Norvik Research 14.07.2016

14/07/2016 15:14

Global developments

Bank of England unexpectedly kept its policy rate unchanged today, prompting a further spike in the sterling’s exchange rate. Market consensus was for a cut from 0.50% to 0.25%. The bank said in a statement that most of its MPC members expected policy to be eased next month. The sterling spiked over 2% against the dollar on this decision to 1.345, before giving some of the gains. Nikkei 225 is up 1.0% today, both FTSE 100 and Euro Stoxx trimmed gains to about 0.5% post-BoE. S&P futures are up 0.5%. Gold prices are down 1.2% to $1,330/tr oz, a 2-week low.

Oil prices are up 0.6% today at $46.8/bbl, having suffered a 3.8% correction yesterday in the wake of US inventories data. EIA data showed a 2.5mn bbl drop in inventories, below the 3mn bbl consensus forecast.

Russia and CIS area developments and market colour

The IMF has expressed support for Russia’s monetary policy and fiscal objectives while highlighting scope for additional recapitalization of the banking sector. In its annual Article IV report published yesterday, the IMF estimated that actual NPLs are likely to be some 3.5 pp higher than officially reported 9.2%, thus resulting in a capital shortfall of 0.5-1.0% of GDP. Under its stress scenarios (admittedly, quite extreme), such a shortfall could reach 4.5% of GDP. The IMF and the government are in agreement that pension reform is essential for achieving the balanced budget objective by 2020.

The pace of inflation in Russia declined to 0.1% WoW in the week to 11 July. This is in line with the situation last month, prior to a seasonal increase (to 0.4% WoW) in the first week of July. Over the past week petrol prices increased 0.4%, and by 2.8% since the start of the year. In year-on-year terms, inflation is estimated at 7.1% YoY, having dropped from 7.5% at end-July.

Yesterday’s OFZ auctions were fairly weak. January 2020 floater was placed at an average yield of 11.24% (cut-off price 103.2%, representing a 25bps premium to secondary market). In the second auction, for RUB 15bn of September 2031 fixed-coupon OFZ the full amount was sold, at an average yield of 8.54% (some 5 bps premium). The yield curve widened by 6 bps on average, with the auctioned paper underperforming by some 10 bps. Today, the rouble is trading 1.2% stronger on the day, at 63.2 against the dollar, with OFZ yields tightening 1-3 bps in the longer end.

Corporate news

Moody’s has downgraded KOKS to B3, keeping negative outlook. The rating action reflected very weak liquidity and increased debt refinancing risks related to large short-term debt maturities. According to Moody’s, the company’s liquidity is insufficient to cover debt maturities and capex in the next 12 months. The liquidity gap is estimated at $170mn, of which $150mn is required in Q3 2016. In addition to liquidity and refinancing risks, other negative factors include limited operational and product diversification, exposure to the weak global steel market environment, weaker leverage and interest coverage metrics, debt-financed expansionary capex program, concentrated ownership-related risks.

At the same time, the agency has highlighted credit-positive factors including the company's status as one of the leading merchant pig iron producers globally, its low-cost position, owing to the weak rouble and operational enhancements, improved product mix, the company’s significant degree of vertical integration and its large coking coal and iron ore reserves. Moody's expects that financial metrics of KOKS will improve over the next 12-18 months. Despite Moody's expectations for an improvement in the company's credit quality in the medium term, we believe taking an exposure in the near term is clearly premature as a possible downturn in the steel market in the event of a further slowdown in China would sharply aggravate the liquidity risks.

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