Category: Corporate & Sovereign Strategy

Despite strong performance in March, JPMorgan is staying underweight EM corporate debt versus sovereigns heading into Q2. “Corporate fundamentals continue to deteriorate with rating downgrades accelerating at a much quicker pace,” says the shop, adding that LatAm defaults look set to rise to 10%, versus a previous 7% forecast. So far this year there has been $2.8bn in defaults in LatAm including Arantes, Independencia, TGN, Vitro, and Iusacell. JPMorgan’s default forecast for EM corporates generally was raised to 13.4% of the high yield debt stock, and 4.5% of the total debt stock, a significant jump from the current EM high yield corporate bond default rate of 3.7% on a 12-month trailing basis. The EMBIG sovereign index has already tightened to JPMorgan’s year-end target of 600bp, while its corporate equivalent, the CEMBI, has returned nearly 9% year-to-date, outperforming all other asset classes, across developed and EM fixed income and equity. “We remain constructive on EM sovereigns but feel that the EM corporate rally is at odds with deteriorating fundamentals,” says JPMorgan.

Cemex’s grip on Grupo Cementos Chihuahua (GCC), in which it holds around 46%, is loosening fast as the debt-laden company grasps at near-term liquidity to stave off default. Analysts point to Cemex’s GCC stake as a prime asset to be sold, and there are rumors locally that Cemex has pledged the stake to obtain financing. “The way the government has operated in the past is the following: if it were to extend some kind short-term bridge financing to a company, they might take some assets as collateral,” says Anne Milne, corporate debt strategist at Deutsche Bank. She points to a case in November where Vitro received a $100m loan from a government development bank after pledging real estate assets to a trust. Gerardo Rodriguez, head of public credit, told LatinFinance in late March that Mexico was looking at various ways to support Cemex, including having development banks extend short-term loans backed by contracts or flows. The official was not immediately available for an updated comment on loans to Cemex backed by equity stakes. GCC, which has a market cap of $695m, according to Economatica, is seen as a valuable asset for Cemex, as it is the company’s most significant minority stake in a Mexican entity, according to Citi. Citi analyst Stephen Trent pegs the stake’s value at around $320m at the end of December and notes that selling minority stakes would not hurt Cemex Ebitda. Asset sales – which have for months been at the top of Cemex’s debt resolution agenda – have so far failed to generate any significant new cash for the company, say its lenders. Buyers are said to be hesitant to lever up for new acquisitions, and some bankers say Cemex has shown little interest in selling quality holdings that might draw a real bid. Instead, the troubled cement maker is placing several smaller ticket and lower priority assets on the block. Cemex controls around half of the Mexican cement market. A New York-based analyst says the government may be interested in seeing Cemex’s i

Ample spreads would suggest imminent default in Argentina, but RBC is recommending the bonds. “Argentine debt could be set to outperform in the near-term as the government may look to resolve defaulted debt with holdouts and the Paris Club to approach the US Fed and IMF for official sector financing following June’s mid-term elections,” says the shop. It notes that until June’s elections, it is possible that Argentina may negotiate upwards of $1.5bn in new funding from various multilaterals, including the World Bank, IDB and CAF, and sees the external debt spread at 3,450bp. RBC attributes little real value to a recently agreed $10bn China swap line, but says this could add to recent positive sentiment. “Technically, 5-year CDS looks possibly in the early stages of a slide towards 2,500bp,” says the shop. “Given the recent ramp up in IMF funding and Argentina’s membership in the G20, some form of assistance at some point could materialize,” it adds. Argentine finance secretary Hernan Lorenzino recently told LatinFinance that the sovereign was not in danger of default. He added that Argentina is waiting for the IMF to define its role as international financial supervisor, as well as changes in governance to allow more participation by EM countries, before entering into financing talks. It also wants to see what conditions are attached to new financing facilities before borrowing from the fund, with which relations remain strained. Argentina is looking to exploit domestic liquidity for funding, as well as undertake more liability management.

From regional blue chip not long ago, Mexican cement maker Cemex has become a problem case for lenders. “Cemex is now being handled by our workout team,” says a New York-based syndications banker, echoing remarks by other executives in similar roles. When Cemex proposed extending tenors on up to $4.7bn in loans last year, the discussion was handled largely by syndications bankers. But Cemex’s most recent announcement of its intention to refinance $14bn in debt has led many credit committees to call into action workout and restructuring teams. These are separate from the syndications and relationship managers that used to work with the large Mexican client, say bankers at shops with varying degrees of involvement in the process. However, one senior banker at a leading Cemex lender insists that while some may have moved the file to other desks, the restructuring should not be characterized as a workout, since the process is moving along well and there is no threat of default. And at some of the main lenders, talks are apparently still being channeled through the syndications desks, the banker adds. Cemex has repeatedly declined to comment on the talks, saying it will communicate with the market when it is ready to do so.

Despite fears among investors that lack of access to international markets will force Argentina to default, the sovereign says that is will stay current on its debt. “We won’t see that in any way,” Argentine finance secretary Hernan Lorenzino tells LatinFinance. “I absolutely rule out [default] in any way,” he adds. The sovereign’s main 2009 payments are in August on the Boden 12 and December on the GDP warrants, and Lorenzino says they will be met. Asked about holdouts from the 2005 exchange, Lorenzino says that a deal circulated last year –which he values at around 40% recovery – is no longer attractive, following significant movement in the market. “Today, exactly the same proposal has a value of around half,” says the secretary. “We think it’s going to be difficult to reach a resolution, but nonetheless we are looking at alternatives that are necessary, with the market, to reach a solution,” he adds. And unlike some of his predecessors, the official remains open to a dialogue with creditors. “We are in discussions with all parties . . . There’s no rush, but there’s a will to continue advancing,” says Lorenzino. Investors appear sanguine on a deal, especially given Lorenzino’s history at the Province of Buenos Aires, which he helped steer through what was seen as a more market friendly restructure. The province was rewarded with market access, and Lorenzino notes that it is important for his country to tap foreign financing. “Argentina has sufficient resources to cover its obligations in the near future, but it’s always good for countries to have access to international markets,” says the secretary. “Today the yields asked from Argentina are not in line with the economic fundamentals, nor are they reasonable,” he adds. Analysts note that financing conditions become more complicated in 2010. And market watchers will remember that former Argentine economy minister Domingo Cavallo ruled out default in late 2001, weeks before a moratorium on $100bn in debt. Continued

As Argentina prepares for G20 meetings later this week, bond holdouts await a possible workout offer from the sovereign, as well as news on consideration of a counterproposal. A group of firms has proposed a plan aiming to unite the country’s infrastructure development needs with bondholder’s demands. They are trying to end a cycle of debt exchanges that inevitably leads to another exchange years later. “There is a need for a new sovereign restructuring system with clear judicial process and method of payment,” Pablo Giancaterino, an Argentine lawyer acting as co-counsel in New York class-action litigation, tells LatinFinance. He proposes creating a trust into which hold-outs would deposit judgments won against Argentina, which would issue investors with certificates of participation tradable in New York. Argentina would then receive the old bonds and pay a pre-negotiated amount of interest into the trust, which would invest funds in tax-free energy and infrastructure projects in Argentina over several years. Funds would be left in the trust as a guarantee in case Argentina defaults on the new deal. More creditors could also be added to the deal at points in the future. Giancaterino estimates that the projects, likely green energy generation at first, could return 20% per year. But a return of just 9% would recover holders’ interest and boosting recovery. He says the deal would function with a minimum of participation, but could accommodate several billion dollars. “It is a win-win situation. Argentina benefits with investment and doesn’t take on new debt. The creditors don’t give up anything,” he says. Giancaterino and holdout counsels Proskauer Rose and Sirota & Sirota officially presented the plan to the Argentine government two weeks ago. They have not yet had any response. Giancaterino is the author of the new proposal. The sovereign’s advisors – Barclays, Citi and Deutsche – have been heard doing the rounds with US holdouts over the last few weeks, amid chatte