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: CEEMEA Perps – Call me!

  • Also in the news: IMF approves emergency financing to Nigeria, policy cuts, new issues and more

Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

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Tellimer Research
30 April 2020
Published byTellimer Research

In Focus: CEEMEA Perps – Call me!

In 2019, Dubai Islamic Bank, Emirates NBD, Al Hilal Bank and Burgan Bank redeemed perpetual securities totalling US$3bn at the first call dates. 2020 has been quite different so far. Ahli United Bank and Bank Dhofar have both announced that their perpetual securities will not be called at the first call dates. This has cast doubt over other banks exercising call options on similar securities, and led to questions about how best to value perpetual securities. Assessing yields to perpetuity may be viewed as most prudent. However, Gazprombank’s decision to call a bond two years after the first call date shows that issuers can renege on previous decisions to skip calls.  

On March 3, Ahli United Bank (AUBBI) disclosed that the US$400mn AUBBI 6.875% Perp would not be redeemed on the first call date, which is 29 April. The bond is callable on subsequent coupon payment dates, and the lender stated that its capital structure 'will be reassessed depending upon the results of the KFH (Kuwait Finance House) transaction.' Completion of that transaction has been temporarily suspended until December 2020. There have been reports that Kuwait’s finance minister had asked to reassess the transaction, but both AUBBI and KFH have said no correspondence has been received. These reports add to uncertainty regarding the AUBBI 6.875% Perp.  

The latest figures we have for AUBBI are for FY 2019. Attributable net income rose to US$730mn from US$698mn in the previous year, generating a return on equity of almost 18%. The NPL ratio was flat yoy, at 1.9%. The LCR was 315%. All capital ratios were lower than at YE 2018 but remained above the minimums required by the Central Bank of Bahrain. The CET1, Tier 1 and total capital ratios were 13.1%, 14.9% and 16.4% respectively which compare to the regulatory minimums of 9%, 10.5% and 12.5% (all include the capital conservation buffer).  

Bank Dhofar (BKDBOM) has decided not to redeem the US$300mn BKDBOM 6.85% Perp at the first call date, which is 27 May. The lender cited '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. The bank had previously approved issuance of Additional Tier 1 instruments of US$300mn (or OMR equivalent). The new issue approval suggests the BKDBOM 6.85% Perp may well have been called if the issuer was able to replace it.  

Bank Dhofar recently disclosed net income of OMR8.8mn for Q1 2020, 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%). At YE 2019, the CET1, Tier 1 and total capital ratios were 12.6% (minimum: 9.5%), 16.4% (11.5%) and 15.5% (13.5%) respectively.  

Following the announcements from AUBBI and BKDBOM, there are three other call dates to watch this year – in June, September and November. Current valuations suggest that the market does not assign a very high probability to these call options being exercised. For First Abu Dhabi Bank (FABUH) and Emirates NBD (EBIUH) the likelihood of the call options being exercised is higher, we think, than it would have been for AUBBI or BKDBOM. Having said this, we acknowledge that even these much larger UAE banks face challenges – Q1 2020 net profit was down in excess of 20% yoy at FABUH and EBIUH. Both banks’ capital ratios remain above regulatory minimums and positively, some forbearance measures have been introduced in the UAE. 

Read the full report here

Recap of the week’s key credit developments 

Egypt (EGYPT): IMF Managing Director Kristalina Georgieva said in a statement released on Sunday that Egypt had requested financial support under the Rapid Financing Instrument (RFI). The country is also seeking a new Standby Arrangement (SBA), after its most recent programme (EFF) expired in July 2019. As the government has acted to reduce the coronavirus’ spread in Egypt, the economy will suffer from the domestic impacts and the global recession. IMF staff are working with Egyptian authorities in their policy response, while the requested RFI financing would allow the government to address any immediate balance of payments needs and support the most affected sectors and vulnerable people. There was no indication in the IMF’s statement on the amount of IMF emergency financing being sought or the programme size. Under the RFI, the limit of 100% of quota amounts to US$2.8bn. Egypt already owes the IMF US$11.7bn under its previous programme as it drew the full amount available. 

Nigeria (NGERIA): On Tuesday, the IMF Board approved US$3.4bn in emergency support for Nigeria, following a request from the government on 7 April. The amount will be disbursed under the RFI and is equal to 100% of Nigeria’s quota. According to the IMF press release, the support comes amid both the pandemic and recently lower global oil prices, which has created an urgent BoP need. Oil remains an important commodity despite government attempts at economic diversification. Nigerian National Bureau of Statistics (NBS) figures show that the oil sector contributed 8.78% to GDP in Q4 19. The coronavirus pandemic is causing a historic contraction in real GDP, which will create large external and fiscal financing needs. The IMF projects real GDP to decline by 3.4% this year, compared to its pre-coronavirus growth forecast of 2.5%. The Fund also notes that the authorities’ commitment to medium-term macroeconomic stability remains crucial to support recovery and ensure debt sustainability, and called for greater exchange rate flexibility. On Thursday, the CBN stated its commitment to maintaining a more unified, flexible and market-determined exchange rate regime and would only intervene to smooth large FX fluctuations.

Greece (GGB): On Friday, S&P affirmed its BB- rating for Greece, but revised its outlook to stable from positive, due to the adverse effects of and uncertainty regarding the coronavirus pandemic. S&P said that it expects the economy to contract by c9% in 2020 before improving from 2021. The Finance Minister recently predicted a recession with a 4% contraction in GDP, according to media sources. Additionally, the stable outlook reflects S&P’s view that fiscal buffers offset risks to creditworthiness stemming from the pandemic. Fitch and Moody’s rates Greece BB and B1, respectively, each with a stable outlook. 

Togo: Also on Friday, S&P affirmed its B long term foreign currency rating on Togo. This was because although the coronavirus pandemic will take a toll on the economy and public finances this year, the country’s solid economic performance and fiscal consolidation over recent years should help to facilitate a rapid recovery from 2021. S&P now expects a slow restart of the economy from H2 20. The agency expects a 1% growth rate for the remainder of 2020, but notes that economic projections are uncertain. The uncertainty is partly attributed to the large informal sector, excluded from official data. A positive point is that Togo is part of the WAEMU monetary union, with solid reserves and potential liquidity assistance. The outlook remains stable, reflecting the view that the adverse coronavirus related impacts ‘will be contained without lasting structural damage to credit metrics’. Moody’s rates Togo B3 with stable outlook. 

Papua New Guinea (PNGIB): On Wednesday, S&P downgraded Papua New Guinea to B- from B, citing pressures to metrics stemming from Covid-19. The agency expects the pandemic to further weaken economic growth prospects and fiscal metrics. Vulnerability to the volatile global backdrop extend from increasing debt levels and limited fiscal options. The low-income country also faces constraints from its dependency on the mining sector and its weak institutions. The outlook is stable, reflecting the view that growth and fiscal deficits will remain under pressure over the next 12-18 months. Moody’s rates the country B2 with stable outlook. 

Global policy response: Central banks around the world have continued to loosen monetary conditions to support their economies amid the coronavirus pandemic. This week, these include:

  1. Russia: On 24 April, the Board of Directors of the Bank of Russia decided to cut the key rate by 50bps to 5.5%. This was the second cut this year, after a 25bps cut on 7 February. Since the last meeting in March, both domestic and global measures to contain the coronavirus pandemic have been introduced, which negatively impact economic activity. This creates a deflationary influence and the Board has decided to respond with further monetary easing. Forecasts now suggest inflation of 3.8-4.8% in 2020, and 4% per year from 2021.
  2. Armenia: On Tuesday, the Central Bank of Armenia Board cut its refinancing rate by 25bps to 5%. Inflation in March 2020 was 0.5% mom, compared to 0.1% in March 2019, bringing the annual inflation rate down to 0.1% yoy, continuing the deflationary trend. The coronavirus spread and responses to it negatively impact Armenia’s economy and that of its partner countries, and is estimated to have a deflationary effect on the Armenian economy. Most economic sectors saw a decline in activity in March, and the Board decided to add to economic stimulus.
  3. Tajikistan: Also on Tuesday, the National Bank of Tajikistan lowered its refinancing rate by 100bps to 11.75%. This follows a 50bps hike in the rate on 28 January.
  4. Georgia: On Wednesday, the National Bank of Georgia cut its refinancing rate by 50bps to 8.5%, due to the pandemic and lower global oil prices. Inflation in March was 6.1% yoy and is expected to remain high for several months. It should then gradually decline and approach the target level of 3% in H1 21.
  5. Kenya: Also on Wednesday, the Central Bank of Kenya (CBK) lowered its main interest rate by 25bps to 7%. This was the third cut this year, following a 25bps cut on 27 January and a 100bps cut on 23 March. The special meeting of the MPC was to try to cushion the effects of the coronavirus pandemic, but the cut was smaller than the 50bps median estimate of economists in a Bloomberg survey. The CBK lowered its 2020 growth forecast to 2.3% this year. The pandemic has disrupted agriculture and tourism which, after remittances, are Kenya’s biggest foreign exchange earners. Authorities are negotiating with the IMF for a precautionary facility to cushion the economy from coronavirus shocks. Governor Njoroge said that the CBK will take further measures as necessary. Read more here

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

  1. Philippines (Baa2/BBB+/BBB): On Monday, the Philippines priced a US$2.35bn dual tranche bond. A US$1bn tranche maturing 5 May 2030 was priced to yield 2.457% and a US$1.35bn tranche maturing 5 May 2045 was priced to yield 2.95%.
  2. · Lithuania (A3/A+/A): Also on Tuesday, Lithuania priced a dual tranche bond totalling EUR2bn. A EUR750mn tranche maturing 2025 with coupon 0.25% was priced to yield 0.345%. A EUR1.25bn tranche maturing 2030 with coupon 0.75% was priced to yield 0.829%.

Province of Buenos Aires (BUENOS): Bondholders rejected the province’s restructuring proposal, according to the committee’s statement released on 27 April. The bondholder group holds more than 40% of the province’s bonds. The province announced its restructuring terms on 24 April, which broadly mirror those of the government’s proposal for restructuring its foreign debt, with a significant cut in interest payments, modest principal reduction, and a three-year grace period on payments. The committee lamented the province’s decision to launch a unilateral offer, without engaging in substantive discussions, and called for the authorities to commit to goodfaith negotiations. It noted that the province’s restructuring should be based on an objective assessment of its own conditions and not the national restructuring process.  

Metinvest (METINV) published its February trading update posting US$129mn in EBITDA and cUS$200mn for the first two months of the year. This in line with management guidance given during the FY 19 conference call and our expectations explained here. The company had a strong Q1 20, but Q2 20 will be hit by the economic slowdown caused by Covid-19. We expect poor visibility on H2 20 to keep the METINV curve under pressure, despite export prices on slab and hot rolled coil stabilising in the Black Sea by the end of April. 

ShaMaran (SNMCN) warned investors that low oil prices and payment delays reduced the company’s liquidity. According to management, the company had US$8.5mn of cash as of 20 April 2020, while its monthly outflows amounted to US$2.7mn after decisive cost cutting measures, including an 80% reduction on capex, a 22% reduction of opex and a 28% reduction of G&A. However, according to our estimates, ShaMaran is operationally loss-making at the current level of oil prices. Altogether, this puts the upcoming scheduled redemption of US$15mn of its US$190mn 12% at risk. According to the press release, management is “exploring all options” with regards to liquidity, one of which could be seeking the support of the Lundin Family Trust, which has helped the company before. The dire liquidity situation is reflected in the bond prices with ShaMaran bonds indicated at 40c on the dollar.