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: MHP – Well prepared for a challenging 2020

  • Also in the news: global policy response to Covid-19, new issue from Saudi, update on Georgian banks and more

Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
16 April 2020
Published byTellimer Research

In Focus: MHP – Well prepared for a challenging 2020

Upgrade MHPSA 26s and 29s to Buy, reiterate Hold on MHPSA 24s. MHPSA bonds made a swift recovery after the March sell-off and, based on Bloomberg indicative prices, once again trade inside the sovereign. MHP remains the strongest corporate issuer in Ukraine that is best positioned to face the challenges of 2020 just as we expected. A combination of solid liquidity, strong cash flow generation, absence of debt repayments until 2024 and a high (c70%) share of hard currency revenues give MHP a head start amid challenges this year, including UAH depreciation, falling commodity prices and Covid-19-related disruptions. Despite the recent outperformance and high uncertainty in the financial markets, we think that positive developments toward new IMF funding for the sovereign, MHP’s solid stand-alone credit profile and relatively low bond prices still offer a good entry point. We upgrade MHPSA 26s and MHPSA 29s and reiterate Hold on MHPSA 24s. 

FY 19 results expectedly mixed. MHPSA reported a 32% yoy increase in revenues to US$2.1bn driven mainly by the acquisition of Slovenian producer Perutnina Ptuj (PP), and a 13% yoy increase in poultry sales generated by the company’s Ukrainian facilities. Weak poultry prices in export markets, the consolidation of less profitable European operations and UAH appreciation put pressure on profitability and reduced EBITDA by c16% yoy to US$376mn on a pre-IFRS 16 basis. The accounting standard introducing changes in the treatment of leases significantly increased both EBITDA and debt. MHP continues to disclose EBITDA before the impact of IRFS 16, which is used to calculate net leverage under bond covenants. Despite lower profitability (EBITDA margin down 11pts to 18%), MHP generated strong operating cash flows further supported by sizable but temporary release of working capital. 

High leverage mitigated by strong liquidity and cash generation. In FY 19, MHP’s net leverage crossed the 3.0x threshold prescribed by the bond covenants, triggering a restriction to put on more debt and limiting dividend payments. MHP’s total debt increased to US$1.7bn, including US$200mn lease liabilities under IFRS 16, which are excluded from net leverage calculation for the covenant purposes. The rest is manly represented by US$ denominated bonds (US$1.4bn) due 2024, 2026 and 2029. The company has effectively no debt maturities in the next three years. Based on the fixed interest rate and the amount outstanding, we estimate annual interest payments at cUS$100mn in 2020-2023. MHP ended the year with US$341mn of cash on its accounts and generated US$380mn free cash flow before M&A and dividend. 

Positive outlook for 2020. Despite a slow start to the year when export sales were affected by an avian influenza outbreak and the uncertainty brought about now by Covid-19, management expects EBITDA to increase 5-10%yoy to US$400-420mn (pre-IRFS 16). These projections are based on the assumptions of single digit growth in production and flat prices in US$-terms. On the conference call, the company confirmed 2020 capex guidance at US$100mn and outlined certain cash outflows expected during the year, including a US$100mn investment into the working capital to replenish grain inventories and dividend of cUS$30mn. Based on management guidance we estimate MHP’s FCF at cUS$70-100mn and net leverage at 2.6x-2.7x at the end of 2020. UAH depreciation is expected to support profitability in 2020 – according to the company’s estimate, UAH1 depreciation generates US$8-10mn of EBITDA on an annualised basis. We estimate that MHP generates c71% of revenue in hard currency, while c70% of costs are UAH-denominated.

Read the full report here

Recap of the week’s key credit developments 

IMF and friends: The IMF and World Bank Spring Meetings are being held online this week. The new IMF WEO forecasts -3% global economic growth this year, and 5.8% in 2021, based on its baseline assumptions that the coronavirus pandemic fades in H1 20. Real GDP growth in the United States and Euro Area are forecast at -5.9% and -7.5% this year, respectively. A G20 communique issued on Wednesday during the Spring Meetings confirms that it supports the international call for official bilateral creditors to provide a time-bound payment standstill for some of the world’s poorest countries that request forbearance. The US, the IMF’s largest shareholder, has not supported measures to increase SDRs for member states, despite calls for this from European and African leaders. The IMF’s Executive Board has continued to approve emergency financing for member states, including for El Salvador with US$389mn this week. See our recent report on IMF emergency financing here and on the G20 endorsement here

Global policy response: Central banks around the world have continued to loosen monetary conditions to support their economies amid the coronavirus pandemic. The South African Reserve Bank decided on Tuesday to cut its repo rate by 100bps to 4.25% at an emergency meeting. The MPC statement noted the global coronavirus spread since its last meeting and cited IMF economic growth forecasts. The latest IMF WEO forecasts South African real GDP growth of -5.8% and 4% in 2020 and 2021, respectively. Neighbouring Namibia also cut its repo rate by 100bos to 4.25% of Wednesday. Mongolia cut its policy rate by 100bps to 9% on Monday, Uzbekistan cut its policy rate by 100bps to 15% on Wednesday and the Philippines cut its key policy rate by 50bps to 2.75% on Thursday. Indonesia opted to hold its reverse repurchase rate at 4.5% on Tuesday, not expected by economists in a Bloomberg survey, and after two cuts already this year. 

Saudi Arabia (KSA): The Kingdom priced a three-part bond issue on Wednesday, totalling US$4bn. This includes a US$2.5bn tranche maturing in 2025, with a 2.9% coupon, a US$1.5bn tranche maturing in 2030 with a 3.25% coupon and a US$3bn tranche maturing in 2060 with a 4.5% coupon. It follows numerous recent sovereign issues, as countries take advantage of low global yields.  

Kazakhstan (KAZAKS): On Tuesday, the Minister of National Economy announced that real GDP growth was 2.7% yoy in Q1 20, led especially by construction and communication. Real GDP growth was 4.5% in Q4 19. Growth in the manufacturing sector was 8.8% as development increased in industries such as pharmaceuticals, mechanical engineering and the production of building materials. Meanwhile, on Wednesday, the IMF reported that it expects 2020 real GDP growth to be -2.5% and 4.1% in 2021, closer to last year’s 4.5%. This puts Kazakhstan ahead of regional peers; the Middle East and Central Asia is forecast -2.8% and 4% real GDP growth this year and next, respectively.  

This week, rating agencies made the following changes to their sovereign ratings:

  • Ethiopia: On Friday, S&P affirmed its rating on Ethiopia’s long term foreign currency rating at B, but changed the outlook to negative from stable. S&P cited rising pressure on debt and external positions. Moody’s and Fitch rate Ethiopia B1 and B, respectively. All three agencies now have a negative outlook on their ratings.
  • Cameroon: Also on Friday, S&P downgraded Cameroon to B- from B due to rising external and still high socio-political risks. The outlook is now stable, from negative. Moody’s and Fitch rate the sovereign B2 and B respectively, both with stable outlook.
  • Ecuador: On Tuesday, S&P downgraded Ecuador’s rating to SD from CCC- on the expectation that interest payments will be missed and a distressed exchange will occur. Fitch lowered its rating to C from CC on 9 April, while Moody’s has a negative outlook on its Caa3 rating.
  • Nigeria: On Wednesday, Moody’s affirmed its B2 rating. The agency maintained the negative outlook on the rating, continuing to reflect material downside risks to creditworthiness, which have increased since a negative outlook was assigned in December 2019, as the rapid coronavirus outbreak brings price shocks. S&P and Fitch rate Nigeria B- (stable outlook) and B (negative outlook), respectively. 

Georgian Banks: Fitch has revised the outlook on five Georgian banks, including Bank of Georgia and TBC Bank, to negative. This is unsurprising, given negative actions on other lenders in CEEMEA including those in Russia, Kazakhstan, South Africa and Nigeria. The changes in Outlook reflects ‘the downside risks to their credit profiles resulting from the economic implications of the coronavirus pandemic.’ Fitch expects the economy to shrink -3.2% this year. This is actually better than TBC Bank’s estimate of -4.5% (though Fitch does state that there are downside risks). A recovery is expected in 2021. Fitch also notes the level of dollarisation as a risk, but there is only a limited reference to efforts to reduce this (including significant restrictions on FX mortgage lending). We do acknowledge that this is a risk to asset quality, earnings and capitalisation, however. Regarding the regulatory changes, Fitch states that ‘these measures will reduce pressures on some borrowers and lower the potential for regulatory breaches by banks’ though the rating agency still sees risks. Fitch highlights the impact of a regulator-driven boost to general provisions on capital ratios (this took c3ppts off these ratios at Bank of Georgia and TBC Bank). However, Fitch also highlights that the buffers versus the new, lower capital ratio requirements are the same. Interestingly, while Fitch believes the regulator could impose restrictions on AT1 coupon payments, the rating agency also states that ‘there is some uncertainty as to whether the NBG would prevent coupon payments if banks breach minimum requirements including all buffers while still meeting minimum requirements plus pillar 1 buffers.’ This is a small relief. We note both banks have not discussed skipping coupons on these instruments. As positives, Fitch flags the two large banks’ deposits have been stable and this year’s wholesale maturities are ‘moderate.’ We recently published an update on Georgian banks, highlighting the regulatory changes and the capital and liquidity buffers the banks have in place. See further details here. 

Kuwait Finance House and Ahli United Bank: On 12 April, Kuwait Finance House (KFH) and Ahli United Bank (AUB) provided a bit more information on the decision to suspend ‘acquisition procedures’ announced in March. Both lenders now expect the process to resume in December 2020. This development may be worth noting for holders of the AUBBI 6.875% Perp. As we previously flagged, the issuer decided against exercising the call on this US$400mn security in March. At the time, AUB stated that a decision would be made following the KFH transaction. It seems that decision may now be delayed. 

Ardshinbank (ARBANK): Fitch has revised the outlook on Ardshinbank’s B+ rating to negative from stable. This reflects the rating agency’s view that near-term pressures related to the Covid-19 pandemic will put pressure on the bank’s financial profile. Asset quality is expected to deteriorate, and provisions will likely be higher. Further, a weaker local currency is seen exerting additional pressure on capital (Fitch notes that foreign currency lending accounted for 50% of loans at the end of last year). Fitch previously revised the outlook on Armenia to negative from stable.  

Privatbank (PRBANK): The Kyiv Court of Appeals has upheld a previous ruling that Privatbank should pay US$259mn to companies owned by the Surkis family. This family is believed to be associated with the former owners of Privatbank, Igor Kolomoisky and Gennady Boholyubov. Deposits held by companies linked to the family were effectively written off in 2016, when Privatbank was nationalised. According to Kyiv Post, this decision is final and ‘cannot be appealed further.’ This case may lead to even more calls for judicial reform in Ukraine. For Privatbank bonds, what the London Court of International Arbitration (LCIA) decides regarding the bank’s bail-in defence is what matters now. For more on the case, see here