EM Sovereign Credit Weekly:Updating Venezuela,Ukraine,and Ar
Market Overview: Strong technicals keep valuation tight.
We highlighted how tight EM credit valuation had become last week – withoutVenezuela, benchmark spread was already at 2014 pre-commodity collapselevels. Spread tightened even more during the past week, but benchmark totalreturn was flat due to higher UST yields, and inflows continued. This is thestatus quo that is likely to sustain for the foreseeable future. We remainmarketweight.
Venezuela – Muddling through for longer.
The situation in Venezuela has quieted down significantly, as the oppositionappears weakened, negotiations re-start, external pressure – while kept – couldonly do so much, and potential bilateral financial support could prolong thestatus quo. We turned more constructive last week, and maintain this view.
We now see a higher chance for the government to survive for longer.
Macro conditions continue to improve in Ukraine, and the ongoing re-financingtransactions via tendering 19s and 20s and issuing new 10-15Y bonds offerinvestors an added bonus after the recent rally.
We estimate the fair yields for a 10Y and 15Y bond to be 7.15% and 7.40%(mid-market), before any concession, based on market close of September 14.
We recommend that investors switch out of the 27s (which are 10bp rich tothe curve) and subscribe to the new issue to pick up this 10bp plus anyconcession.
We stay on the sidelines on GDP Warrants, the outperformance of which vs.
bonds recently stopped, a move justified by a diminished value in Holder Putoption following the re-financing transaction.
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