices, laying the foundations for future production growth. We upgrade GENLLN 22s to Buy. See our recent research here

    DNO (DNONO): DNO bonds have posted an impressive recovery with their z-spreads tightening to levels last seen long before the news of delayed payments hit the wire in December 2019. Fundamentally, little has changed in our long-term credit view on the company in the past two weeks. With Kurdistan back to paying for oil, and security risks normalising, we upgrade to Hold on DNONO 23s and DNONO 24s based on the company’s strong stand-alone credit metrics: high cash flow generation, low leverage and long-term debt profile; and potential upside from exposure to the North Sea. See our latest report here

    Nostrum (NOGLN): The company disappointed with weak 2020 production guidance indicating a 30% yoy decline in volumes to 20,000boepd. Reviews of producing reservoirs confirmed persistent challenging conditions, which the company will try to resolve in 2020. Management decided to put drilling on hold and focus on finding technological solutions to stabilise well flows and reduce subsoil risks. Meanwhile, 2P reserves will be seriously downgraded and a hefty impairment charge reflected in the FY 19 financials. In our view, Nostrum is getting closer to the formal debt restructuring process, but in light of further negative developments, it is increasingly difficult to give a well-justified recovery estimate. We have Sell recommendations on both NOGLN 22s and 25s indicated on Bloomberg at mid-prices of 43-44. 

    Ardshinbank (ARBANK): After a roadshow late last year, the bond issue from Ardshinbank (ARBANK) was postponed. The bank has now returned to the bond market. On 21 January, a 5-year US$300mn bond priced at par to yield 6.5%. This puts the new ARBANK bond more than 300bps wider than the Republic of Armenia 2025 security. While this may appear wider, we note that ARBANK is not government owned. Further, US$300mn equates to about a fifth of total assets at end-Sept 2019 (though we note that ARBANK intends to use two-thirds of the bond issue proceeds to repay existing liabilities, so the net increase in liabilities should be much smaller than US$300mn). See our recent research here

    Bank Leumi (LUMIIT): Bank Leumi issued a US$750mn 11NC6 subordinated bond on January 22 at UST+170bps. The IPT was 200bps area. The issuer disclosed that the order book exceeded US$4bn. Bank Leumi is rated A2/A/A (Moody’s/S&P/Fitch). This is the first benchmark-sized subordinated bond to be issued by an Israeli bank in USD, and we expect the bond to be well-supported. 

    Isbank (ISCTR): The bank placed a US$750mn 10NC5 subordinated bond on January 16 at 7.5%. The IPT was 8.25% area and the final order book was in excess of US$3.2bn. This the first bond Isbank has issued since the much-discussed crisis that reached its nadir in August 2018. The new ISCTR bond is now quoted c2ppts higher than it was issued, but is still over 200bps wider than the ISCTR 6.125% 2024 bond, the bank’s longest-dated senior security. 

    Halkbank (HALKBK): On 21 January, the US authorities asked a federal judge to impose a US$1mn fine on Halkbank. This fine is to double every week Halkbank refuses to show up in court. Halkbank previously stated that the US Department of Justice does not have jurisdiction over the bank, and has not sent proper representation to the US courts. It seems likely that Turkey’s President, or other senior-ranking officials, may choose to get involved with this again. 

    Credit Bank of Moscow (CRBKMO): The issuer placed a US$600mn 5-year senior bond at 4.7%. The order book exceeded US$1.6bn and the IPT was 5% to low 5%. At the time of the new issue, there was a c30bps spread difference between the bank’s 2023 and 2024 bonds. The new 2025 bond was issued less than 30bps wider than the CRBKMO 7.121% 2024 bond, but does have the benefit of being priced at par (the USD 2024 bond is quoted at over 110). 

    Samba Financial Group (SAMBA): Following the triple-tranche US$5bn issue from the Kingdom of Saudi Arabia, Samba priced a US$500mn 7-year bond at MS+130bps. The IPT was MS+160bps area and the size of the order book was US$2.3bn. The new bond was issued just over 50bps wider than the KSA Feb 2027 security. The SAMBA 2024 bond was quoted less than 40bps wider than the KSA 4% 2025 security.

    GFH Financial Group (GFHSUK): GFH Financial Group placed a US$300mn 5Y bond at par, with a coupon of 7.5%. This is most comparable to securities rated low single-B in the Bloomberg Barclays Emerging Markets USD bond index. The issuer is rated mid-single-B, with a stable outlook, at both S&P and Fitch. The new bond marks a return to the market for this issuer, which redeemed a bond in 2018, according to Bloomberg data.