Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

  • We round up the week's key developments in the world of sovereign and corporate credit

  • In focus: Metinvest – Clouds gather over steel and iron ore; downgrade bonds to Sell

  • Also in the news: New issues round-up, Fitch's latest set of negative rating actions and more

Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
9 April 2020
Published byTellimer Research

In Focus: Metinvest – Clouds gather over steel and iron ore; downgrade bonds to Sell 

Metinvest’s yield curve shifted up considerably after its sister company DTEK Energy announced a debt restructuring. 

Looking at METINV bond prices, a fair question to ask is, where are they more likely to go next: up or down? In search of the answers, we turn to the steel and iron ore markets for guidance. What we see are seriously declining steel prices and softening iron ore, trends that will increase pressure on Metinvest’s profitability. 

According to our estimates, the company needs a minimum US$560mn-690mn to meet interest payments, capex commitments and repay maturing debt in 2020, but has limited (US$290mn) cash reserves to fall back on. Hence, Metinvest’s ability to generate sufficient cash flows in 2020 has become the key variable and the main credit criterion. 

We are concerned that, with continued pressure on commodity prices, Metinvest’s EBITDA could substantially fall or turn negative in Q2. In this environment, there is little upside in holding METINV bonds. We downgrade the METINV 23s, 26s and 29s to Sell.

Read the full report here

Recap of the week’s key credit developments  

Zambia (ZAMBIN): On Friday, Moody’s downgraded its long term foreign currency rating on Zambia to Ca from Caa2, with stable outlook, while S&P and Fitch each have a CCC rating with negative outlook. Moody’s downgrade was due to the weakening of the country’s debt service capacity over the past year. Bloomberg reported last week that Zambia was seeking to restructure its foreign debt, and the FT reported on Monday that the authorities had already found advisers for a restructuring. S&P has cited weak governance for the lack of rapid and decisive policy actions, and the resulting deterioration of fiscal metrics. The probability of default has also risen as external and liquidity pressures have built due to challenging global conditions. The agency believes that the likelihood of a public debt restructuring and the severity of investor loss in a restructuring scenario are greater than previously thought. The combined effect of lower global oil prices and the coronavirus pandemic have left Zambia’s public finances vulnerable. Moody’s has also said that a reprofiling of non-commercial debt could limit losses for private bondholders, while the losses for bondholders could be greater still than implied by a Ca rating if a non-commercial debt reprofiling does not occur. 

Ecuador (ECUA): Ecuador announced a consent solicitation on 8 April as it seeks to amend certain terms of its bonds in order to provide short-term payment relief. Specifically, it is seeking approval to defer until August, interest payments originally due between 27 March and 15 July. It is also seeking approval to allow a consent solicitation fee, by reducing slightly the first originally scheduled interest payment on or after 27 March (by US$0.5 per US$1,000 of principal), and to remove certain events of default. The deadline for consent solicitation is 5pm NY time on 17 April. The consent solicitation seems to go further than we might have expected when Ecuador announced on 23 March that it will suspend certain upcoming bond payments, by seeking interest deferral on more bonds, but we think this suggests Ecuador is heading for a comprehensive bond restructuring as a prior action for a new IMF programme.   

On Friday, Moody’s downgraded its long term foreign currency rating for Ecuador to Caa3 from Caa1, and the new rating is now on negative watch. Moody’s cited the ‘now very high probability’ of debt restructuring, distressed exchange or default for the move. The IMF announced on 23 March that Ecuador has expressed its intention to seek emergency financial support through its Rapid Financing Instrument (RFI). Moody’s has noted uncertainty around new IMF financing, and concerns over the severity of investor losses as the government uses its available resources in its coronavirus response. Last month, Fitch and S&P lowered their respective ratings to CC from CCC and CCC- from B-. S&P has a negative watch on its latest rating, citing risks to debt service. 

Gabon (GABON): On Friday, Fitch downgraded Gabon’s long term foreign currency rating to CCC from B (Moody’s currently rates Gabon Caa1 with positive outlook). Fitch’s decision comes as sovereign debt repayment capacity faces greater risks due to liquidity pressures amid lower global oil prices. Weak public finance management is illustrated by past accumulated arrears on external debt and delays in securing planned multilateral funding. The agency now expects a fiscal deficit of 4.6% of GDP this year, from the 0.2% estimated surplus in 2019 and a previously estimated small surplus in 2020. Fitch expects revenues to contract by c32% based on the lower oil price assumption of US$35/bbl and consequences of the coronavirus outbreak. The agency expects public debt to rise to 73% of GDP in 2020, from 60% in 2019, due to larger deficits and contracting GDP. The country has a large financing gap and liquidity pressure could mount in June 2020 in particular, as US$228mn of domestic and external debt will mature. Further peaks will occur over July-September and in December.

Nigeria (NGERIA): On Monday, Fitch lowered its long term foreign currency rating on Nigeria to B from B+, and retained its negative outlook. S&P downgraded its rating to B- on 26 March, now with a stable outlook. Moody’s rating is B2 with a negative outlook. Fitch cited the aggravation of ongoing external finance pressures due to recent lower oil prices and the coronavirus pandemic shock. Nigeria has a lack of fiscal buffers and precarious monetary and exchange rate policy settings, and will likely see rising public debt. Fitch assumes an average oil price of US$35/bbl this year, from US$64.1 in 2019. The country’s dependence on oil is illustrated by the oil sector’s 57% contribution to current account receipts and almost half of fiscal revenue over the last three years. The agency says that this shock exacerbates the naira’s overvaluation and measures taken by the Central Bank of Nigeria are not sufficient to address deteriorating external imbalances. Fitch estimates that foreign reserves would fall to 2.5 months’ current account payments by end2020 if sufficient adjustments are not made to the exchange rate, portfolio outflows and a wide current account deficit, which would be below the historical B-rated median. The country will be heavily impacted by the outcome of further discussions between OPEC+ members. Separately, on Tuesday, Nigeria became the latest country to seek IMF emergency financing under the RFI, which could be up to US$3.3bn. However, this is not a programme, and the authorities have ruled out requesting one, as it would likely come with conditions, including on exchange rate management. See our recent report here

Argentina (ARGENT): The government has deferred interest and principal payments of domestic law dollar denominated bonds until 31 December 2020, or sooner at the Ministry of Economy’s discretion. This covered 8 bonds with debt service (principal and interest) amounting to a combined US$8.05bn. This is negative for the restructuring and may indicate the authorities’ intention to be more aggressive, as it was a unilateral decision. Similar actions were not taken for foreign law bonds, despite Economy Minister Martin Guzman’s statement that both would receive similar treatment, suggesting greater risk for domestic law bonds. However, payments on foreign law bonds are approaching, with US$503mn due on 22 April on the 2021s, 2026s, and 2046s (see our research, Argentina’s restructuring plan: four observations). No further fiscal adjustments were announced, while Guzman’s projections are to reach a primary balance in 2023. A short run fiscal deficit expansion is expected due to stimulus measures in response to the coronavirus pandemic, which also complicates the solvency outlook. See our partner research here

Benin (BENIN): On Thursday, Fitch changed the outlook on its long term foreign currency B rating on Benin to stable from positive, based on the agency’s expectation that the coronavirus pandemic will add to the economic and fiscal shock of the continued border closure with Nigeria. The heightened risks associated with these shocks offset Benin’s improvements in public and external finance metrics, which have come from fiscal consolidation since 2016 and rebased GDP statistics published in 2019. Fitch now expects GDP growth to slow to 1.8% in 2020, from 6.4% in 2019. Benin is rated B2 (positive outlook) and B+ (stable outlook) by Moody’s and S&P, respectively. 

New issue round-up: This week, a number of sovereign issuers have priced bond deals as issuers take advantage of lower global yields, including:

  • Slovenia: On Tuesday, the country issued EUR2.25bn in a three-part deal. It priced a EUR1.15bn issue with a 0.2% coupon, maturing in 2023; a EUR1bn issue with a coupon of 0.875%, maturing in 2030; and a EUR100mn issue with a 3.125% coupon, maturing in 2045.
  • Qatar: Also on Tuesday, Qatar issued US$10bn in a three-part deal with a 5, 10, and 30-year. It priced US$2bn 3.4% notes due 2025 at T+300, US$3bn 3.75% notes due 2030 at T+305 and US$5bn 4.4% notes due 2050 at T+307.9. Total orders reached US$45bn. 
  • Cyprus (Ba2/BBB-/BBB-): Cyprus issued two new bonds on Tuesday for a total of EUR1.75bn, a seven year (2027) and 30-year (2050). The EUR1.25bn seven year was priced at midswap+165 and the EUR500mn 30-year was priced at midswap+215. Total orders amounted to EUR2.6bn. 
  • Indonesia (Baa2/BBB/BBB): Indonesia issued US$4.3bn in a three-part deal priced on Monday with a 10.5, 30.5 and 50-year: US$1.65bn 3.85% notes due 2030 (priced to yield 3.9%), US$1.65bn 4.2% notes due 2050 (priced to yield 4.25%)and US$1bn 4.45% notes due 2070 (priced to yield 4.5%). Total orders amounted to US$11bn. 
  • Latvia: The Republic of Latvia returned to international capital markets to raise EUR1bn on Monday with a coupon of 0.125% and maturity in 2023, after a previous EUR550mn issue on 26 March with 0.375% coupon and 2026 maturity.

Global policy response: Central banks around the world have continued to loosen monetary conditions to support their economies amid the coronavirus pandemic. The Central Bank of Sri Lanka cut its key interest rate by 25bps to 6% on Friday, the third cut this year after 50bps on 30 January and 25bps on 16 March. The central bank said that the decision will compliment previous measures to ease market conditions and enable the domestic financial markets to provide further relief to businesses and individuals amid the coronavirus outbreak. Separately, on Monday, Israel’s central bank cut its benchmark rate by 15bps to 0.1% and Uganda cut its central bank rate by 100bps to 8%. On Wednesday the National Bank of Poland unexpectedly cut its benchmark interest rate by 50bps to 0.5%. On Thursday Bank of Korea held interest rates constant at 0.75%. Last Friday, Kazakhstan cut its policy rate from 12% to 9.5%, reversing its previous hike last month. 

Kazakhstan banks: In the latest set of negative rating actions, Fitch has revised the outlook on for Kazakhstan banks’ ratings including Halyk (HSBKKZ) and Fortebank (ALLIBK). For these two lenders, the outlook has been changed to negative from positive. Halyk is rated BB+ and so was on the cusp of being investment grade. Similar to other countries, the change in outlook reflects the view that asset quality will ‘materially weaken’. Higher impairment charges are expected to lead to lower earnings. Fitch notes the clean-up of the banking sector as a strength, and states that funding and liquidity are not under immediate pressure. 

Russia banks: Fitch has also revised the outlook on 15 Russian banks to negative from stable. Banks affected include Alfa (ALFARU), Credit Bank of Moscow (CRBKMO), Sovcombank (SOVCOM), Tinkoff Bank (AKBHC) and Home Credit & Finance Bank (HCFBRU). ALFARU and SOVCOM Tier 2s were cut to BB- reflecting a methodology change. Ratings of both banks’ perps were affirmed at B. We note that this methodology change has resulted in widespread rating changes – in both emerging and developed markets. No other subordinated bond ratings were downgraded, including the B- ratings on the AKBHC and HCFBRU perps. This is probably a relief, as these ratings are on the cusp of triple-C (and we understand some funds may not hold securities carrying that rating). Positively, Fitch notes that both these banks have ‘considerable buffers’. The rationale for the outlook changes is the potential impact of the COVID-19 pandemic and lower oil prices – clearly, this isn’t surprising, and isn’t unique to Russian banks. The latest update comes after Fitch changed the outlook on the sector to negative (on March 25). Much will depend on how long current challenges last. Fitch notes that ratings have not been placed on negative watch and states that the banks’ ‘financial profiles, and therefore ratings, could probably tolerate a short-lived, sharp economic contraction in 2Q20 if this is followed by stabilisation in 2H20. However, an extended period of suppressed economic activity would be more likely to result in rating downgrades.’ Asset quality – in both retail and corporate lending – is expected to deteriorate, and profitability is seen weakening. However, Fitch highlights that the banks are ‘entering the downturn with significant capital buffers’ and says liquidity has been stable. 

Sovcombank (SOVCOM): Sovcombank disclosed plans to buy back up to US$40mn of its USD-denominated bonds earlier today. The two bonds targeted are the SOVCOM 7.75% Perp and the SOVCOM 8% 2030 Tier 2 security. Both bonds have US$300mn outstanding. Reg S securities are targeted and the deadline for this offer is 5pm UK time on April 15. The minimum buyback prices are 75 on the Perp and 80 on the Tier 2 (plus accrued interest, Modified Dutch Auction Procedure). The prices achieved may be higher. However, based on the minimums disclosed, if it is assumed that SOVCOM spends US$20mn on each bond, the lender could book a gain of almost US$12mn on the buyback (RUB723mn based on end-2019 exchange rate or RUB887mn based on the previous day’s levels). Looking at the lender’s 2019 figures, this potential gain is not significant for Sovcombank, suggesting the rationale may just be to support bond market prices. The issuer reported net income of just over RUB30bn for 2019, up from RUB18bn in the previous year. SOVCOM also reported total assets of RUB1.13tn and equity of RUB139bn at end-2019. Tier 1 and total capital reached RUB131bn and RUB157bn, respectively at the end of last year. We note that Credit Bank of Moscow (CRBKMO) recently announced a buyback offer targeting its USD-denominated senior bonds and SOVCOM has bought back its domestic USD bonds. Tinkoff Bank has so far bought back shares. SOVCOM clearly isn’t alone in buying back securities in this market. It is not clear that this buy back is large enough to make a significant, lasting impact on valuations.