Emerging Markets: Russia, Ukraine conflict rattles markets, spurs fund outflows; Chile prices

By Rebecca Melvin

Concord, N.H., March 4 – Emerging markets debt players were not only watching Russia and Ukraine debt this past week – which opened with a round of cuts for the sovereigns from the major ratings agencies – but also on signs of contagion.

Damage to a major Ukrainian nuclear-power plant reignited market angst on Friday as market participants continue trying to assess how much Russia’s invasion of Ukraine, which began on Feb. 24, and the world’s response to it will damage economic growth and further stoke inflation.

Record-setting sums have been pulled out of European bond funds, and emerging markets and other asset classes have been hit by redemptions, data-tracker EPFR said on Friday. Meanwhile the U.S. Federal Reserve indicated its on course to begin a new rate tightening cycle later this month.

On Monday, Moody’s Investors Service said it acted on three Ukrainian corporates. The rating actions followed Moody’s decision on Friday to place government of Ukraine’s B3 foreign- and domestic-currency long-term issuer ratings on review for downgrade.

The agency downgraded to B3 from B2 and placed on review for downgrade the corporate family ratings of MHP SE and Metinvest BV to reflect their credit linkages with the Ukrainian sovereign. Both companies probability of default ratings are B3-PD.

Moody’s said it placed on review the corporate family rating of DTEK Energy BV. The company’s corporate family rating is Caa3, and its probability of default rating is Caa3-PD.

S&P said it lowered Russia’s foreign-currency sovereign credit ratings to BB+ from BBB- and its local-currency ratings to BBB- from BBB and placed the ratings on CreditWatch with negative implications.

“The downgrade follows the abrupt escalation of Russia’s military intervention into Ukraine, which has prompted a series of stringent economic and financial sanctions from the U.S., E.U., and U.K. governments, among others. In our view, the sanctions announced to date could carry significant negative implications for the Russian banking sector’s ability to act as a financial intermediary for international trade,” the agency said in a press release.

S&P said it also lowered Ukraine’s long-term foreign- and local-currency sovereign credit ratings to B- from B and downgraded the national scale rating to uaBBB- from uaA. The agency placed all these ratings on CreditWatch with negative implications.

“Russia’s military assault on Ukraine poses risks to Ukraine’s economic growth, financial stability, external position and public finances,” S&P said in a press release.

The negative watch indicates the ratings could be lowered if multiple uncertainties connected to the military conflict were to significantly weaken Ukraine’s external liquidity, financial system or the government’s administrative capacity, the agency said.

Fitch Ratings said it downgraded Ukraine’s long-term foreign-currency issuer default rating to CCC from B. The agency usually does not assign outlooks or apply modifiers to sovereigns with a rating of CCC or below. Before the downgrade, the outlook was stable.

“The military invasion by Russia has resulted in heightened risks to Ukraine’s external and public finances, macro-financial stability and political stability. Russia has launched missile and ground operations across multiple fronts, including Kyiv. There is high uncertainty over the extent of Russia’s ultimate objectives, the length, breadth and intensity of the conflict, and its aftermath,” Fitch said in a press release.

EPFR-tracked bond funds extended their longest outflow streak since the fourth quarter of 2018 as U.S. bond funds posted their seventh outflow in the past eight weeks. Redemptions from both global and emerging markets bond funds hit a 51-week high and Europe bond funds chalked up a seventh consecutive outflow.

Events in Ukraine, and the impact they will have on global inflation and the response of central bankers to rising prices, kept fixed-income markets and investors on edge coming into March, according to EPFR Global Navigator, a weekly update, on Friday.

Both hard and local currency emerging markets bond funds saw more than $1 billion flow out during the week ending March 2. Redemptions from frontier markets bond funds hit a 14-week high. At the country level, Turkey and Romania bond funds posted their biggest outflows in eight and 101 weeks, respectively, while China bond funds experienced net redemptions for the third week in a row.

Meanwhile, the Republic of Chile priced its first sustainability-linked note, with a $2 billion issue of 4.34% notes due 2042 (A1/A/A-), according to an FWP filing with the Securities and Exchange Commission.

The notes priced at 99.92 to yield 4.346%, or a spread of 200 basis points over Treasuries.

The 20-year sustainability-linked notes were talked to yield in the area of Treasuries plus 205 bps, according to an informed market source.

The interest rate steps up on March 7, 2034 by 12.5 bps or 25 bps unless Chile meets some specified sustainability performance targets at least 30 days prior to the step-up date.

BNP Paribas, Credit Agricole CIB and Societe Generale are the bookrunners.

As previously reported, the sovereign had been anticipated to price a dual-tranche offering of dollar- and euro-denominated notes. The euro-denominated notes had been expected to have a maturity around 15 years.

Among new issues in the emerging markets primary market, which was very quiet, was a new issue from a China tourism company. The issue priced Feb. 23.

Sunny Express Enterprises Corp., a wholly owned subsidiary of China Tourism Group Corp. Ltd., issued $700 million of 2.95% guaranteed notes due 2027 (A3) at 99.774, according to a listing notice with an appended offering circular on Wednesday.

The notes are callable at any time for taxation reasons at par plus interest. The issuer will also be able to exercise a make-whole call at the greater of par and the value of the notes plus all remaining scheduled interest payments discounted at Treasuries plus 50 bps.

Noteholders will be able to exercise put options for a change-of-control event at 101 or a registration event at par. Both sums will include accrued and unpaid interest.

Proceeds will be used to refinance debt and for general corporate purposes.

Formerly known as China National Travel Service Group Corp., Ltd., China Tourism Group provides comprehensive domestic and international travel and tourism services.

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