Weekly Credit Risk Monitor /
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Weekly Credit Risk Monitor

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

  • In focus: Argentina exchange offer – Carry on regardless

  • Also in the news: Tullow Oil sells Uganda asset, Fitch report on multilateral development banks, new issuance and more

Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

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Tellimer Research
23 April 2020
Published byTellimer Research

In Focus: Argentina exchange offer – Carry on regardless

Argentina announced the launch of its exchange offer on Tuesday (21 April), pressing ahead despite the proposal being rejected by its major bondholders. The financial terms are unchanged from those the government announced on Friday (see here). The invitation expires on 8 May (but can be extended, terminated or modified by the government).  

It is not clear what happens from here, and we think the situation could get messy. According to local reports, the government accepts the possibility of a partial exchange, which means it could remain in default, a repeat of what happened in 2005.  

Given the public rejection by bondholders and lack of meaningful discussions, bondholders may have hoped that the authorities would have either delayed the launch or moved to sweeten the offer, such as by paying accrued interest (which could be worth up to 4pts depending on the bond), or including early consent fees. The government hasn't done this, and carried on regardless, saying it won't improve the offer. The offer clearly states that there will be no payment for any accrued or unpaid interest, although holders may still hope that the government will modify the terms before the offer closes (perhaps if participation is really low, for example). 

The four other key features of the offer, set out in the exchange prospectus, are (i) use of collective action clauses (CACs) to effect the exchange, (ii) the use of exit consents, (iii) a Rights Upon Future Offers (RUFO) clause, and (iv) limitation of cross default. Under the existing bonds' CACs, the Proposed Modifications to eligible bonds will be binding on all holders of eligible bonds, whether or not they consented, upon reaching the required thresholds (Requisite Consent), on an aggregated or single series basis, along with meeting certain other conditions. Furthermore, the offer envisages the use of exit consents (Subsequent Modifications) after its completion that, subject to the necessary consents, can be proposed to modify the new bonds and 2016 Indenture bonds (approval requires 75% of the aggregate principal amount); we think this can be used, upon gaining the necessary support, to weaken certain terms of the remaining eligible bonds to reduce their attractiveness, liquidity and legal standing. Regarding the RUFO, under the terms of the new bonds (except for the 2047s USD and EUR), for a period of five years from the expiry of the offer, if the government makes a voluntary offer for any of the untendered eligible bonds, it will have to offer the same terms to holders of the new bonds (investors will recall that the 2005 exchange had something similar). Fourth, the prospectus states that a default on any eligible bond will not result in a cross-default or acceleration on any new bonds. These requirements, individually and taken together, are aimed at encouraging participation, and/or threatening non-participation. 

Crucially, rather than delay the offer because of bondholder objections, the government is pressing ahead with the exchange anyway. Ordinarily, given the presence of CACs in the existing bonds, one might have expected the authorities to proceed only if they were reasonably assured of achieving the necessary thresholds (and only presenting an offer that they thought would do this). However, Argentina seems intent on undertaking the exchange, irrespective of participation, and maybe modifying the terms, or keeping it open for a bit longer, possibly hoping that others come in, until they build a critical mass to force all untendered holders into the new bonds through the CACs and threaten remaining holdouts with subordination through exit consents. The government seems to accept the result may be a partial exchange, without a (publicly stated) minimum participation threshold. 

Read the full report here.

Recap of the week’s key credit developments 

Benin (BENIN): On Tuesday, the IMF announced that a staff-level agreement (SLA) had been reached on the sixth and final review of its ECF programme with Benin, which is due to run to July 2020. The SLA includes an increase in the next disbursement under the programme of US$103.5mn, which would make cUS$125mn available by mid-May, pending Board approval. The entire programme had been for cUS$154.2mn. Beninese authorities had requested additional IMF funding, as they have set out an emergency response plan for the coronavirus pandemic. This will utilise funding to increase health sector spending, support vulnerable households and support impacted businesses. The IMF noted that the pandemic will have a negative impact on Benin’s near-term economic outlook and its fiscal and external accounts. 

Uzbekistan (UZBEK): The Uzbek government has allocated cUS$1bn in funds to address the economic consequences of the coronavirus pandemic, and is engaging with multilateral creditors such as the World Bank and Asian Development Bank to obtain US$1bn in loans to maintain a cash buffer, as it is unclear how long the pandemic will last, according to local media reports of an investor call with Deputy Finance Minister Odilbek Isakov on 16 April. The latest IMF WEO data forecasts real GDP growth of 1.8% in 2020, from 5.6% in 2019. The 2021 projection is 7%. Economic projections may change as the impact of coronavirus becomes clearer. 

Ecuador (ECUA): On 17 April, Ecuador announced the success of its consent solicitation with bondholders dated 8 April 2020. There was sufficient bondholder support, which varied by security, by the deadline of 5pm NY time on 17 April. The aggregate principal amount outstanding that consented was 91.52% for all bonds except the 7.95% 2024, and was 82.24% specifically for the 7.95% 2024s (the 24s had different voting thresholds). The consent solicitation sought approval to defer until August, interest payments originally due between 27 March and 15 July. It also sought 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. 

Cameroon (REPCAM): Fitch affirmed Cameroon’s long term foreign currency rating at B on Wednesday, but changed the outlook to negative from stable. The move comes as the coronavirus pandemic and lower oil prices will cause GDP to contract and weaken the country’s public finances. The agency expects Cameroon to meet its fiscal financing needs in 2020 and 2021, but notes the increasing medium-term liquidity risks. Fitch now expects the economy to contract by 2.1% this year, largely caused by delayed infrastructure project implementation due to financing constraints and the impact of the moderate coronavirus containment measures. Additionally, Fitch expects 2020 average Brent crude oil prices of US$35/bbl, from US$64.1/bbl in 2019 which, combined with suspended activity at the public oil refinery SONARO since May 2019, will weaken the hydrocarbon sector’s outlook; the sector contributes 5% to GDP. A mild recovery in 2021 is now expected, with GDP growing by 2.8%. In comparison, GDP growth was 3.7% in 2019, and the forecast B-rated median is 3.9%. 

Ukraine (UKRAIN): The National Bank of Ukraine (NBU) has cut its key policy interest rate for the seventh consecutive time. On Thursday, the discount rate was cut by 200bps to 8% to support the economy as it may face recession due to the effects of the coronavirus pandemic. A cut had been expected by economists in a Reuters poll, however the actual cut was deeper than expectations. The NBU Board statement said that inflation fell to 2.3% yoy in March, compared to the target of 5% +/-1%. The Board expects inflation in 2020 to be within this target range, and the current monetary and fiscal stimulus will not impede this. Separately, on Wednesday, Fitch affirmed Ukraine’s sovereign rating at B, but changed the outlook to stable from positive. The agency cited the heightened macroeconomic and fiscal risks stemming from the coronavirus pandemic, and the resulting negative impact on the growth outlook and fiscal accounts. Fitch now expects the Ukrainian economy to contract by 6.5% in 2020, after 3.2% growth in 2019. Growth in 2021 is forecast at 3.5%, in line with Fitch’s medium-term view. 

Global monetary policy: Central banks around the world have continued to loosen monetary conditions to support their economies amid the coronavirus pandemic. This week, in addition to Ukraine above, these included:

  1. China: The People’s Bank of China cut its benchmark (one-year loan prime) rate by 20bps on Monday, the second cut this year, as expected by all 52 participants in a Reuters survey. In Q1 20, the economy contracted by 6.8% yoy following the coronavirus lockdown. As economic activity starts to recover, it is unclear how long it will take to reach its previous level.
  2. Turkey: The central bank (TCMB) announced on Wednesday that it had decided to lower its policy (one-week repo) rate by 100bps to 8.75%, according to the MPC statement. The TCMB noted that developments regarding the coronavirus pandemic substantially weaken the global growth outlook, and that central banks were continuing to take expansionary measures. Economic conditions started to weaken in mid-March, after a strong upward trend in January and February, due to the effects on the pandemic on external trade, tourism and domestic demand.
  3. Paraguay: The central bank opted to cut the policy interest rate by 100bps to 1.25% on Wednesday. This was the third cut this year, after three cuts in March, totalling 275bps YTD.

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

  1. Peru: On 16 April, Peru (A3/BBB+/BBB+) priced a dual tranche US$ bond. This included a US$1bn tranche maturing 23 January 2026, priced to yield 2.392% and a US$2bn tranche maturing 23 January 2031, priced to yield 2.783%.
  2. Israel: On 16 April, Israel (A1/AA-/A+) priced a EUR200mn bond with a 1.5% coupon maturing 16 January 2029 to yield 1.171%, and a EUR250mn bond with a 2.875% coupon maturing 29 January 2024 to yield 0.849%.
  3. Guatemala: On Tuesday, Guatemala (Ba1/BB-/BB-) priced new bonds: A US$500mn bond with a 5.375% coupon maturing 24 April 2032 and tapped the existing 6.125% 2050 bond by US$700mn, doubling its size. 
  4. Mexico: On Wednesday, Mexico (Baa1/BBB/BBB-) priced a three-tranche bond totalling US$6bn. A US$1bn tranche with a 3.9% coupon maturing 2025 was priced to yield 4.125%, a US$2.5bn tranche with a 4.75% coupon maturing 2032 was priced to yield 5% and a US$2.5bn tranche with a 5% coupon maturing 2051 was priced to yield 5.5%.

Gulf Keystone (GULFKY): The company reported FY 19 financial result with revenues declining 18% yoy to US$207mn, EBITDA was down 19% yoy to US$122mn, debt remained unchanged at US$100mn and cash reduced to US$190mn due to high capex and generous shareholder distributions (cUS$100mn) through dividends and share buyback. As of 22 April 2020, Gulf Keystone’s liquidity remained strong with cS$164mn cash reserves, which according to management’s stress scenario estimates, is sufficient for 12 months from the date of approval of the 2019 results. In 2020, falling oil prices and payment delays from the KRG (US$73mn outstanding unpaid invoices) shifted the company’s focus from growth to cash preservation. Gulf Keystone suspended drilling, cut capex by 50% yoy, opex and G&A by 20% yoy and reduced headcount. The Shaikan field development plan has not approved yet by the Ministry of Natural Resources of Kurdistan. In a different (more constructive) oil price environment, this would have been negative, but it is less of a concern now. Working interest production is at 28,800boepd and is no longer expected to increase in 2020 as expansionary capex has been suspended. We have a Hold recommendation on GULFKY 23s. 

Tullow Oil (TLWLN): The company has sold its Lake Albert Development Project in Uganda, together with the proposed East African Crude Oil Pipeline, to Total for a total cash consideration of US575mn plus first oil contingent payments. This is the first transaction of the previously announced US$1bn asset disposal programme designed to optimise operations and reduce net debt. Considering existing hedging contracts, substantial headroom under the Reserves Based Lending (RBL) facility and expected proceeds from the asset disposal, Tullow’s operating and financial performance looks sustainable in 2020-21. Investors reacted positively to the news despite unprecedented pressure on crude oil prices. In FY 19, the company reported US$3.1bn in debt, US$0.3bn in cash and net leverage measured as net debt to EBITDAX of 2x. Following the transaction, Tullow’s pro-forma net debt could reduce to US$2.2bn (from US$2.7bn in FY19). This, however, is unlikely to improve the leverage ratio as lower oil prices put pressure on EBITDAX. According to Bloomberg, the mid price of US$650mn 6.25% notes due 2022 surged to 60 from 36 yesterday and the mid price of US$800mn 7% notes due 2025 increased to 55 from 36. See more here

KRG oil & gas companies operating in the Kurdistan Region of Iraq received payments last week for March 2020 oil shipments, according to Genel, Gulf Keystone and ShaMaran. This indicates a change of the payment terms, reducing the period between shipment and payments to two weeks from about three months in 2019. However, oil receivables for November 2019-February 2020, the period when oil price was roughly twice as high as its current level, will not be settled at least until the end of year, with the Kurdistan Regional Government (KRG) willing to put a settlement schedule in place if oil prices recover to US$50/bbl, according to Genel.  The new payment schedule proposed by the KRG with invoices settled within 15 day after the end of the month, is positive for the sector, particularly for companies with relatively small liquidity reserves and high costs such as HKN Energy. However, it won't help those with tight liquidity and those with essential costs not covered at US$25-US$30/bbl Brent price (eg ShaMaran). See the full report here

Multilateral development banks: Fitch Ratings released a report on multilateral development banks (MDBs) on April 22. As the rating agency highlights, the G20 and Paris Club has asked MDBs to ‘explore the options for suspension of debt service payments.’ Here are our takeaways from Fitch Ratings’ comments, and some additional points: (i) Payment delays of more than six months will result in any ratings uplift given for 'preferred creditor status’ being reduced. (ii) The impaired loan ratios at MDBs could increase, Fitch will assign a default rating to the relevant sovereign(s). This will impact the average rating of the MDB's loan portfolio. (iii) Fitch is concerned that payment suspensions may also impact cashflows/liquidity at some MDBs, especially ‘lower rated MDBs’. (iv) Positively, there may be support from the MDB’s shareholders. Fitch notes that this has happened before – shareholders/donors fully compensated for foregone sovereign debt payments in the Multilateral Debt Relief Initiative of 2005. (v) The most exposed will be ‘regional MDBs...operating in sub-Saharan Africa if debt payment suspensions are ‘applied to the same countries as the bilateral debt relief initiative.’ (vi) At present, Fitch assigns stable outlooks to the three SSA issuers it rates - Afreximbank (AFREXI, BBB-), BOAD (BBB), and PTA Bank (BB+). (vii) Moody’s recently placed the Baa3 rating assigned to PTA Bank on review for downgrade, citing ‘material risks to...capital and liquidity’ due to this bank’s exposure to Zambia. Moody’s is also concerned about losses and/or delayed payments from other countries in SSA, due to the Covid-19 pandemic. Thus, PTA Bank is at risk of losing its sole investment grade rating. As highlighted in a previous comment on AFREXI, PTABNK bonds are quoted quite wide relative to these other SSA issuers. (viii) As PTA Bank is already rated sub-investment grade at Fitch and BOAD is rated mid triple-B, comments from Fitch may increase the focus on AFREXI the most. AFREXI recently hosted a conference call, during which management stated that the issuer has ‘ample’ liquidity and continues to receive support from partner DFIs and central banks. AFREXI has already identified vulnerable borrowers in its portfolio and made some arrangements to cover payments.

Bank Dhofar (BKDBOM): The lender has decided not to redeem the US$300mn BKDBOM 6.85% Perp at the first call date, which is May 27. Bank Dhofar cites ‘the current extraordinary market circumstances due to the Covid-19 pandemic’ as one reason for the decision. The Perp is callable at every subsequent coupon payment date, and the bank says its position will be re-evaluated taking market conditions and capital into account. Bank Dhofar recently disclosed net income of OMR8.8mn for Q1 20, down 30% yoy, reflecting lower revenues as well as higher costs and provisions. The equity/assets ratio was slightly higher than it was a year ago (12.02% versus 11.89%). There may be questions about other Omani banks’ perps. The National Bank of Oman (NBOBOM) perp is callable in November. Current indicative prices suggest the probability of a call is not seen as high. Bank Dhofar’s disclosure comes after Ahli United Bank (AUBBI) decided against exercising the call on its perpetual security. That issuer stated that the decision related to talks with KFH (now postponed until December, due to current market conditions). Separately, KFH issued a press release on April 23 stating that no correspondence had been received from Kuwait’s Finance Ministry. This came after reports that the Finance Ministry was re-assessing the proposed deal.

Kuwait Projects (KWIPKK): The issuer, which owns a stake in Burgan Bank, is now rated Baa3 (-ve)/BB+(-ve) at Moody’s/S&P. Kuwait Projects was downgraded to sub-investment grade by S&P on 21 April, and released a statement addressing this the following day. The issuer noted that there is sufficient liquidity to redeem the US$500mn July 2020 bond. After July, the next bond maturity is March 2023. Kuwait Projects also highlighted that the S&P rating was last affirmed in March 2020. This week’s downgrade partly reflects the move in equity valuations – Burgan Bank is down 29% YTD, according to KWIPKK. Kuwait Projects also stated that it ‘owns fundamentally strong market leaders’ and ‘believes that current market prices do not represent the intrinsic value of its portfolio companies.’

TBC Bank (TBCBGE): TBC has secured a banking licence in Uzbekistan. The bank already runs a payments business there. TBC Bank joins Halyk, which has also set up operations in Uzbekistan. For both TBC Bank and Halyk, operations in their home countries will likely continue to drive performance. The EBRD has stated that it will invest in TBC Bank’s Uzbek business. These comments confirmed previous statements from TBC Bank. There may be other shareholders in TBC Bank’s Uzbek business, but the Georgian lender has said it will remain the majority owner. Recent comments suggest Uzbekistan may be a preferred investment destination for the EBRD – the Bank has also provided a USS$150mn trade finance facility to three Uzbek lenders, including Uzpromstroybank (ticker: SQBN). This currently contrasts with Kazakhstan – the EBRD says there are no plans for further investments in banks there. We note that Uzbekistan is one of the countries which is still expected to grow this year – the World Bank forecasts GDP growth of 1.6% for 2020. Kazakhstan (-2.5%) and Georgia (-4.0%) are both expected to record negative GDP growth this year. For more on TBC Bank, see our report on Georgian lenders.

Halyk Bank (HSBKKZ): The Board of Halyk Bank has recommended not paying dividends on 2019 profits. This disclosure came after Kazakhstan’s banking regulator followed South Africa and others in CEEMEA in recommending that banks skip dividends this year. Halyk, which had excess capital going into this crisis, had asked bondholders' permission to modify the terms of its senior securities, to allow the bank to pay dividends of up to 100% of net income. It seems that will now not be possible this year (but we think it is possible Halyk may consider this in 2021). Halyk’s solid liquidity metrics mean we don’t think there should be concerns about bond repayments. The bank has just two USD-denominated senior eurobonds outstanding - the 2021s and 2022s, on which we have Hold recommendations.