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: DNO – Focusing on cash flows in 2020

  • Also in the news: Argentina extends deadline, Ukraine passes crucial banking law, Pakistan under review and more

Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
14 May 2020
Published byTellimer Research

In Focus: DNO  Focusing on cash flows in 2020

We upgrade the DNONO 23s and 24s to Buy and reiterate Hold on the DNONO 20s. Details of DNO’s response to the oil price shock disclosed with the Q1 results give us confidence that the company has sufficient operating and financial flexibility to adjust to the changing environment and is well funded for more than 12 months. By end-Q1, DNO had accumulated enough cash to repay its 2020 debt maturities and sufficient reserves to shield its operating units from potential liquidity gaps. We estimate the Kurdistan and North Sea operations could be self-funding in April-December 2020 if Brent stays at cUS$30/b. The DNONO 23s and 24s lagged behind the recovery of Kurdistan E&P bonds, but we expect them to catch up with peers and upgrade them to Buy. 

Kurdistan operations fully funded in 2020. In response to the severe price shock, DNO suspended all discretionary and uncommitted capex, and released four drilling rigs, keeping only one workover rig on site. According to a company presentation, its total 2020 budget for Kurdistan, including opex, capex and exploration expense, is planned at cUS$175mn in 2020, of which cUS$85mn has already been spent. Assuming the KRG follows the new payment schedule and settles invoices monthly, we estimate that DNO’s opex and capex in the nine months from April to December 2020 can be fully funded with cUS$186mn of oil revenues, with a substantial safety margin. DNO operates the mature Tawke field, with rapidly declining production, and the new Peshkabir field, which is likely to deliver more sustainable volumes. Lower capex will most likely accelerate the production decline at Tawke field and DNO’s Kurdistan operations, particularly towards the end of 2020 and in 2021. 

North Sea operations fully funded in 2020. According to the presentation, the North Sea operations budget is cUS$345mn, of which cUS$100mn was spent in Q1. If Brent stays at US$30/b until year-end, proceeds from oil sales could fund cUS$115mn of remaining opex, capex, exploration and abandonment expenses, with the rest covered by cUS$130mn of expected tax refunds. High-cost North Sea barrels have several advantages over those from Kurdistan: 1) severe payment delays are highly unlikely; 2) the beneficial tax regime in Norway enables the company to carry on with exploration during periods of low oil prices (the government refunds c75% of expenses the year after they were incurred); and 3) business risks in Norway are lower than in Iraq, which could reduce costs of funding and help achieve higher equity valuations over time. North Sea sales contributed 35% to consolidated revenue in Q1. 

Sufficient liquidity to repay 2020 debt maturities. DNO had US$1.2bn of debt in Q1 (Table 1 on page 2). With Kurdistan and North Sea operations self-funding in the remainder of the year before interest costs, cash reserves could cover the repayment of US$214mn short-term debt, including a US$140mn bond maturity, and cUS$80mn interest expenses (see chart). The next significant maturity is US$400mn of bonds in 2023. In Q1, the cash position increased to US$543mn as the KRG settled its August-September 2019 invoices, followed by another payment for October 2019 oil sales after the reporting date. The price slump led to the KRG postponing payment of the US$233mn November 2019-February 2020 export invoices at least until year-end and, in the case of DNO, also suspending override payments starting from March. DNO’s liquidity has been further strengthened by cUS$131mn (up to US$530m with accordion options) available under the revolving exploration financing facility (EFF) and reserve-based lending (RBL) facility as of 31 March 2020.

Read the full report here

Recap of the week’s key credit developments 

Argentina (ARGENT): The government announced on Monday that it had extended the deadline for its exchange offer to restructure its foreign bonds to 22 May, thereby coinciding with the end of the grace period on three bonds for which coupons were due in April and have not yet been paid. The original deadline for the debt exchange offer was 8 May, but leading creditors had already rejected the proposal suggesting participation would likely be low (below 20% according to some local reports but official figures haven’t been released). The lack of take-up and an extension had been widely expected (see last week’s Credit Weekly). After the embarrassing failure of the offer, the government said it was open to counterproposals, consistent with its debt service capacity, but it remains to be seen how much it is prepared to compromise, by improving the terms, to get a deal done and avoid default.

Ukraine (UKRAIN): Ukraine’s Parliament (Rada) passed the crucial banking law on Wednesday, seen as the last remaining hurdle to reaching an agreement with the IMF on a long-awaited new programme. The banking law prevents former owners of nationalised or liquidated banks from regaining ownership or receiving state compensation, and is seen as especially being aimed at the oligarch Igor Kolomoisky whose Privatbank was nationalised in 2016. The bill, which had suffered from efforts to delay or disrupt its passage, was approved by 270 votes out of 450. Its approval was one of the key conditions to securing a new IMF programme. The IMF had reached staff-level agreement on a new three-year EFF in December for US$5.5bn, but delays to meetings its conditions and the subsequent impact of the coronavirus meant that the discussions shifted to a new shorter 18-month SBA, with less structural conditionality, as confirmed in the IMF’s press briefing on 7 May. Local reports say the new programme will be US$5bn in size and should catalyse other donor flows. IMF approval of a new programme could come by the end of this month.

Pakistan (PKSTAN): Moody’s placed Pakistan’s B3 rating under review for downgrade on Thursday on the expectation that the government will request bilateral official sector debt service relief under the G20 initiative (DSSI) announced on 15 April. The temporary suspension of bilateral debt service would be unlikely to have ratings implications on its own as it would free up resources for health and other coronavirus-related spending. However, Moody’s decision to place the rating under review comes as the G20 have called on private creditors to participate in the debt service suspension initiative as well, albeit on a voluntary basis and at the request of the sovereign. Pakistan’s participation could therefore lead to a default on private sector debt. Moody’s also placed the B3 rating on The Third Pakistan International Sukuk Co Ltd under review for downgrade, as these are direct obligations of the government in the agency’s view. S&P and Fitch both rate Pakistan B- with stable outlook. 

Qatar (QATAR): On 8 May, S&P affirmed its AA- long-term foreign currency for Qatar and maintained its stable outlook. Fitch rates Qatar AA- with stable outlook and Moody’s rates the country Aa3 with stable outlook. S&P said that the fiscal and external positions were strong enough to withstand the shocks of the pandemic and low global oil prices, and will not deteriorate beyond the agency’s expectations. Despite the twin shock, income levels in Qatar remain among the highest of rated sovereigns, supporting the credit profile. While growth prospects have weakened, high GDP per capita help to mitigate this. The rebound in growth is expected by S&P to be linked with an increase in hydrocarbons prices. 

Costa Rica (COSTAR): Also on Friday, Fitch downgraded its long-term foreign currency rating on Costa Rica to B from B+, and retained the negative outlook. Fitch cited increased risks of near-term financing stress due to widening fiscal deficits, a steep amortisation schedule and borrowing constraints, which come as the economy is forecast to contract by 4% this year due to the coronavirus pandemic. The negative outlook reflects further downside risks to debt sustainability amid post-crisis uncertainty. Government finances this year will depend on multilateral loan disbursements, according to Fitch, while there is uncertainty in external capital market access and rising costs in domestic capital markets. S&P rates the country B+ with negative outlook and Moody’s rates the country B2 with stable outlook. 

Tunisia (BTUN): On Tuesday, Fitch downgraded its long-term foreign currency rating for Tunisia to B from B+. The previous rating had a negative outlook since May 2018; the new rating’s outlook is stable. S&P no longer rates Tunisia, while Moody’s B2 rating has been under review since 17 April 2020. In its statement, Fitch said that the downgrade reflects the aggravation in the persistent macroeconomic imbalances and deterioration in external and public debt trajectories due to the economic impacts of the coronavirus pandemic. The agency is projecting that the Tunisian economy will experience its sharpest contraction on record in 2020, as a 4.3% GDP contraction is now expected this year, before 4.7% growth in 2021. The current account deficit will fail to narrow as fiscal consolidation is expected to temporarily halt. Forecasts are updated to consider the now expected impacts on global trade, manufacturing and tourism from the pandemic, while remittances from Europe will likely also fall. The stable outlook on the new B rating reflects the balance of continued strong support from official creditors against ongoing external vulnerability from large funding needs and risks to fiscal reforms stemming from social tensions. However, Fitch also notes that Tunisia’s economic growth has also consistently underperformed the B category median since 2011. Separately, the IMF approved a US$745mn disbursement (100% of quota) to Tunisia on 10 April under its Rapid Financing Instrument (RFI), in response to the urgent fiscal and balance of payments needs emerging from the pandemic. 

Belize (BELIZE): On Tuesday, Moody’s downgraded its long-term foreign currency rating for Belize to Caa1 from B3 and changed the outlook to negative from stable. S&P rates the country CCC with negative outlook, after a downgrade on 16 April. Moody’s move follows its assessment that the probability of a deferral on interest payments or distressed exchange on public debt has risen. Authorities will likely ask for deferrals on US$13mn in interest payments due in August on the 2034 bond, which would lead to moderate losses for investors, according to Moody’s. The country is experiencing a severe economic shock due to the pandemic and related lockdown, and tourism receipts and economic activity have declined sharply. GDP could contract by up to 15% this year, while authorities reported 72,000 applications for unemployment by mid-April (28% of the workforce). Moody’s expects the liquidity and funding position to deteriorate to such an extent that the government will need to request interest deferrals. We note that the bond (BELIZE 4.938% 2034) fell by over 10pts on the news earlier this week to cUS$40 (mid basis), based on Bloomberg indicative prices. 

North Macedonia (MACEDO): On Wednesday, S&P affirmed its BB- long term foreign currency rating for North Macedonia and maintained its stable outlook. Fitch rates the country BB+ (stable outlook). The agency said that the pandemic would lead to a 5% contraction in GDP this year, while the budget deficit would expand to 7% of GDP, which would push net government debt up to 50% of GDP. The eurozone economy is also set to contract by 7.3% this year, which is where most of Macedonia’s trading partners are. However, the country also has some fiscal and external buffers, and there is potential upside from structural reform implementations as part of EU accession negotiations and stronger growth prospects beyond 2020. The agency has balanced these considerations and affirmed the rating and maintained a stable outlook.

Global policy response: Central banks and governments around the world have continued economic stimulus to support their economies amid the coronavirus pandemic. This week, these included:
  • Vietnam: On Tuesday, the State Bank of Vietnam cut its policy interest (refinancing) rate by 50bps to 4.5%, after a 100bps cut on 17 March. The meeting was unscheduled and takes the rate to its lowest on record. After the lockdown was lifted in April, economic activity is returning only slowly, and exports fell by 60% yoy last month. Fitch expects a further cut of 50bps to 4% by the end of the year.
  • Belarus: On Wednesday, Belarus cut its refinancing rate by 75bps to 8%. This was the second cut this year after 25bps on 12 February. The National Bank now expects inflation to remain close to the target of 5%.
  • India: The central government announced a large fiscal stimulus package, amounting to US$266bn (10% of GDP), although no precise details were given. Before this, India’s fiscal response had been rather limited, amounting to just 1.1% of GDP, according to IMF data, and well below the EM average of about 5% on our own calculations (see here). Inflation figures this week show that headline inflation has fallen, allowing policymakers to implement fiscal stimulus. This follows a 75bps rate cut by the Reserve Bank of India on 27 March, which left the repo rate at 4.4%.

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

  • Bahrain: On 7 May, Bahrain (B2/B+/BB-) priced a dual tranche bond offering, comprising a US$1bn Sukuk with a 6.25% profit rate, maturing on 14 November 2024, and a US$1bn bond with a 7.375% coupon maturing on 14 May 2030. Both were priced at par. Total orders were reported in excess of US$11bn. 
  • Serbia: On Monday, Serbia (Ba3/BB+/BB+) priced a EUR2bn seven-year bond to yield 3.375% (spread MS +360.2bp). The bond has a 3.125% coupon and was priced at 98.464 maturing 15 May 2027. Final orders were over EUR6.5bn. 

Mongolian financials: Moody’s has revised the outlook on nine Mongolian banks’ ratings to negative from stable. These lenders include Development Bank of Mongolia (DBMMN, B3) and Trade and Development Bank (TDBM, B3). Moody’s has also revised the outlook on the B3 rating assigned to Mongolia Mortgage Corporation (MGMTGE, B3) to negative from stable. These changes follow the rating agency’s decision to revise the outlook on the sovereign’s rating to negative from stable. Moody’s sees exposures to domestic sovereign debt as significant and notes that operations are generally concentrated in Mongolia. Asset quality and profitability are seen weakening over the next 12-18 months due to the impact of the Covid-19 pandemic. Moody’s sees ‘favourable funding, liquidity and moderate capital buffers’ as positives. On DBMMN, Moody’s believes the high CET1 ratio of 30% offsets rising asset risk – the problem loans ratio was 18.9% at end-19. On TDBM, Moody’s expects the US$500mn bond due on May 19 to be repaid (as does S&P, according to a recent comment). Moody’s sees TDBM’s franchise as strong, and funding and liquidity as stable though high problem loans and modest capitalisation are concerns. On MGMTGE, Moody’s sees ‘rising challenges’ in refinancing foreign currency debt, but notes that asset quality is strong and profitability is stable. The rating agency sees the probability of support from the Government of Mongolia as high.  

Turkish banks: Ziraat Bank, Halkbank and Vakifbank are to receive capital injections from Turkey’s Wealth Fund totalling TRY21bn, with equal amounts going to each lender. New shares will be sold to the Wealth Fund, boosting Tier 1 ratios at all three banks – we estimate that this will add 1.3ppts, 2.1ppts and 2ppts to Tier 1 ratios at Ziraat, Halkbank and Vakifbank respectively. This is based on the latest-disclosed figures (FY 19 for Ziraat and Halkbank, Q1 20 for Vakifbank). The boost to capital is not a surprise, as there has been speculation about this for some time, as state banks have played a key role in continuing to extend loans. Further, these banks have benefitted from Tier 1/Tier 2 injections from the State in the very recent past. The latest capital injections, varied forms of liquidity and other support and regulatory forbearance measures should all aid Turkish banks as they seek to navigate the current crisis.  

South African banks: Following yet another sovereign rating downgrade, S&P has cut some of South Africa’s largest banks such as FirstRand Bank and Investec Bank Ltd. African Bank (AFRIBK) was lowered to B from B+. AFRIBK redeemed a eurobond earlier this year, and now has just one USD-denominated security left, which matures in October. The bank bought back US$20mn of the Oct 2020 bond in the market in March, and there is now less than US$106mn of the bond outstanding. The rating agency is concerned that NPLs may rise, and coverage may fall. However, S&P expects lower risk-weighted asset growth to mean that its risk-adjusted capital ratio remains stable over the next 12-18 months. Further, S&P believes that African Bank ‘has sufficient liquidity to cater for maturities over the next 12-18 months.’ Thus, the rating agency is not concerned about repayment of the USD-denominated eurobond due in October.

UAE banks: Phoenix Commodities Pvt, which trades agricultural products, has fallen – it has been placed in liquidation. Reports say the entity had US$1.6bn in banking facilities from lenders in Singapore, the UK and the UAE. The UAE lenders are reported to have extended about US$400mn of this. Banks in the UAE have begun to disclose their exposures to Phoenix Commodities. FAB disclosed direct exposure of US$7.7mn and US$65.5mn exposure to two related entities. Emirates NBD's exposure is less than US$24mn and Mashreqbank disclosed AED43mn (US$11.7mn) exposure. Many other lenders including ADCB, ADIB, DIB and CBI have said they have no exposure to Phoenix Commodities. Taken together, if reports regarding the total UAE banking sector exposure are correct, there may be more disclosures to come from the banks.