Turkey under pressure; Klabin eyed; muted reaction in Venezuela, PDVSA bonds to election

By Rebecca Melvin

New York, May 21 – Turkey’s bonds were under pressure again on Monday as the Turkish lira slid another 2% on the day, while the Central & Eastern Europe Middle East & Africa region overall was largely quiet given many European countries on public holiday in observance of the Christian feast day of Pentecost, market sources said.

The lira was down at about 4.5920 against the dollar on Monday, having hit a record low of 4.5933 earlier in the session. The currency has lost 17% for the year so far.

Turkey’s newer 6 1/8% notes due 2028, of which $2 billion priced in mid-April, were quoted at 91.31, which was down 0.13 on the day.

“I think investors are disappointed that the central bank has not taken action to hike interest rates yet,” a New York-based analyst of emerging markets debt said regarding Turkey on Monday.

There were no new issues announced or priced in the CEEMEA region, according to sources. One deal on deck is Israel Chemicals Ltd., which set pricing on the tender offer for its $800 million of 4½% senior notes due 2024 on Monday and said the pricing would remain in place until late Tuesday.

Brazil’s real also declined as the strengthening U.S. dollar continues to roil emerging markets, exposing areas of weakness in the debt asset class, which was snapped up by investors seeking yield during the years of ultra-low interest rates.

A rising dollar makes it more difficult for countries to service debt denominated in U.S. dollars, while rising yields diminish the appeal of these assets. On Monday, U.S. stocks rallied and Treasuries edged up, leaving the yield on the U.S. Treasury 10-year benchmark at 3.06%, which was off last week’s high mark of 3.11% – the highest level since 2011.

Brazil’s Petroleo Brasileiro SA saw a pair of actively traded bonds move higher on Monday. The oil and gas company announced an offering to repurchase 11 series of notes for up to $4 billion. The Petrobras 7 3/8% bonds due 2027 were higher by more than 0.25 point on Monday at 105 and slightly higher, compared to a level of 104.78 on Friday. In addition, Petrobras 8¾% bonds due 2026 traded up on Monday with a late print at 113.85 on Monday, up from 112 7/8 on Friday, according to Trace data.

Brazil’s Klabin SA bonds were quiet on Monday, but they stand at 52-week lows. Still the outlook is bright for the rest of the year, and Gimme Credit remains constructive on the short-term outlook for Klabin. Its 5¼% bonds due 2024 stood at 97¾ on Monday, unchanged on the day, but down from their 52-week peak of 103.90, which it notched in September. The Klabin 4 7/8% notes due 2027 are also at 52-week lows, having slid since early April to 94.20, from 96½ previously.

The slump in Klabin paper has played out amidst the currently volatile period for emerging markets and despite solid growth for the Brazil-based pulp and paper company. Its first-quarter results reported May 1 came in line with expectations, with the company showing increased revenue and EBITDA even though volume declined due to a scheduled maintenance outage of a key pulp mill.

Gimme Credit analyst Alexandre Dray has noted that buoyant demand levels for pulp and kraftliner and a return to full production capacity means that the second-quarter and full-year outlooks are solid. The Klabin 2024 bonds are yielding 5.4% with a z-spread of 245 basis points.

Also Saudi Arabia continues to be an outperformer. On Monday, its shorter- and medium-term notes were marked tighter on a spread basis, while the longer-dated notes were wider by 1 or 2 bps. The Saudi Arabia 2.894% note due 2022 was tighter by 5 to 6 bps at 96 bid, 96.40 offered, according to a London-based market source. The Saudi 3 3/8% note due 2028 was seen 3 bps tighter at 97½ bid, 97¾ offered. But the 4 5/8% notes due 2047 were 2.5 bps wider at 89.68 bid, 90.18 offered.

Venezuela and Petroleos de Venezuela SA bonds opened lower by about a point and then recouped some ground and were hovering only about 20 cents to 30 cents lower on the day after the result of Venezuela’s presidential election on Sunday came in as a resounding victory for incumbent president Nicolas Maduro.

Later one source said some notes were even positive.

While there had been some expectation that opposition Henri Falcon had a chance to win given some recent polling, the result was overwhelmingly in favor or Maduro and gives the authoritarian leader, blamed for the country’s current economic and social problems, another six-year term.

“For the past week, the market has gradually lowered its expectations [regarding an upset for Maduro],” a New York-based analyst said.

“It’s not a surprise,” the analyst said of the Maduro victory. “People are still waiting for what the U.S. is going to do, whether it will launch sanctions banning imports from Venezuela, which will have a big impact, or if it will launch sanctions against imports of Venezuela oil first, which will have less of an impact,” the analyst said.

Venezuela’s 2022 bonds were quoted at 29.20 on Monday morning, down 20 cents to 30 cents on Friday.

PDVSA’s 12¾% bonds due 2022 were down by 50 cents at 26.80.

Investors do not expect any improvement in the pricing of their bonds under a government led by Maduro. There has been some criticism of investors for not accelerating bonds for which coupons have not been paid. But an analyst blamed the inaction on a lot of uncertainty surrounding the situation and not a lot to gain for investors.

“The process is very painful and lengthy. At current prices, there is not much to gain if you accelerate, and the bond prices are relatively resilient because people are still waiting for what the U.S. is going to do,” the analyst said.

“There are a lot of uncertainties out there. Some may be pinning hopes on some kind of involuntary regime change down on the road; but that depends on the military and that is unpredictable. That can only be called a random event, and you shouldn’t price in such an event.”

Following the election, a group of 14 nations called the Lima Group issued a condemnation of the vote and said they would not recognize it. The countries include Brazil, Argentina, Panama and Canada. The United States also said it would not recognize the vote and said that it was considering a range of options to encourage democracy to be restored.

Late Monday, U.S. President Trump signed an executive order barring U.S. companies and individuals from purchasing Venezuela’s debt and money owned to government-owned businesses.

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