CEEMEA credits cruised through the week, said two traders and two buysiders, as investors calmly faced up to news of Venezuela’s sudden announcement to restructure external debt.
So far, state-owned Petroleos de Venezuela SA (PDVSA) 2027s 28% drop in cash price on Friday morning has not been matched in CEEMEA, the buysiders stressed. There was some selling in oil and gas names like Oman and Kazakhstan on Friday, but prices fell less than 1% in cash terms, the first buysider said.
“What’s interesting is that, for a country whose problems are so well flagged, the impact this news has still had on pricing, with [Venezuelan] assets dropping 10-15pts and [Venezuela] prints going [below 30 cents],” said the first trader. “What’s impressive, though, is the very limited contagion so far….with the rest of EM credit at least rolling along just fine.”
Indeed, African names did not reverse the week’s gains, with high betas like Ghana and Zambia adding up to two points (see Debtwire’s Africa comment for more). Russia’s underperformance was led not by Venezuela but by the overarching risk of further US sanctions. Firmer oil prices helped others in the East (see our Russia/CIS comment here).
In MENA, Bahrain’s 2021 note was the week’s underperformer, after news emerged of the tiny island monarchy seeking financial assistance from the GCC. The bonds widened 6.1bps to trade at 246bps/ 221bps z-spread or 104.31/105.06 cash price, according to a trader run (see Debtwire’s MENA comment for more). Otherwise, spreads in the Middle East were flat to slightly tighter on Friday, the same trader run showed.
EM debt’s overall cautious stance could be due to uncertainty over the scale and timeline of Venezuela’s restructuring, the first buysider noted. At this stage, it is unknown how much of the country’s debt and PDVSA will be affected.
“Venezuela has about USD 60bn of outstanding sovereign bonds, but if the government is looking to restructure all foreign debts, this would be over USD 120bn” said Stuart Culverhouse, head of macro and fixed-income research at Exotix Capital. “[This] would be the biggest emerging market bond restructuring or default since Argentina [in the early 2000s], if excluding Greece in the definition of EM.”
It is also unclear whether Venezuela will default on coupons due over the next weeks, or if it will hold out until its next principal repayment in August 2018, the first buysider continued. Venezuela paid USD 2bn to its bondholders over the past week, but has not clarified whether future payments will be met.
“The way in which this [restructuring announcement] has been handled does not give confidence that refinancing or restructuring talks will start smoothly nor that there will be a quick solution” Exotix’s Culverhouse said. “Details are sparse and it is not really clear what the government intends, nor whether it can do anything at all with US sanctions in place. This is may be the most complicated debt restructuring in modern times — not least because of the bonds’ capital structure, and the mix of sovereign and PDVSA bonds.”
Elsewhere across the Atlantic, US non-farm payroll (NFP) data showed 49,000 fewer jobs than expected were added in October, despite unemployment dropping 0.1pp to 4.1%. US Treasury yields initially fell on the news, only to sell-off to pre-NFP levels shortly after, said a broker. CEEMEA creditors were equally unfazed by the news, the buysider and the second trader said.
Global EM debt flows were positive for the eleventh week in a row, taking total YTD gains to USD 62.932bn, according to EPFR data. But the trend has slowed over the past weeks, Bank of America Merrill Lynch analysts noted, as USD 132m in local currency outflows partly offset the USD 682m hard-currency inflows.
“Investors are cautious coming up to year-end,” the first buysider said. “Valuations are stretched, yields are tight, and people have no risk appetite after this year’s good performance. They just want to sit and wait.”
“There are plenty of inherent risks that are emerging-market specific,” said Elbek Muslimov, head of emerging markets credit trading for Central Europe, Middle East and Africa at Citigroup. “These have been ignored for a while given the “wall of money” flowing into the asset class. These risks, coupled with the real-money community’s defensive stance towards the year end, and a reduction in liquidity as dealers want to keep balance sheets trimmed towards the end of the year are likely to bring tension to the market.”
by Laura Gardner Cuesta, Michael Ogunleye and David Graves