Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Chief Economist & Head of Fixed Income Research

    Tellimer Research
    13 February 2020
    Published byTellimer Research

    In Focus: DTEK – ‘Hold’ still holds

    We reiterate our Hold recommendation on DTEKUA 24s, despite weak FY 19 results. We believe that electricity prices have bottomed out in Q4 and Q1 20 could see a qoq improvement. Hence, we expect that further deterioration of DTEK’s financials in 2020 would be mostly driven by phasing out of the highly profitable H1 19, but not by lower prices or volumes. A debt repayment schedule that is almost clear in the next three years give the company plenty of time to come up with a refinancing solution, assuming it can generate enough cash to pay cUS$170mn interest annually. Besides, there could be a way to reduce debt at the DTEK level, which could facilitate refinancing. DTEKUA 24s are the highest unyielding bonds in the Ukraine corporate universe. While uncertainty around the company’s future profitability remains, we expect DTEKUA to continue to underperform the rest of Ukrainian corporates. However, over 10% yield to maturity, c540bps spread over the sovereign and 435bps spread over the interpolated curve of its “sister” company, Metinvest, are levels at which selling could only be justified by a severe deterioration in credit quality of the kind that would raise “going concern” questions. We are nowhere near that yet. 

    Expectedly weak FY 19. DTEK reported US$3bn in revenues, up 11% yoy, on the back of 12% yoy lower electricity generation and a c8% yoy lower average electricity price (see Tables 1 and 2 on page 3). We estimate that DTEK’s adjusted EBITDA declined 36% yoy to US$568mn and EBITDA margin reduced to 20% (from 28% in FY 18). Although a limited format of preliminary reporting does not give us full details, electricity generation has historically been the main source of EBITDA, and in our view was the main explanation for its decline in FY 19. DTEK’s leverage increased from c2.2x in FY 18 to c3.2x in FY 19, according to our calculations, on the back of lower EBITDA. There are no sizable debt repayments in 2020-22 (US$90mn in total), making interest payments the main financial outflow for the company. However, most of the US$2bn debt matures in 2023-24. Some time between now and 2023, DTEK will have to address the debt refinancing question 

    Unexpectedly weak Q4 19. Q4 was the second quarter when DTEK operated under the new regulatory framework introduced in July 2019, with electricity prices established daily based on the balance of supply and demand. Despite initial concerns that free market pricing could drive prices up (hence a price cap of UAH1,640/kWh imposed until 1 April 2019), the reality was precisely the opposite. Prices stayed around the cap level in Q3, but gradually reduced in Q4 to cUAH1,200/mln kWh on the DAM market. An unusually warm winter and the reopening of electricity imports from Russia and Belarus put pressure on prices in October-December. In Q4 19, DTEK cut production to 5,671mn kWh (-18% qoq, -40% yoy). Mathematically, calculating Q4 revenues and EBITDA based on the FY 19 preliminary and 9M 19 suggests that in Q4 19 DTEK generated only US$187mn in revenues (-75% qoq) and US$52mn in adjusted EBITDA (57% qoq). 

    Read the full report here

    Recap of the week’s key credit developments 

    Argentina (ARGENT): In an eventful week, Argentina unilaterally extended the maturity of a local bond that was due on 13 February to 30 September. The government had failed to get sufficient support for its offer to exchange the maturing US$1.6bn dual currency bond (ARGDUO), offering a number of different options. Much of the bond, which was issued in July 2018, is held by foreign investors. In the end, it managed to swap just 10% and agreed to pay small retail holders on time, but deferred the remaining US$1.5bn to September, and announced it will be restructured consistent with the external debt restructuring. The event raised investor concerns that the government will adopt a harder line with creditors, perhaps a response to the embarrassing U-turn by the Province of Buenos Aires last week. On Wednesday, Economy Minister Martin Guzman addressed Congress, warning that deep debt restructuring is needed and that bondholders may be disappointed. Guzman said that the focus would be sustainability and repeated the message that Argentina need to grow before it can pay its debts. We think his comments showed some inconsistencies and contradictions, while still lacking a lot of detail. His harder line, following the ARGDUO decision, further undermined market sentiment, although his comments could have been specifically aimed at a domestic audience. At the same time, the IMF technical mission arrived on Wednesday, with its visit extended to 19 February.

    Lebanon (LEBAN): The government requested help from the IMF, according to media reports on 13 February. The request for help is in the form of advice and technical expertise, and might also include advice on whether to pay the US$1.2bn, 9 March eurobond maturity. The IMF is expected to send a mission soon (although no date has been given). Our view: A formal request for IMF help is a welcome and sensible step for the authorities, given the scale and complexity of the financial crisis facing the country, although it may be seen as a negative sign by bondholders nervous about where it will end up. Our understanding, however, is that the call for help falls short of a formal request for a programme, although we know what the thrust of IMF advice will look like, based on the Fund’s recent Article IV (published in October). The price of the March bonds plummeted this week to US$76, falling by c10pts and reversing gains in the past two weeks, as investors grappled with news about the request for IMF help and the formation of a bondholder group (see Chart of the Week on page 1). For more, see our flash note: Lebanon seeks IMF help.

    Costa Rica (COSTAR): On Monday, Moody’s downgraded Costa Rica’s long term foreign currency rating to B2 from B1 and changed its outlook to stable from negative. The move takes it below the B+ rating from both S&P and Fitch. Moody’s cited two key reasons: 1) high fiscal deficits, leading to deteriorating debt metrics, and 2) further credit risks stemming from repeated funding challenges and resultant borrowing increases. The stable outlook reflects the view that liquidity pressures can be contained as debt metrics rise. The fiscal deficit in excess of 6% of GDP since 2015 have led to a rise in government debt/GDP above those of peers: Moody’s forecasts this to reach 63% this year, compared to a ‘B’ peer median of 56%. Fiscal reforms approved in 2018 will only reduce deficits slowly, while interest costs and capital spending drove the deficit 1% of GDP higher than the original target last year. Meanwhile large debt repayments pushed overall funding needs to 12% of GDP last year. Amid high international borrowing costs, c75% of government funding came from domestic financial markets. Costa Rica’s US$ bond prices have also fallen recently, as the fiscal deficit reached its widest in four decades, at 7% of GDP in 2019.

    Ecuador (ECUA): On 6 February, Moody’s downgraded Ecuador’s long term foreign currency rating to Caa1 from B3 and changed its outlook to stable from negative. The move takes it below the B- rating from both S&P and Fitch. Large debt amortisations commencing 2022 and policy uncertainty stemming from resistance to reforms will likely lead to constrained market access, according to Moody’s. Repayment capacity is hindered by the high cost of new debt and the resulting difficulty in rolling over maturing debt, especially from 2022. While the liquidity position may have improved with the new EFF programme with the IMF (March 2019), funding costs have remained high due to delays in implementing the recommended reforms. In its last review of the programme in December, the Fund said that public financial management reforms were paramount to secure fiscal sustainability, but was optimistic about higher revenues due to implemented tax reform. The authorities’ intention to maintain their efforts leads Moody’s to assign a stable outlook to the rating. 

    Nigeria (NGERIA): President Buhari is seeking approval from the National Assembly to issue US$3.3bn in eurobonds, US$2.8bn of which would be external financing for the 2020 Budget and US$500mn for debt refinancing. It would come after west African peers issued bonds recently, notably Ghana and Gabon, and would be the first Nigerian issue in over a year. Bond proceeds, not specifically for a particular purpose, could help to boost international reserves, after recent declines due to central bank support for the currency. After reaching a recent peak of US$47.4bn in April 2018, gross reserves have declined to US$38bn at end-January. As a major oil producer, Nigerian public finances may be hurt by falling global oil prices; prices are currently below the US$57 per barrel assumption in the 2020 Budget. Our view: After Finance Minister Ahmed previously indicated Nigeria might return to the market in Q1, issuance plans seemed to be put on the back burner, according to the DMO’s statement as recently as 17 January, with the authorities preferring instead to seek concessional finance from the multilaterals. Perhaps this is taking too long. Issuance would take advantage of current benign market conditions to borrow at favourable rates, as Ghana and Gabon, and many others, have done recently, and the proceeds help to boost gross reserves in an environment of softer oil prices. But we also wonder if Nigeria’s renewed interest in issuing is a direct response to Ghana’s recent operation, in which it earned the moniker for the longest eurobond in SSA with the 41yr! 

    Benin (BENIN): High demand for African debt has also led Benin to consider a return to the market, after its eurobond debut with a EUR500mn issue in March 2019. A second issue would likely be larger and occur in Q2 20. The B2/B+/B rated government has not confirmed the information provided by an anonymous source. Low global growth and financing costs have led many issuers to the market. YTM on the existing 5.75% 2026 bond have declined this week to 4.86% at cob on Wednesday.

    Piraeus Bank (TPEIR): On Wednesday, the Greek Piraeus Bank successfully priced a EUR500mn Tier 2 bond, with 5.5% coupon and 2030 maturity. The bond will be callable at par in February 2025. Consistent with the bank’s strategy indicated on 3 February, the bond will raise the total capital ratio by c110bps. The tighter yield versus last June’s 10 year EUR400mn 9.75% bond indicates investor confidence in the bank and the Greek banking sector. It follows the 4 February issue of a Greek government EUR2.5bn 15-year bond at 1.91% yield, as confidence in the economy rises and investors seek higher yields. 10-year government yields fell below 1% this week.