Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Chief Economist & Head of Fixed Income Research

    Tellimer Research
    30 January 2020
    Published byTellimer Research

    In Focus: Argentina’s restructuring timetable – Not a Buy signal

    The government’s restructuring timetable published last night may look like a Buy signal for the US$ bonds, for the only way it will be met, in our view, is through a very favourable deal for bondholders; however, this is not necessarily the government’s narrative. 

    The timetable envisages: 

    • The process starting next week, with requests for proposals (RFPs) for bank and information agents; 
    • Economy Minister Martin Guzman presenting the guidelines for debt sustainability in mid-February; 
    • Bondholder meetings in the second half of February in a 10-day consultation period; 
    • The launch of the debt offer in the second week of March; and 
    • Closing by end-March. 

    However, this seems ambitious to us. It may also be unrealistic, ill-considered and lacking credibility. The speed would also seem unprecedented in our view for a sovereign restructuring rather than something more akin to a voluntary debt swap. Ukraine (2015) for instance (which ended up as a good deal for bondholders, with a strong committee, but over a much smaller bond stock) still took the best part of five months (from the government’s presentation on the perimeter of the restructuring in April that year), and an IMF programme was already in place. 

    We also see some potential problems with what this timetable might mean. First, while bondholders will no doubt be happy to see a favourable deal (anything which offers recovery values reasonably above current prices), if it is seen domestically as caving in to foreigners, this may risk the Alberto Fernandez government's political capital at home. 

    Second, of more importance for bondholders, it is not clear to us what it means for IMF involvement. Although the timetable incorporates the IMF technical mission in February (12-14), it does not seem to allow much more time for agreement on, and IMF Board approval of, an IMF programme (assuming the authorities want one, which we still do not know – we infer, from this timetable, that either they do not or the government has completely misjudged how this works). 

    And here is the conundrum – if the government is prepared to go it alone, without the IMF, that may help speed up the process, but we suspect many bondholders will be sceptical over the government’s policy commitment, which could influence the nature of the deal, exit-yield assumptions or how the bonds trade after it. 

    In particular, we worry that a favourable deal for bondholders now, without an IMF programme (ie weak policy commitment and discipline) will just store up problems for later on and require another (deeper) restructure in a few years’ time. Or the government wants the IMF, and so do bondholders (for the policy discipline as well as the money), but we think this will take longer than March. In particular, it may – from the IMF’s perspective – be putting the cart before the horse if the government requests an IMF programme, but reaches a debt restructuring before the IMF have done their own debt-sustainability analysis (DSA).

    Read the full report here

    Recap of the week’s key credit developments 

    Greece (GREECE): On Monday the Public Debt Management Agency (PDMA) of Greece announced plans to issue 15-year bonds, for the first time since 2009. Yields on 10-year bonds fell to a record low on the news. The announcement comes after Fitch upgraded the long-term foreign currency rating on Friday to BB with a positive outlook amid improving debt sustainability and political stability (S&P and Moody’s rate Greece BB- and B1, respectively).

    Kenya (KENINT): Also on Monday, the Central Bank of Kenya (CBK) lowered its key (lending) interest rate to 8.25% from 8.5%, in a bid to stimulate the economy, which the MPC said was operating below potential. The rate was last cut by 50bps in November. This week’s cut was unexpected, as was South Africa’s rate cut on 16 January. 

    Ghana (GHANA): Roadshows start today for 7- and 15-year bonds the government of Ghana is seeking to issue. Longer dated tenors may follow. Ghana also announced a cash tender offer for up to US$500mn of its outstanding 7.875% 2023 notes (US$717mn outstanding) and 8.125% 2026 notes (US$1bn outstanding). The offer deadline is 3 February. 

    Province of Buenos Aires (BUENOS): After announcing that the Province did not have the funds to pay bondholders, it has improved the terms being offered to creditors to accept the consent solicitation launched on 14 January. A statement on Monday revealed a sweetener for holders, as the Province seeks to delay a US$250mn amortisation payment due 26 January until 1 May. Investors will receive an extra US$7.2mn interest payment (worth US$28.7 per 1000 of principal) for accepting the consent solicitation, equating to an advance on the next coupon that would accrue between 26 January and 1 May.

    Ukraine (UKRAIN): The National Bank of Ukraine (NBU) cut the policy interest rate for the second consecutive meeting. The discount rate was cut by 250bps on Thursday to 11% (effective 31 January), after being cut by 200bps in December. It was 18% at the start of 2019. 

    Petra Diamonds (PDDLL): The company released H1 20 (Jul-Dec 19) operating update posting a 3% increase in production to 2.1mn cts and disclosed that it was on track to meet FY 20 guidance of 3.8mn cts. Revenue, however, was down 6% yoy to US$194mn due to lower prices and lower quality product mix. The company observed improving demand and stabilising prices towards end-2019. Management expects seasonal release of working capital and a mild price recovery to improve liquidity in early 2020. 

    Vodafone Ukraine (VF Ukraine): The second largest mobile operator in Ukraine is looking to issue debut bonds. Note that Vodafone is not a shareholder of VF Ukraine – it was recently acquired by NEQSOL Holding, a company beneficially owned by Nasib Hasanov, of whom little is known. Given its private ownership and FX risks, it seems logical that new bonds should be priced at a premium to the sovereign, quasi-sovereigns (RAILUA, NAFTO) and most of the corporates with established yield curves, all of which rank better on FX mismatch due to high proportion of export revenues, have moderate leverage and a proven history of investor-friendly disclosure standards (MPHSA, KERPW, METINV). Having compared the new bonds to the Ukrainian corporate universe and to telco names in Turkey and Russia, we think Vodafone Ukraine z-spread could be 180-250bps over the sovereign. If the deal were priced today it could be issued with a yield to maturity of 6.8%-7.5%. Read the full report here

    MHP (MHPSA): The company reported mixed operating results and downgraded FY 19 EBITDA guidance. In Q4 19, poultry sales from its Ukraine-based facilities increased 10% yoy, but prices dropped 14% yoy on the back of weaker pricing in the EU, rapidly appreciating local currency towards the year-end and trade restrictions temporarily imposed in some of its many export markets. Last week we downgraded MHPSA bonds to Hold on bird flu news.