20161101-法国巴黎银行-SELL_SOUTH_AFRICA_CDS,_BUY_TURKEY_CDS_14页_662kb

CEEMEA Credit Strategy Trade Ideas - November 2016

Core Content Overview

This document outlines several credit strategy trade ideas focused on CEEMEA (Central and Eastern Europe, the Middle East, and Eastern Europe) and African markets, particularly highlighting opportunities in Turkey and Slovenia, while cautioning against risks in South Africa and Romania.

Main Views and Key Information

1. CEEMEA Credit Strategy: Sell South Africa CDS, Buy Turkey CDS

• CDS Spreads and FX Decoupled: Recent developments have shown a divergence between CDS spreads and FX for South Africa and Turkey.
• Rating Differential Mispricing: South Africa CDS currently trades at 17bp inside Turkey, which does not reflect the actual rating differential (Baa2 vs Ba2).
• Turkey's Vulnerability: Turkey's reliance on external debt means its CDS spreads are closely tied to FX movements. Recent central bank rate cuts and declining retail FX deposits have pressured the currency.
• South Africa's Downgrade Risk: Political developments have reduced the likelihood of a near-term downgrade of South Africa to HY. The earliest possible downgrade is expected mid-2017.
• Relative-Value Trade Preference: Due to uncertainty in US long-term rates, the strategy favors relative-value trades over outright directional bets.

2. CEE - USD Bonds Increasingly Rare

• Shift to EUR Funding: Countries like Latvia, Slovenia, and Lithuania have repurchased USD bonds, funded by new EUR issuance, due to low EUR yields from ECB asset purchases.
• Cost of Buybacks: Despite the cost of repurchasing USD bonds above par, profits from cross-currency swaps offset this.
• USD Issuance Slowdown: Declining EUR yields have reduced the appeal of USD issuance, making it increasingly rare.
• Rarity Value: The reduction in USD bonds outstanding is expected to lead to longer-term performance improvements.

3. CEE - Positive on Slovenia $ Bonds

• Cheaper EUR Issuance: Slovenia finds it much cheaper to issue EUR bonds than USD.
• Improved Fundamentals: Fundamentals have improved, with S&P and Fitch upgrades to A and A- respectively.
• Deficit Reduction: The government has managed to reduce the fiscal deficit to below 3% of GDP.
• Growth Recovery: Growth has recovered since 2013, aided by stronger exports.
• Recommendation: Investors are advised to switch from Romania to Slovenia for better value.

4. CEE - Negative on Romania Due to Fiscal Deterioration

• Wider Deficit: Romania's 2016 deficit is expected to exceed recent years, with tax cuts and increased public spending.
• Fiscal and Growth Risks: The deficit is projected to surpass the EU limit of 3% of GDP, and growth is likely to slow.
• Sovereign Risk: The country's credit profile is negatively impacted by the 2015 fiscal code and potential FX-related risks.
• Recommendation: Investors should consider switching from Romania to Slovenia for better risk-adjusted returns.

5. Africa - Kenya Too Cheap Despite Risks

• Non-Commodity Growth: Non-commodity-dependent countries like Kenya have outperformed commodity-dependent peers in growth.
• Spread Divergence: Kenya's spreads are wider than Senegal's, reflecting a double deficit.
• Tourism Recovery: Recent growth in tourism is supporting Kenya's economic outlook.
• S&P Outlook Change: S&P has moved its outlook on Kenya from Negative to Stable, indicating improved external and fiscal positions.

6. Turkey - Buy 5Y CDS Basis

• CDS Basis at 6M Lows: The Turkey CDS basis is at its six-month lowest level, making it an attractive buy.
• Global Basis Comparison: Turkey's basis is one of the most attractive globally, with a spread differential of -63bp.
• Forced IG Fund Selling: The strategy believes forced selling by IG funds is largely completed, giving investors more flexibility.
• Recommendation: Buy Turkey 5Y CDS and sell South Africa 5Y CDS, targeting a spread differential of -40bp.

7. Turkish Banks: Further Outperformance Unlikely

• Sovereign Risk Impact: Turkish banks trade at wider spreads due to sovereign risk, especially after losing their IG rating.
• Capital Ratios Sensitivity: Turk Eximbank's capital ratios are sensitive to TRY depreciation and sovereign ratings.
• Recommendations:
  • Switch from AKBNK 5% '22s to TCZIRA 4.75% '21s.
  • Switch from EXCRTU 5% '21s to TCZIRA 4.75% '21s.
  • Switch from VAKBN sub '22s to VAKBN sen '21s.

Summary of Trade Ideas

Disclaimers and Legal Information

• The document is a non-independent research for FCA and MiFID purposes.
• It does not constitute investment research and should not be relied upon as such.
• BNP Paribas may have conflicts of interest and financial interests in the mentioned entities.
• The information is based on public sources and not independently verified.
• No liability is accepted for any loss arising from reliance on the document.
• The document is for professional clients and relevant persons only.