EM Sovereign Credit Weekly:Inflows not tapered
Market Overview: Fed’s balance sheet unwinding unlikely to taper inflows
The Fed is on track for (gradually) reducing its balance sheet, but this isunlikely to taper inflows into EM for now. “Good” high-yielders continue tooutperform in PETBRA tender offer and enter PETBRA 26s vs. 23s followingthe exchange offer. We also recommend keeping curve flatteners in Argentina(46s vs. 27s) and Hungary (41s vs. 23Ns).
Primary market update – Quite a September spike
EM sovereigns have sold USD15bn in gross terms so far this month, and EMquasi-sovereigns have sold another USD7bn during the same period.Solid performance of EM sovereign credit this month, despite the increase inprimary market supplies, attests to the strong appetite for EM bonds andfavorable technical conditions.
While EM sovereigns have completed 80% of their issuances for the yearaccording to our (revised) projections, a number of them are expected to cometo the market: Argentina, Egypt, Indonesia, and Nigeria, to name a few.Petrobras – Liability management transactions create RV opportunitiesWe view the liability management transactions as credit positive due to reliefto debt amortization profile and marginal reduction in interest rate, despite a2% increase in net debt due to tender/exchange premia.
On the back of the exchange, we initiate a trade idea recommending a switchout of PETBRA USD '23s and into PETBRA USD '26s. From valuation point ofview, the 26s and 27s are the most attractive on the curve.
Venezuela – Crystallex is ahead of everyone else in the collection gameFollowing Crystallex’s efforts to enforce its arbitration awards helps shed lighton what bondholders may potentially be able to do in the future. What itsucceeds in – or fails at – will likely set important precedencies for potentialsimilar efforts by bondholders in the future.
So far, Crystallex has had some success in its efforts, most notably obtainingan order to seize a fund held in a trust account at Bank of New York that hasbeen frozen due to historical and unrelated issues. So far, Crystallex’s successseems to validate government’s long-held stance of avoiding default at all cost.However, we also note that Crystallex – to our knowledge – has not attemptedto seize PDVSA’s oil receivables, despite that it trying to establish the argumentof “alter ego” in its challenge of PDVSA’s Citgo shares and Citgo’s upstreamingdividend payments to its parent in the past (with no success so far).