This week's key development has been the 97.85% acceptance by bondholders of Ecuador's debt restructuring proposals, and Argentina's agreement with its three key bondholder groups, which should now permit the achievement of qualifying majorities to approve restructuring.

Argentina and Ecuador debt restructuring

On 3 August, Ecuador announced that 97.85% of bondholders had accepted its proposals for debt exchange, with exchange slated for completion by 20 August.

On the same day, Argentinean media reported that the government had made an improved offer to creditors, worth around a net present value of 54.8%, versus 53% in its prior proposal.

On 4 August, Argentina's Ministry of Finance issued a statement that it had reached agreement with the country's three main creditor groups, allowing them "to support Argentina's debt restructuring proposal and grant Argentina significant debt relief". The new proposal alters certain payment dates to increase the overall net present value for investors, with Argentina offering a further extension to 24 August to permit bondholders to accept the new terms. It proposes to announce the results on 28 August with settlement slated for 4 September.

Argentina's EMBI+ bond spread index improved sharply on the news, from 2247 to 2027 basis points over US Treasuries, its lowest level since February: the 23 March peak for 2020 was 4362 basis points. Ecuador's spread, which peaked at 6063 basis points on 23 March, fell from 2954 basis points on 30 July to 2740 basis points on 4 August, but remains above levels recorded earlier in July.

Turkey

In a recent COVID-19 briefing, IHS Markit sovereign risk specialist Venla Sipila-Rosen highlighted Angola and Nigeria as facing increased risk of debt sustainability stress. The briefing also flagged Turkey as at high risk, given the depletion of its official reserves reflecting repeated monetary easing in response to government pressure.

Capital markets are increasingly focused on Turkey. Turkish bond yields widened by nearly a full percentage point against US Treasuries in the week to 30 July, with its EMBI+ spread widening 5.8 percent to 674 basis points on 30 July. On 6 August, the Lira fell to a new low of TRL/USD7.30.

According to IHS Markit economist Andy Birch "with reserves depleted, the lira is in danger of suffering further, substantial losses that reflect a brewing external-financing crisis", with the country running out of capacity to defend its external position.

In a recent report, citing data from the Central Bank of Turkey, he notes that total (non-gold) foreign exchange reserves have fallen from USD77 billion in December 2019 to USD45.774 billion at end-June. Of these, USD54.4 billion are short-term currency swaps, up from USD18.16 billion in December 2019, and just USD3.7 billion a year previously. A further USD18.87 billion are commercial bank holdings, with remaining foreign exchange reserves worsening sharply from USD33.15 billion in December 2019 to a negative USD27.5 billion in June.

Emerging markets issuance

IIF data for July suggest that emerging markets enjoyed USD15.1 billion of net portfolio inflows in July, versus a downwardly adjusted USD29.2 billion in June. Debt inflows totaled USD13.2 billion with USD2.3 billion invested in non-Chinese equities: Chinese stocks suffered outflows of USD0.4 billion.

Israeli driller Delek Drilling is preparing private placements to raise USD2.25 billion of debt, spanning maturities of three, five, seven and 10 years. The transaction is "for the purposes of financing the Leviathan project" and will be secured by the firm's assets and revenues there.

Mexican ferrous metals producer Industrias Peñoles has sold USD500 million of 30-year bonds at 4.75%, versus guidance of low 5% area. It also tapped its 2029 bonds at 3.375%, versus the 4.15% paid in September 2019 when the issue was first distributed. The issue was heavily oversubscribed, with the company statement noting the tap was 10-times subscribed with demand for seven times the amount offered at 30 years.

Banco Nacional de Panamá, one of two state-owned banks in Panama, on 4 August sold USD1 billion of 2030 debt yielding 2.51%, with pricing well inside guidance of mid-200 basis points over US Treasuries.

Other debt

Austrian energy company OMV will seek up to EUR1.5 billion in hybrid debt to finance the acquisition of a 39% stake in Borealis AG and for general corporate purposes.

On 31 July, UK 10-year gilt yields fell to an all-time low of 0.073%, while five-year gilts also set a record of -0.150%.

During July, Italian debt was Europe's best performing, with 10-year BTPs closing the month at just over 1% yield, down 30 basis points during the month. The improvement reflects the positive financial implications of the EU's EUR750 billion package, with Spanish and Portuguese yields also having improved during the month.

Spain's first auction since the EU relief package was agreed was noteworthy for its strong demand. Spain issued EUR4.53 billion of April 2023, July 2027 and October 2030 debt, for which it attracted EUR10.59 billion in aggregate demand. At all three maturities, the cost of borrowing declined. With the three-year debt clearing at -0.379%, versus -0.223% in Spain's prior auction at the same maturity. The seven-year tranche showed a more dramatic improvement, with EUR1.979 billion sold at -0.001%, versus 0.633% on 7 May. Spain limits its issuance during August given the country's traditional vacation season and does not plan further medium to long-term auctions this month.

High yield debt

According to Ice Data Services, published in the Financial Times, US junk bonds provided a 4.78% positive return in July, the strongest performance since October 2011. As a result, the average US junk bond yield fell to 5.46%, from 6.85% at end June, coming close to the levels achieved in the first quarter. Junk bond yields have now more than halved from their double-digit peak in late March and early April. The report noted that sub-investment grade corporate issuance of over USD150 billion has been achieved since early April. High-grade corporate yields remain under 2%, according to the same sources.

Our take

Progress with the debt restructurings in Argentina and Ecuador are both clearly positive events.

Ecuador's process has been generally quite consensual but faced latter-stage difficulties. Argentina's rescheduling has been much more finely balanced, but ultimately validates various IHS Markit forecasts that the country was keen to achieve a negotiated deal and avoid hard default. El Cronista suggests international and domestic debt relief will provide total debt service reductions between now and end-2024 of USD42.5 billion, with a reduction of USD25.7 billion on international debt.

Argentina's deal has required compromises by both sides. The government proposals are well above their initial offer, and some 1.8 percent in net present value above what was previously described as its final offer. With that reportedly having obtained backing from roughly one-third of bondholders, according to Argentine media, and with the three bondholder groups representing over half of its investors, achievement of qualifying majorities for restructuring now looks very likely.

For Argentina, the next stage will be to seek restructuring of its official liabilities, notably those with the IMF. This should prove less contentious, with the IMF having been involved in advising Argentina on its treatment of private creditors. Key further challenges will be to restore Argentina's deteriorating fiscal balances, and to regain investor trust for FDI and portfolio investments.

The ICE data for junk bond spreads and IIF figures on emerging market portfolio inflows both represent further positive indicators of risk-taking within the higher-risk market segments.

However, Turkish fundamentals do cause concern, both at sovereign level and within its banking system.

The country's central bank has made repeated interest rate cuts despite negative real policy rates and currency weakness, with strong indicators that its policies have been government-driven rather than independently-set. Turkey's current account balance is persistently weak, and its appeal as a destination for FDI is hindered by its involvement in regional conflicts and the apparent curtailment of judicial independence.

However, many of these factors have been present for an extended time, and Turkey has policy options - like a sharp hike in rates, or further bilateral borrowings - still available to limit full-scale financial dislocation. Overall, however, it remains a high-profile candidate for debt stress, with Angola and Nigeria also viewed by IHS Markit as higher-risk hot-spots.

Posted 07 August 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence