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
    6 February 2020
    Published byTellimer Research

    In Focus: Turkish banks – FY 19 review

    This week, we highlight five Turkish banks in our coverage that have reported FY 19 results. We make three changes to our recommendations: upgrade Akbank (AKBNK) 6.797% 2028 subordinated bond and the GARAN 6.125% 2027 subordinated bond to Buy; downgrade TSKB (TSKBTI) 6% 2025 bond to Hold.  

    Yapi Kredi – all about provisionsWe reiterate our Hold recommendations on the senior and subordinated Yapi Kredi (YKBNK) bonds. We acknowledge that all bonds have already performed well, especially the YKBNK 8.5% subordinated bond, which has tightened relative to other YKBNK securities since Vakifbank announced that it would call a similar bond. The call date is now just over a year away, and we currently expect Yapi Kredi to exercise this option. 

    TSKB – solid resultsWe downgrade our recommendation on the TSKB (TSKBTI) 6% 2025 bond to Hold from Buy. The bond is up over 3ppts versus the issue price of 99.47, and current valuations are no longer out of line with the rest of the bank’s bonds. We reiterate our Hold recommendations on TSKB’s other securities, including the TSKBTI 7.625% subordinated bond, which still yields almost 6.5% to the March 2022 call date. 

    Alternatifbank – strong pre-provision performanceWe reiterate our Hold recommendation on the Alternatifbank (ALNTF) 8.75% 2026 subordinated bond, which is callable next year. Once again, the final quarter of the year appears to have been a ‘clean-up’ period for Alternatifbank. Provisions in Q4 19 equalled pre-provision profit. A small tax credit meant that the lender reported a TRY3mn net profit for the final quarter.  

    Akbank – best value in AKBNK 2028sWe upgrade our recommendation on the Akbank (AKBNK) 6.797% 2028 subordinated bond to Buy from Hold. We reiterate our Hold recommendations on Akbank’s other bonds. The spread difference between the AKBNK 2028 bond and the AKBNK 7.2% 2027 security is now almost 70bps. This looks excessive, given that both bonds are Tier 2s, and the difference between the first call dates is just over a year. Since mid-January, the AKBNK 2027 and 2028 bonds have both widened relative to the AKBNK 5% 2022 senior bond. We note that Akbank reported excess Tier 1 capital of over TRY20bn at the end of last year, and internal capital generation remains strong. These factors are especially positive for Akbank’s subordinated securities. 

    Garanti – decent performanceWe reiterate our Hold recommendations on the Garanti BBVA (GARAN) senior bonds and upgrade the GARAN 6.125% 2027 subordinated bond to Buy from Hold. We see most value in the subordinated bond, which is callable in 2022. The sub/senior spread multiple still exceeds 2x and the spread difference is almost 240bps. This spread difference has narrowed but is still wider than in H1 18.

    Recap of the week’s key credit developments 

    Ghana (GHANA): On Tuesday, Ghana (B3/B/B) priced US$3bn in triple-tranche amortising eurobonds, comprising US$1.25bn 6.375% seven year bonds (WAL 6 years), US$1bn 7.875% 15 year bonds (WAL 14 years) and US$750mn 8.75% 41 year bonds (WAL 40 years). The longest tranche is the longest dated bond ever issued by a sub-Saharan African government. Final pricing tightened from initial guidance of 6.75%/8.5%/9.375%, respectively, which was later revised down by 25bps for each tranche, and ended up at 6.375%/8.000%/8.875%, amid strong demand. The order book was US$14bn at final pricing. The 7-year bond (2027) was issued at par with a spread of 495bps. The 15-year bond (2035) was issued at 98.96, priced to yield 8%, with a spread of 640bps. The 41-year bond (2061) was issued at 98.617, priced to yield 8.875%, with a spread of 680bps. In conjunction with the offer, Ghana also made a cash tender offer for up to US$500mn for its outstanding 7.875% 2023s (US$717mn outstanding) and 8.125% 2026s (US$1bn) – at the time of writing results hadn’t been confirmed. The issuance comes after Moody’s affirmed its B3 rating on 24 January and changed its outlook to positive from stable – see last week’s Credit Risk Monitor. On Monday, Bloomberg reported that the cedi was the world’s best performing currency against the US dollar this year, strengthening 3.9%. As the bond issuance could boost foreign reserves, it is speculated by some investors that the cedi could rise further. Our view: Ghana’s return to the market was another success, capitalising on strong demand for EM bonds fuelled by global liquidity, and with final pricing more or less in line with our own fair value estimates of 6.44%/7.96%/8.82%, the authorities didn’t have to give anything away. We have a Hold on Ghana given election-related risks to fiscal policy this year. 

    Province of Buenos Aires (BUENOS): After a messy approach to bondholders, the Argentine province undertook a spectacular U-turn, withdrawing its consent solicitation offer on 4 February and deciding to make a principal repayment, and therefore averting a default. The province was seeking to delay the 26 January’s principal instalment of its 10.875% 2021 bond to 1 May, citing lack of resources, but failed to get the necessary support from bondholders in time (see also last week’s Credit Risk Monitor). The final decision to pay came after four attempts to extend the consent solicitation deadline and two attempts to sweeten the terms, with the final offer on Monday to pay 30% of the US$250mn due now and 70% on 1 May. Despite some progress, with the province stating it had support from more than half its creditors, they failed to reach the 75% threshold that was needed. In a press conference on Tuesday, upon expiry of the deadline for consent solicitation and the day before the end of the 10-day grace period for principal, Governor Alex Kicillof stated that one fund had a large enough position to block the plan. He said that the province would therefore make the US$250mn payment at the end of the 10-day grace period on Wednesday, using funds recently raised in local markets, but would seek to restructure its foreign debt. By making the payment, the province avoided the alternative of default (at least for now), which could have had potentially negative implications for the sovereign restructuring. The Argentina complex reacted positively on the basis that it signalled the authorities wanted to avoid default and would not be as confrontational as feared. The bond of interest (BUENOS 10.875% 2021) jumped five points on the news (from 52.3 cob Monday to 57.9 cob Tuesday) while sovereign US$ bonds also rallied (ARGENT 6.625% 2028 rose two points).

    Brazil (BRAZIL): On Wednesday, Brazil’s central bank (BCB) cut its policy Selic interest rate by 25bps, to 4.25%. The latest cut (fifth in succession) is the most recent in an easing process that has brought the rate down from its high of 14.25% during much of 2015-16. The move had been expected by 35 out of 45 economists in a Bloomberg survey. The central bank has indicated its intention to hold rates going forward, to observe the expansionary effects. The real has depreciated amid monetary easing and the impact of the coronavirus in China, a major trading partner, although this has not raised inflation estimates. The central bank survey forecast 2.3% growth this year, although industrial production and exports have recently disappointed. Inflation expectations are 3.4% this year and 3.75% in 2021. The target rate has declined to 4% for 2020.

    Kurdistan oi l& gas: Independent oil & gas companies operating in Kurdistan have received their second payment from the government in 2020, according to disclosures made by Genel, Gulf Keystone and Shamaran Petroleum. This further eases concerns about Kurdistan’s payment discipline that arose at the end of 2019, when the region delayed payments to oil companies for August-September shipments. Although Iraqis continue to protest in Baghdad, Basra and other cities, the risk of further escalation between the US and Iran has subsided. Our view: We upgrade HKNENG 24s to Hold on resumption of timely payments for oil from Kurdistan and SNMCN 23s to Hold on anticipated higher payments for oil. We maintain our Buy recommendation on GENLLN 22s and our Holds on OILFLO 22s, DNONO 21s, 23s and 24s. See our latest research here. 

    Vodafone Ukraine (VODUKR): The company issued its debut US$500mn 5-year callable (5NC2) bonds at 6.2% and is indicated above reoffer. High investor demand for the maiden issue supported aggressive valuations with VODUKR offering a narrow pick-up in yield over quasi sovereign RAILUA and equally rated MHPSA. Vodafone Ukraine is the second-largest mobile operator in the country with c20mn subscribers and c36% market share in Q3 19. We estimate that after issuing bonds, VODUKR’s leverage will increase to c2x. The company is exposed to a high and unhedged FX risk, earning most of its revenues in the local currency, but borrowing in hard currency. FX exposure exists in the operating side too with c80% of capex denominated in hard currency. We think that market is overly optimistic about the new issue and does not take into account FX mismatch and a lack of proven track record of shareholder support.