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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
    20 February 2020
    Published byTellimer Research

    In Focus: MHP – EU lifts ban on poultry imports from Ukraine – positive for bonds

    The EU has voted to lift the ban on poultry imports from Ukraine, according to media reports citing the Facebook account of Taras Kachka, Ukraine’s Deputy Minister of Economic Development Trade and Agriculture. Trade restrictions were imposed in January following a case of bird flu in the Vinnytsia region of Ukraine. The details of the decision have not been published yet, according to the same source. 

    The news is positive for bonds and we expect stronger sentiment around MHPSA. Following the EU’s decision to lift the ban, MHP could resume exports to the EU from some of its three Ukraine-based facilities, but possibly even from Vinnytsia Poultry Complex located in the same administrative region where the bird flu case was reported. MHPSA bonds have already largely recovered after the initial negative price action in January. Despite a positive change in sentiment, we maintain our Hold recommendations on MHPSA 24s, 26s and 29s as new factors of uncertainty have emerged recently: 

    • Potential investments in the KSA. MHP has recently announced that it is at an advanced stage of planning a sizable greenfield project in Saudi Arabia. If approved, the new project could require c30% equity funding from MHP and its partners with the balance funded by long-term low interest rate government loans. These investments have not been quantified yet and are not part of the capex programme guided at US$100mn in 2020. The risk of further expansionary investments, as opposed to deleveraging, is the first thing that comes to mind. We think that current leverage, just shy of the 3x debt incurrence threshold, gives a degree of protection to the bondholders from bold investment decisions.
    • The coronavirus (COVID-19) outbreak could have reduced meat consumption in China, as many restaurants are either temporarily closed on government orders or seeing substantial decrease in traffic because people are reluctant to eat out. According to Bloomberg, domestic retail poultry prices have dropped substantially in 2020. On the other hand, China reported two outbreaks of bird flu in February and allowed more chicken import into the country. The combined effect of these two trends on poultry prices in different parts of the world is yet to be seen. Having said that, MHP’s export exposure to Asia is very small and events in China are unlikely to have direct implications on the company’s P&L. However, as a big importer (7.5% of world imports, according to USDA), the situation in china may influence supply-demand balance and prices in other markets.

    Read the full report here.

    Recap of the week’s key credit developments  

    Turkey (TURKEY): On Wednesday, Turkey’s central bank (CBRT) cut its policy interest rate (one-week repo) by 50bps to 10.75% as widely expected. This follows a 75bps cut in January and marks the sixth consecutive cut since rates peaked at 24% between September 2018 and July 2019. Meanwhile, the lira has become more volatile this month and weakened on the interest rate cut news to TRY6.085/US$ at cob on Wednesday.

    Argentina (ARGENT): Following a mission to Argentina, the IMF team released a press statement on Wednesday which explicitly called for a debt restructuring (“a definitive debt operation — yielding a meaningful contribution from private creditors”). The Fund is stating the obvious to some extent (although we suspect its conclusion may be met with resistance by some investors), and given market prices outside the front-end of the US$ curve in the low 40s, the market had been fearing as much anyway. The government has already called for restructuring, although still refusing to give any specific details on what it might look like other than its own very ambitious timetable. Public debt is reported by the IMF at 90% of GDP at end-2019, and the Fund now assesses Argentina’s debt to be unsustainable. Otherwise, the IMF’s statement following the conclusion of its recent staff mission doesn’t say a lot that is new (but it does address the elephant in the room). Our view: While its conclusion is no real surprise, it seems unusual to us for the Fund to call so explicitly for restructuring so far in advance (or outside) of programme discussions. Typically, the IMF’s stance is shrouded in secrecy during programme discussions, for fear of destabilising markets or provoking contagion. However, getting it out there now at least avoids the market continually second-guessing what the IMF think. Still, there is some way to go before turning this statement of intent into the modalities of a debt restructuring – and the devil will be in the detail, as well as the policy assumptions. Read more here.

    Halyk Savings Bank (HSBKKZ): Halyk launched a consent solicitation process on February 19. This covers the HSBKKZ 2021 and 2022 USD-denominated bonds. Halyk is primarily seeking to remove restrictions on dividend payments in bond documentation. This should have been expected – during the last investor day, Halyk stated that it was looking to pay out 50-100% of net income as dividends, given its excess capital position. Bond terms don’t currently allow for this. Halyk previously stated that it could redeem the bonds or change the terms. The issuer has chosen the latter (for now). Halyk is paying a consent fee of 0.25% of par, and the final consent expiration date is March 10. We note that profitability at this bank is exceptionally strong, as are capital and liquidity metrics. As such, we do not think the change in dividend policy should concern bondholders. As we have discussed before, Halyk is becoming more of an equity story – the bank has excess FX liquidity so doesn’t need to come to the bond market, but changes such as the dividend policy and the sale of shares by the largest holder (which was done to improve liquidity of the stock) have been positive for equity investors. We still have Hold recommendations on the 2021 and 2022 bonds. We stress that the 2022s may be redeemed at par, at any time, with 30 days’ notice. Halyk has not ruled out redeeming more of that bond early (US$200mn was redeemed early last year).

    Lebanese banks: S&P has withdrawn ratings assigned to Blom Bank and Bank Audi. These actions came after similar moves at Fitch. Both issuers are still rated by Moody’s – the long-term counterparty credit risk rating assigned to both banks is Caa1 (negative review). Moody’s differs from S&P and Fitch in its assessment of these Lebanese lenders, as Moody’s did not cut these banks to ‘selective default’ or ‘restricted default’ when the banks were asked to pay half of the interest due on foreign currency deposits in LBP.

    Riyad Bank (RIBL): Riyad Bank has placed a US$1.5bn 10NC5 subordinated bond at MS+180bps. The initial price talk was MS+225bps area. At the time of writing, the indicative mid-YTC on the new RIBL 3.174% bond was 3.01% and the bond was just over 40bps wider than the SAMBA 2.75% 2024 senior security. The new RIBL subordinated bond is Basel III-compliant and will ‘absorb losses through a permanent principal write-down at the point of non-viability’ according to Moody’s. Riyad Bank is the third-largest bank in Saudi Arabia, with SAR266bn total assets, SAR174bn total loans and SAR195bn deposits. Riyad bank is 22% owned by the Public Investment Fund and 17% owned by the General Organisation for Social Insurance. There is a 49% limit on foreign ownership, but actual foreign ownership is just over 8%. Riyad bank last had a USD-denominated bond outstanding in 2011. That was a 5-year senior bond. Currently, only a SAR4bn subordinated bond is outstanding. It was issued in 2015 and matures in 2025. The subordinated bond is callable in June this year. It is possible that this call date contributed in some way to the decision to place a USD-denominated Tier 2 security. Merger talks with NCB, the largest lender in KSA, were called off in December 2019, after a year of discussions. NCB shares rose and Riyad Bank shares fell following this announcement. Comments suggest pricing, differences in strategy as well as agreement on strategic roles may have led to the decision to end talks. Riyad Bank is rated A2/BBB+/BBB+ at Moody’s/S&P/Fitch. All ratings carry stable outlooks. 

    Sberbank (SBERRU): On February 11, the Central Bank of Russia (CBR) announced that a bill has been developed,which will see its stake in Sberbank sold to the National Welfare Fund (NWF, which is part of federal budget assets and managed by the Ministry of Finance) at market value. The CBR owns 50% plus one share of Sberbank. The rationale for the sale is to remove perceived conflicts of interest, from the CBR serving as ‘shareholder, regulator and supervisor.’ An offer is to be made to minority shareholders, as is mandated by such a sale. There might be questions about the potential implications of this news on Sberbank (SBERRU) bonds. Change of control language applies to Sberbank’s senior securities. The SBERRU 5.717% 2021 and SBERRU 6.125% 2022 bonds are the only two USD-denominated senior eurobonds outstanding on Bloomberg, and are indicated above par. Importantly, the change of control language requires that Sberbank cease to be directly or indirectly owned by ‘any...federal state agencies’ (bold our own).