We upgrade GLYHO 21s to Buy. The US$250mn bonds due November 2021 lost nearly half of their value as Covid-19 shut cruise ports and reduced through-put of commercial cargo. Under normal conditions, GPH is a business with valuable and highly profitable assets. The company finished Q1 20 with enough cash to support its operations in the coming months, when its business activity is expected to reach a nadir. However, with little visibility on tourism in the post-pandemic world, the sustainability of GPH’s cash flows is uncertain and the restructuring of US$250mn bonds seems likely. We believe that, if cruise ports show signs of recovery by end-21, the bonds will be refinanced/restructured, with investors realising significant gains to the current indicative mid-price. However, if cruises are gone for good, the recovery value could fall short of the level implied by the mid-price. Having considered 3 scenarios of future restructuring outcomes, we estimate the recovery value at 59-75 and upgrade GLYHO 21s to Buy.
When the dust settles, GPH will still have highly cash-generative ports. Temporary closure of the Mediterranean and Caribbean cruise ports brings commercial port Akdeniz to the forefront as the main source of cash flow and the key element of any refinancing/restructuring outcome in the next 12-18 months. Once the business overcomes short-term operating challenges, even if it takes longer than management estimates suggest, we expect GPH to restructure debt without causing bondholders any more pain (loss of NPV) than they have already seen. In 2019, GPH earned US$118mn in revenues and US$77mn in adjusted EBITDA, both split c54%:46% between the cruise and commercial ports. Operating cash flows before changes in working capital came to US$65mn.
Scenario 1: Akdeniz is sold by end-20; recovery 76-89. Management is looking to sell Akdeniz and has entered into exclusive negotiations with a potential buyer that will continue until Q3 20. Because the sale of Akdeniz will cause GPH to lose cUS$40mn in EBITDA, we estimate that the minimum valuation that will enable the company to partially repay debt and refinance the rest should be north of US$160mn. A lower price could prevent GPH from reducing debt enough to keep leverage unchanged, which could complicate refinancing. We estimate the probability of disposal is relatively low. For more details, see page 2 of the downloadable PDF.
Scenario 2: Business gains momentum in H2 21; recovery 65-84. This scenario is roughly based on the management stress case, which implies that cruise ports will remain closed in 2020. We take this assumption further, expecting the recovery in cruise operations to be delayed until H2 21. Commercial ports alone may struggle to generate enough cash to help GPH meet all liquidity requirements. However, when cash flows from cruise and commercial ports begin to recover, debt restructuring could be agreed. We assign 60% probability to this outcome.
Scenario 3: Worst case and the least likely; recovery 36-45. What if cruises never come back? In this case, debt repayments will largely depend on Akdeniz. With Akdeniz’s concession expiring in 2028, there is not enough time to return money to the creditors, assuming the port’s EBITDA recovers to 2018-19 levels.
Read the full report here.
Recap of the week’s key credit developments
Argentina (ARGENT): On Tuesday, Fitch lowered its long-term foreign currency rating on Argentina to RD from C while S&P lowered the issue rating on certain bonds to D from CC (its issuer rating remains SD). Moody’s continues to have a negative outlook on its Ca rating. The moves come after President Alberto Fernandez said the government would not honour US$503mn in interest payments on three bonds (BIRAD 21s, 26s, 46s) that were due when the grace period expired on 22 May. The downgrades from Fitch and S&P apply to these three bonds. Meanwhile, S&P has also downgraded a local law US$ bond (BONAR 24s) to D, whose coupon and amortisation payments of US$1.6bn were deferred from their due date of 7 May to 31 December. The downgrades came after creditors had earlier rejected a government proposal of a three-year moratorium, a 62% reduction in interest payments and a 5.4% reduction in principal payments on over US$60bn of sovereign bonds. Argentina’s latest default is the ninth time in the country’s history, with the last one in 2001. In the most recent WEO, the IMF projected a contraction in Argentina’s real GDP of 5.7% this year, and did not include projections for inflation, which were reported at 45.7% yoy in April on official CPI figures accessed via Haver.
Tajikistan (TAJIKI): On Tuesday, Moody’s affirmed its B3 long-term credit rating and negative outlook on Tajikistan. The negative outlook reflects Moody’s view that the coronavirus pandemic is increasing external liquidity risks, as remittances fall and public spending needs rise. The agency sees international financing sufficient to cover this year’s needs, but fiscal consolidation challenges beyond 2020. The affirmation of the B3 rating reflects progress made in stabilising the external payments position over the past year, alleviating pressures on foreign reserves, that led to the initial outlook change to negative from stable in December 2018. S&P rates the sovereign B- with stable outlook. Our view: We echo concerns over financing options beyond 2020, but also highlight the possibly more imminent risk of commercial debt service suspension under the G20 DSSI initiative (although we understand no such request has been sought yet), although Tajikistan is now projected to experience a V-shaped recovery by the IMF and received US$189.5mn in IMF support earlier this month through the RCF. There is also a widening balance of payments gap, although central bank reserves remain strong at 5.1 months’ import cover (latest 2020 IMF projection). Last week we maintained our Hold recommendation on the TAJIKI 2027 bond following a downgrade from Buy on 10 March on rising borrowing costs and uncertainty over financing for the Rogun Dam project, which is the sole use of funds raised in the bond offering (see our report here). The yield on the bond is 14.0% (indicative mid-yield to convention basis on Bloomberg as of cob 27 May).
Suriname (SURINM): On Monday, general elections were held in Suriname with results pointing to a win for the opposition. The election for the unicameral National Assembly of Suriname returned preliminary results of: 20 seats for the opposition Progressive Reform Party (VHP), 16 for the ruling National Democratic Party (NDP), 7 for the General Liberation and Development Party, 4 for the National Party and 2 each for the Pertjajah and Brotherhood and Unity in Politics parties. If confirmed, this sees an 11-seat gain for the VHP and a 10-seat loss for the NDP since the 2015 election. Since the last election, the V7 and A-Combination coalitions were dissolved, making comparisons more difficult. The VHP had been part of the V7, but left its previous alliance to run alone. On Tuesday, opposition leader Chan Santokhi of the VHP claimed victory after 46% of votes had been counted, although a party or coalition needs a simple majority to take control of the National Assembly. The president is indirectly elected by the 51-seat National Assembly by a two-third majority. Last year, incumbent President Desi Bouterse of the NDP, and a former military dictator, was sentenced to 20 years in prison, with Santokhi carrying out an investigation into political killings by Bouterse. The conviction has been appealed by Bouterse, and the case delayed until June due to the coronavirus pandemic. For now, the future of Suriname’s presidency remains unclear. Meanwhile, the price of Suriname’s US$550mn international bond (9.25% 2026) has slumped to c30 from c90 pre-Covid-19. A US$22.1mn debt service payment (coupon and amortisation) on the US$125mn private placement from December 2019 is due on 30 June. Santokhi has previously pledged to restructure Suriname’s debt. See our Developing Markets Guide for more on Surinamese political system here.
Cameroon (REPCAM): On Wednesday, Moody’s placed Cameroon’s B2 rating under review for downgrade. The decision comes as the agency sees possible private sector creditor losses due to the country’s participation in the G20 debt Service Suspension Initiative (DSSI). While the suspension of debt service to official creditors would be unlikely to have rating implications, it could be extended to commercial creditors at the country’s request. Announced on 15 April and supported by the World Bank and IMF, the DSSI allows for bilateral debt service suspension if the debtor country requests it, and may be extended to private sector creditors on a voluntary basis. This raises the risk of default on privately held debt under Moody’s definition. It comes as Cameroon’s external position is experiencing significant pressure as a result of the coronavirus pandemic and lower oil prices. The review period will allow Moody’s to assess the significance to its rating. Cameroon is rated B- (stable) by S&P and B (negative) by Fitch.
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:
- North Macedonia: On Wednesday, North Macedonia (-/BB-/BB+) priced a benchmark 6-year EUR700mn bond with a 3.675% coupon to yield 3.95%. The RegS/144A senior unsecured bond had IPTs of around 4.375-4.5%, before guidance tightened to 4.125%. The Republic of North Macedonia is rated BB- with stable outlook by S&P, while Fitch rates the country BB+ with negative outlook, after changing the outlook from stable on 15 May. The proceeds will be used for budget support in 2020 and 2021, and to refinance maturing public debt liabilities.
- Iceland: Also on Wednesday, Iceland (A2/A/A) issued EUR500mn in bonds with a coupon of 0.625% and a 6-year maturity, priced to yield 0.667%. Order books reached EUR3.4bn while the terms improved by 30bps during book building. The Minister of Finance said that the proceeds would help to enhance capacity to address the effects of the coronavirus pandemic.
Nigeria (NGERIA): On Thursday, the Central Bank of Nigeria (CBN) cut its monetary policy rate by 100bps to 12.5%, in the first interest rate move in over a year; the rate has been 13.5% since March 2019. Many economists had expected rates to be left unchanged. Governor Godwin Emefiele said that 7 out of the 10 MPC members had voted for the cut. The latest official statistics show 12.34% yoy inflation in April, which has risen now for seven consecutive months. Inflation may rise further due to higher VAT and the weaker naira. Other highlights from the MPC meeting: GDP expected to contract but less than the IMF’s 3.4% expectation; average lending increased by 8% in Q1 20; focus on keeping inflation contained in FY 20. Our view: It was certainly a surprise move but we think the CBN is more concerned about trying to mitigate the impact of growth than concerns about inflation.
India: On Friday, the Reserve Bank of India (RBI) cut its policy repo rate by 40bps to 4%, following a previous cut of 75bps on 27 March. The MPC voted unanimously to cut the rate to support the economy amid the coronavirus pandemic. It comes as the RBI lowers its growth expectations, but also warns that the inflation outlook is uncertain. Food supply shocks could cause headline inflation to accelerate, but the RBI expects it to remain within the target range in the near term. It follows a large fiscal stimulus package, equivalent to 10% of GDP, announced by the central government earlier this month.
DNO (DNONO) expects its average WI production to decrease by 16% yoy to 88,000boepd in 2020. The decline will come mostly from Kurdistan where gross production at Tawke and Peshkabir is expected to average 100,000boepd, down 19% yoy with an exit rate of 85,000boepd. Management believes that once normal drilling restarts, the company will be able to ramp up production quickly. Although the recent guidance surprised us on the downside, coming c9% below our expectations, it does not affect DNO's fundamental credit outlook for 2020. In our view, the key issue for DNO in Kurdistan is irregular payments for oil, which, in fact, are directly linked to low oil prices. Until the oil price recovers to the level, which will boost confidence in the KRG’s ability to make regular payments to the oil companies, DNO is likely to keep capex at the lowest possible level and see its production decline. According to our estimates, DNO is well funded for the next 12+ months even if it receives no payments from the KRG. After an impressive rally, we downgraded DNONO 23s and 24s to Hold. We believe new credit drivers such as normalisation of payments or a further increase in oil prices is needed to justify higher bond prices.
Genel (GENLLN) could see its production decrease at least 16% yoy due to lower volumes expected at DNO-operated Tawke and Peshkabir fields, which are also the main cash generating assets for Genel. Although, the news suggests a higher production decline than we expected, it does not affect our fundamentally positive view on the company supported by its strong liquidity. Genel has cUS$400mn cash reserves, which fully cover its US$300mn debt and ensure that the company will not run into liquidity problems in the foreseeable future. We estimate that with its significant cash position, Genel could cover costs for 2-3 years, making it the least sensitive to the KRG’s payment discipline among its peer group. Since we upgraded GENLLN to Buy at the end of March, the bonds have rallied c16ppts and are indicated at a mid-price of c95, according to Bloomberg. Although the new production guidance does not change our fundamental view on Genel, we downgrade GENLLN 22s to Hold in the absence of new credit drivers to justify the higher prices. See our report here.
Meanwhile, the KRG has made payments for April oil exports, according to Genel, ShaMaran and GulfKeystone disclosures. Because of the low oil prices the payments were very small. In fact, Gulf Keystone, which sells its oil at the highest discount to dated Brent among local peers (US$21/bbl) received zero payments for the oil sold in April. Genel was paid US$3.2mn, ShaMaran US$0.5mn and DNO US$6.4mn. The news supports our argument about the KRG’s strong commitment to its financial obligations, but also illustrates the region’s vulnerability to low oil prices. With the average Brent price increasing in May to US$32.2/bbl vs US$26.6/bbl in April, the independent oil companies operating in Kurdistan can expect to see higher payments in June assuming there are no delays.
Petropavlovsk (POGLN) reported strong FY 19 financial and Q1 20 operating results. The company earned US$742mn in revenues posting a 48% yoy increase on the back of higher production and sales volumes, as the company started processing third-party concentrates and normalised stockpiles of its own refractory concentrate with the launch of the POX Hub. EBITDA was reported at US$265mn, up 45% yoy and net leverage decreased to 2.1x from 4.0x in 2018. All this happened before the company could realise the benefits of higher gold prices in 2019, which were capped by hedging contracts and advance funding. With gold trading above US$1,700/koz, new hedging contracts reflecting current price levels put in place and reducing utilisation of advance gold sale agreements, one could expect Petropavlovsk to perform strongly in 2020. The company is in talks to sell its stake in the iron ore associate IRC, which could release it from guarantees on US$219mn debt as of Q1 20. Strong performance and declining leverage set a scene for a potential liability management transaction in 2020. One of the ways to achieve it could be early refinancing of US$500mn bonds potentially through a tender offer conditional on the issuance of new bonds with longer maturity and lower interest rate. This, in our view, together with high gold prices will continue to support the POGLN 22s.